Financial information is often stored in a multiplicity of systems, outside the main financial management system and the same rigour is not brought to bear in ensuring it is complete accurate and timely. Reporting disciplines are often also weaker than in the commercial world. Even where accruals accounting has been adopted, often there is only an annual hard close and typically a balance sheet produced once a year rather than on a monthly, or at least quarterly basis. Clearly there are some examples of excellent practice in public financial management – the Government of New Zealand produces a monthly balance sheet – but it is the exception.
Impact of lower levels of financial management discipline
The lack of strong financial management discipline means that information in financial systems is less reliable and sometimes contradictory to information held off-system – this means there is not a generally agreed single version of the truth which often undermines the ability of the top management team to control and divert resources to meet corporate level priorities. Audit takes longer or is weaker, and places far less reliance on testing the integrity of systems with far more substantive work having to be undertaken. Lack of common approaches to data definitions and categories of expenditure mean that it is difficult to use data analytics without extensive work to cleanse data.
Cross cutting functional disciplines are generally weaker than in businesses with less emphasis placed on compliance. There are rarely sanctions for individual managers who fail to maintain mandated corporate standards for financial management information and practices. There is also little enforcement of information management discipline at all levels with no action taken against business areas that hold information off-system or which fail to ensure that a single version of data exists in both corporate and local systems.
The lower levels of financial management discipline than seen in large, especially quoted, businesses also extends to regular management review of financial information and effective variance and exception reporting. The lack of good quality variance analysis and difficulty in examining the relationship of data to activity patterns means it is hard to identify cost drivers, make comparisons across the business and establish cause and effect relationships. The forecasting system is rarely predictive and it is not unusual in many departments for the year-end figures and audit to contain surprises.
Risk management, while improving in many countries and given greater focus through the annual reporting process, is not always fully integral to senior management discussions throughout the year or evident in core planning processes.
Commercial practice
The differences in the level of rigour between commercial best practice in maintaining financial management disciplines and those found in government departments ultimately comes down to the emphasis placed on these activities by senior management. “Tone from the top” is very important in setting expectations of behaviours and in ensuring that there are consequences for those who do not comply with corporate standards.
In a quoted company a failure to maintain corporate data standards would be a disciplinary event for a management team at any level within the business. Ultimately failure to maintain accurate and complete accounting records or to plan and forecast on a realistic basis inevitably leads to removal of those individuals responsible from management positions and in some cases, where this failure was to deliberately mislead auditors or investors, prosecution.
Employing people with strong financial management discipline into senior management roles definitely helps to improve working practices. However, for any system to be reliable and effective there have to be consequences for those who do not live up to the required standards. This includes managers at all levels and the top management team. A demonstrable and persistent failure to maintain complete, accurate and consistent records should be treated as grounds for disqualification from holding any management role that involves the responsibility for financial resources as it is in public companies. A new qualification to the auditor’s opinion in a set of accounts in industry, is grounds for removal of the financial team. A similar discipline would probably need to be adopted in the public sector if the quality of information and reporting was to be significantly improved.
It is accepted that many managers in the public sector inherit situations where a combination of poor management practices, inadequate and outdated systems have led to material problems with the reliability and completeness of financial records. On taking up responsibility for a post where such weaknesses are identified there needs to be an allowance for an action plan to be formulated and to take effect. This should form part of the appointment conditions to the post in question however with performance review based on progress made in tackling the shortfalls.