methodology for measuring Performance of Government Accounts Offices: A Case Study

METHODOLGY FOR MEASURING PERFORMANCE OF GOVERNMENT ACCOUNT OFFICES; A CASE STUDY By Muhammad Akram Khan Former Deputy Auditor General of Pakistan makram1000@gmail.com

1. OBJECTIVE The objective of this paper is to present the results of a study aimed at measuring the performance of four account offices of the federal government. Auditors normally express an opinion on the financial statements prepared by the account offices. They hardly ever look into the management aspects of these offices. The performance auditing, as it has evolved over the last two decades has concentrated mostly on development expenditure, public sector programmes or entities. I have not come across any study where the efficiency of the account office itself has been the subject of study. In this perspective, the results of present study are interesting both from the point of view of the government as well the Auditor General. The government is the both a beneficiary and a stakeholder in the performance of account offices. The Auditor General maintains the accounts of a large part of the government at the federal as well as provincial level. This study is also topical in the perspective of the controversy whether the Auditor General should continue maintaining the accounts of the government or he should hand over this function to the executive. In the background of this controversy is the World Bank financed project known as Program for Improvement of Financial Reporting and Auditing (PIFRA), which envisages a complete separation of accounting and auditing functions of the government, relieving the Auditor General of its accounting responsibility. In this context, the question arises: how successful has been the experience of the separation of accounts of those offices which was done in the past and which have been operating independent of the Auditor General now for quite some time? This question was posed by a group of officers in the Department of the Auditor General who argued that theoretically, the idea of independence of accounts is quite plausible but in the specific circumstances of Pakistan, it will not be workable. This group feared that the separation of accounts from the auditing and handing over of this function to the government would play havoc with the financial management of the government. They apprehended that the internal controls and budgetary discipline among the departmentalised account

offices was considerably weak and any further departmentalisation of accounts would expose the government to unmanageable risks. Some of the people in this group argued that that we should consider bringing back the departmentalised account offices to the fold of the Auditor General, thus reversing the whole process of departmentalisation which started in the sixties. As compared to this stood the group of those officers in the Department of the Auditor General which believed that the accounting and auditing function under the Auditor General leads to a conflict of interest.

Developments all over the world have recognised that the accounting is an executive function and should remain as such. The auditors should have nothing to do with the accounting function. This group had the backing of the World Bank and its consultants. These two points of view led to an ever-raging controversy within the Department of the Auditor General. It was in this background that the Auditor General ordered a systematic and objective review of the performance of the two sets of offices.

Office of the Accountant General Pakistan Revenues (AGPR) represents those offices which are still under the Auditor General. There are ten departmentalised accounts offices. The Auditor General decided that three of them viz., Pakistan Railways, Pakistan Public Works Department and Pakistan Post Office, should be selected for comparison with the AGPR. The Auditor General assigned this study to a team of five persons. 1 The team started its work in the first weak of October 1997 and finalised the report by the end of February 98. All the team members undertook this work on a part time basis, by squeezing their regular office work and by working during holidays and at night.

2. APPROACH OF THE STUDY The team discussed the methodology of performance measurement in its first planning meeting and agreed that there did not exist any ready-made methodology. Therefore, the first task of the team was to develop a suitable methodology before going into the field for collection of data. As a first step, the team identified the performance indicators around which the methodology had to be woven. It agreed on the following indicators: A. B. C.

Timeliness of Accounts a) Regularity in submitting the monthly civil account b) Annual closing of accounts a) Extent of completeness b) Frequency of completeness Accuracy of Accounts a) Adjustments through journal entries b) Suspense account movement c) Reconciliation with the executive d) Reconciliation with the bank

e)

Audit report observations on accounts

D. Financial Control: Management of Budget a) Excesses/savings over the budget 1. Management of personal ledger accounts 2. Movement of deposit works account 3. Management of assignment account E. Efficacy of Pre-audit a) Expenditure without sanction 1. Control on establishment expenditure F. Instruments of Internal Control a) Various types of broad sheets b) Objection books c) Registers of advances G. Personnel Services a) General Provident Funds b) Pension c) Pay slips, Last Pay Certificates/ History of Services etc H. Responsiveness to Audit a) Response to audit observations b) Affecting recoveries pointed out by audit I. Reported Frauds The next task was to develop an audit programme and to design format of the work papers for collecting data. All the team members did considerable home work and held several long sessions to finalise the audit program and format of the work papers. As a result, the team was able to develop a consolidated set of audit programs and work papers. The methodology focused on definition of performance indicators in each area.

For each indicator it defined the data to be collected, and its source and the form in which to be collected. Each area consisted of two types of documents: first, an audit programs; second a set of work papers. The audit program was a sort of control document, that allowed the auditor to plan, manages and concludes his work. The work papers contained the detailed design in which the data were to be collected.

The audit team used these instruments in the field for developing its findings. Each audit work paper asked the auditor to record his conclusion and then each audit program summarised the main conclusion for the area as a whole. The convenience of this approach was that as soon as the fieldwork was over, the auditors compiled their conclusion and the evaluation report was almost ready.

3. SAMPLE SIZE

Ideally the team should have adopted a single sample size for all review areas. But since it was not a financial audit where the population is homogeneous and since the areas differed in their nature it was not feasible to select a single sample size for all areas. For example, while looking into the responsiveness to audit, we took a sample of 100% since the number of audit reports during the last five years was five in each case.

We could look into each report and see if the account office had been responsive to those reports or not. As compared to this, the pre-audit function involved vouchers in millions and even 1% sample size was prohibitive, therefore, we decided to take as small a sample as 0.1% to 0.2%. A summary of the sample size for various issue areas was as in Table1 below: Table 1 SAMPLE SIZE Performance Indicator Timeliness of accounts Completeness of accounts Accuracy of accounts Financial Control/Management of budget Pre-audit Internal control instruments Personnel services Responsiveness to audit Reported frauds

Sample Size (%) 25 25 25 100 0.1 -0.2 5 0.5 100 5

4. SCOPE OF THE REVIEW The team decided to review the records of five years starting from July 1992.

5. FINDINGS 5.1 Timeliness of Accounts (a) Efficiency in Receiving the Monthly Accounts from Field Accounting Offices All the selected account offices were responsible for consolidating the monthly accounts received from their component field accounting offices.

Thus during 5 years 60 monthly accounts were to be consolidated by each account office. The question before the audit team was: how often the accounts are received late at the head office from the respective

component units of each selected office? This question was important the ultimately timeliness of accounts depended on the promptness with which the component field accounting units sent their accounts to the head office, where they had to be consolidated. Each head office had fixed a due date for its component field accounting office to submit the monthly account.

We adopted the same date as our criterion and worked out the delay in receiving the accounts. Besides, the delay in terms of number of days we were interested in finding out how often that delay occurred. Our results were as follows.

Table 2 EFFICIENCY IN RECEIPT OF MONTHLY ACCOUNT IN THE HEAD OFFICE 1 2 3 4 Office %-age offices %-age of time Efficiency index sending the account was [1.00 – (Col. 2 x account late delayed Col. 3)] AGPR 100 83 0.17 Pak Railways 25 13 0.97 Pak PWD 90 65 0.41 Pak Post Office 99 87 0.14 There was no criterion to decide which level of efficiency index was satisfactory. But if we accept 0.80 as a satisfactory level of efficiency, only Pakistan Railways seemed to perform efficiently with an index of 0.97. This was also confirmed from the average number of days of the delay. This was 4 days for the AGPR, 3 for PPO, 2 for Pak PWD and 1 for the Pakistan Railways. (b) Efficiency in Despatching the Monthly Account The three selected departmentalised account offices despatch consolidated monthly account to AGPR who incorporated these accounts into the monthly Civil Account of the federal government. The AGPR consolidated the accounts from all agencies and sent it to the Ministry of Finance. There was a due date for despatch of these accounts. We adopted the same date as criterion and worked out the delay with reference to the due date. Our findings were as follows.

Table 3 EFFICIENCY IN DESPATCH OF MONTHLY CIVIL ACCOUNT 1 2 3 Name of office %-age of time Efficiency index delay occurred [1.00 – Col.2]

AGPR 33 0.67 Pakistan Railways 33 0.67 Pak PWD 87 0.13 PPO 80 0.20 If we adopt the same cut off point of 80% as satisfactory performance, none of the offices had a satisfactory level of efficiency. However, relative to each other Pakistan Railway seemed to perform better. This was also confirmed from the average number of days the delay occurred. It was 5 days for AGPR and 3 days for rest of the three offices. Perhaps, the delay in AGPR occurred because it had to consolidate the accounts sent by the other departmentalised offices including the ones under study. Therefore, the delay caused by others on whom the AGPR had no control caused the overall delay in despatch of his accounts to the Ministry of Finance.

5.2 Completeness of Accounts The departmentalised account offices sent the monthly account received from their component accounting offices in the field. Since the component accounting offices delayed the monthly account to their head offices the latter often excluded the delayed accounts from their monthly consolidation. As a result, the monthly account sent to the AGPR contained only part of the current accounts and from the component accounting offices and rest of the information pertained to the previous month. Thus, the information being compiled by the AGPR from the accounts of the departmentalised account offices was not current and could not be used for decision making. Our findings were as follows.

Table 4 COMPLETENESS OF ACCOUNTS 1 2 3 Office %-age time the %-age of the account was not current accounts complete excluded AGPR Pakistan Railway

40 0

3.2 0

4 Efficiency Index [ 1(Col. 2 x Col 3)] 0.99 1.0

Pak PWD 47 1.1 0.99 PPO 87 6 0.95 The above table shows that the PPO was behind other offices in completeness of accounts. Others performed fairly well.

5.3 Accuracy of Accounts:

We selected four indicators for judging the accuracy of accounts: a) The rate at which suspense account was increasing/decreasing; b) Extent of year-end adjustments through journal entries; c) Reconciliation of accounts with the spending departments; d) Reconciliation with the bank.

We found as follows: a) Rate of Accumulation of Suspense: Ideally all accounting transactions should be charged to final heads of account and the past suspense balances, if any should show a declining trend. But the situation was highly unsatisfactory as the rate of accumulation of suspense was as follows: Table 5 RATE OF ACCUMULATION OF SUSPENSE BALANCES 1 2 3 Office Average Yearly Rate of Efficiency Index Increase in Suspense Balance AGPR 286% 0 Pakistan Railways 12% 0.88 Pakistan PWD 211% 0 PPO NA NA It is obvious that the position of the AGPR and Pak PWD was the worst.

The Pakistan Railway faired well on this indicator. The reason for a zero suspense balance in the Pakistan Post Office was that the system of posting of transactions in the books of account provided for recording only when a final head of account was determined. This led to delay in accounting as was obvious from Table 3 above. For measuring efficiency we adopted 1percentage point increase in the suspense balance as erosion of 1 percentage point of efficiency. Thus, in case of AGPR and Pak PWD, the efficiency index was zero as the increase in the suspense balances was over 100%. For others we have shown the calculation in Table 5 above. b) Year-end Adjustments The Account offices carried out several year-end adjustments to rectify the accounts. Some of these adjustments were essential but others were made to hide irregularities in budget spending. The account heads which had an excessive spending were credited and those where a saving appeared were debited to conceal any financial mismanagement. Therefore we thought that the number of entries and amounts thus adjusted were of some significance to reveal the accuracy of the accounts in the first instance and to show the extent of window dressing in the accounts.

The range of year-end adjustments was as follows:

Table 6 EXTENT OF YEAR-END ADJUSTMENTS 1 2 3 Office Average Efficiency index [1adjustments a %Col.2] age of the total account AGPR 2.5 0.97 Pakistan Railways 0.3 0.99 Pakistan PWD 1.1 0.99 PPO NA NA This indicator also showed that the position at AGPR and Pak PWD was not satisfactory, while Pakistan Railways showed a satisfactory trend. The reason Pakistan Post Office showed a very satisfactory picture was that the account office booked the transactions where funds were available in the budget and not where the transaction should be booked in reality. Thus it avoided the occasion of making year-end adjustment. However, it made the whole system of accounting highly unreliable. This observation was based on anecdotal evidence and we learnt about it during interviews with the staff of the office. Otherwise such an irregularity could be detected in a financial audit exercise and not through the present evaluation study. (c) Reconciliation with the Spending Departments: We assumed that a time lag of two-month was reasonable for reconciliation with the spending units. We found that on this criterion, the delay in reconciliation was as follows: Table 7 DELAY IN RECONCILIATION WITH THE SPENDING DEPARTMENT as on 31/12/97 1 2 3 Office Delay (months) Efficiency Index [1.0 –(col.

2/12)] AGPR 0 1.00 Pakistan Railways 0 1.00 Pakistan PWD 4 0.67 PPO 1 0.92 It showed that the position was satisfactory in AGPR, Pakistan Railway and PPO. Position in the Pak PWD was not satisfactory.

(d) Reconciliation with the Bank: The account offices should carry out reconciliation with the bank on a monthly basis. But again adopting a lag of two months as reasonable we found as follows: Table 8 DELAY IN RECONCILIATION WITH THE BANK As on 31/12/97 1 2 3 Office Delay Efficiency Index [1.0 ( col. (months) 2/12)] AGPR 1 0.92 Pakistan Railways 4 0.67 Pakistan PWD 4 0.67 PPO NA NA The position was satisfactory in AGPR while it was not satisfactory in Pakistan Railways and Pak PWD. The indicator was not relevant in case of Pakistan Post Office, as it did not maintain account in the bank.

5.4 Budgetary Control All the four offices were responsible for controlling budgets of their respective departments. They did not have any control over the savings in the budgetary allocations as the spending units controlled them. However, these offices had the authority to refuse payment in the absence of the budgetary allocation. But we found that all the offices had a lax control over budget management. They allowed excess over the budget under pressure from the management. The extent of this excess of course differed as was obvious from Table 9 below.

Table 9 BUDGETARY CONTROL 1 2 3 4 Office %-age of the Extent of excess (4- Efficiency grants in which year average) index[1 – excess was allowed (Col 2 x Col (4-year average) 3)] AGPR 24.5 15.5 0.96 Pakistan 43.75 5.25 0.98 Railways Pak PWD 26.25 10.5 0.97 PPO 50 4.5 0.77 In brief, the budgetary control in the PPO was very weak. The PPO account office administered only 2 grants and even in the administration of these two grants it could not control the excess over the budget.

5.5 Efficacy of Pre-audit Checks (a) Payments It was very difficult to determine the efficacy of pre-audit function in these offices. We selected four types of bills: • Procurement • Contingencies • TA/DA • Refunds On these types of bills we reviewed if the offices applied at least the following four checks: • verification of budget; • verification of competent sanction; • checking of classification and • Checking of stock entry where applicable.

By applying an equal weight to each type of bills (25%) we found the following: Table 10 EFFICIACY OF PRE-AUDIT CHECKS 1 2 3 4 5 6 Office Efficien Efficiency Efficiency Efficiency Overall cy in in pre-audit in prein preEfficienc Preof audit of audit of y index audit of contingenc TA/DA refunds [sum of Procure y bills col. 2-5] ment bills AGPR 0.2425 0.2468 0.2500 0.2500 0.9900 Pakistan 0.1875 0.1613 0.2262 0.2341 0.8091 Railway s Pak 0.2500 0.2250 0.2500 0.2500 0.9800 PWD PPO 0.1875 0.1875 0.1250 0.1667 0.6667 It showed that the pre-audit function was being performed by the AGPR in the most efficacious manner. Next came Pak PWD. The PPO was the least efficient in this respect.

(b) Scale Audit of Payroll One of our concerns was to see if these offices were applying the pre-audit checks on the staffing position of the executive departments. For this purpose the criterion was the proper maintenance of Scale Audit Registers.

We found that all the offices were negligent in the maintenance of these registers. Thus the efficiency index in this regard was zero for all offices. (c) Maintenance of Broad Sheets of Advances One of the important internal controls of account offices in Pakistan is the maintenance of Broad Sheets of Advances. The Broad Sheet provide information on individual accounts of the loans taken by government employees for various purposes, such as house building advance, motor car advance, motor cycle advance, or cycle advance. In the absence of proper maintenance of Broad Sheets, there was likelihood of an employee escaping the recovery of his loan or that excessive recovery was made from him unduly. We found that in all these offices the Broad Sheets were not being maintained properly. Thus efficiency index in these offices was zero.

5.6 Personnel Services (a) General Provident Fund (GPF) We reviewed the record for the following parameters: • GPF cases where recoveries were made without allotting GPF account number.

• No. of Cases with Missing credits • No. of Missing Credits • No. of Annual Balance Statements not Issued • Delay in Issuing Annual Balance Statement • Delay in Making Final Payments We compounded the averages for each parameter and our results were as in Table 11 below. (b) Pension Payments We were interested in identifying the pension cases that were delayed beyond one month after receiving a case for the first time. Our other concern was that the pension calculations were done correctly. We did not notice any case of incorrect calculation in our sample. However, there were cases of delayed payments. We calculated the percentage of such cases and thought the efficiency index was the percentage of cases handled satisfactorily within one month of the receipt of the case for the first time. Results were summarised in Table 11 below.

(c) Payslips We adopted the criterion of 15 days after the receipt of notification of a change requiring fresh issue of payslip. On this criterion we recorded the delays and considered that the efficiency index represented the cases where the payslips were issued within the due date. Results were summarised in Table 11 below. (d) Last Pay Certificate (LPC) Last Pay Certificates (LPCs) are issued on the transfer of an employee from one post to another. In this case also promptness was the criterion We adopted a period of 15 days from the receipt of the notification in the account office as due date for issuing the LPC. On this criterion we calculated the delays and considered efficiency index as the percentage of those cases that were handled within the due date. The results were in Table 11 below. (e) History of Services (HOS) The account offices should keep an up to date record of all movements of gazetted officers. They should update the book History of Services on an on-going basis. We adopted the criterion that each office should have updated its book as on 30th June 1996. The delay will be calculated from the date the last edition was published to this date. Then assuming a person had a normal service tenure of 30 years, we treated 100/30 = 3.33% as loss in efficiency for each year for which the History of Services was outdated. The results were as in Table 11 below.

Table 11 EFFICIENCY IN PERSONNEL SERVICES 1 2 3 4 Office Efficienc Efficienc Efficienc y Index y Index y Index GPF Pensions Payslips AGPR 0.68 0.43 0.30 Pakistan 0.73 0.53 0.54 Railways Pak PWD 0.48 0.79 0.54 PPO 0.87 0.54 0.84

5 Efficienc y Index LPCs 0.24 0.95

6 Efficiency Index HOS 0.77 0

0.82 1.00

0 0.73

5.7 Responsiveness to Audit One of our concerns was to see how promptly the account offices were responding to the audit observations on their own accounts. We found that all the offices were negligent in responding to the audit observations.

They did not have any system of tracking the audit observations and generally they did not respond to the audit observation within the

prescribed time of 6 weeks. None of the offices issued instructions to its employees to be careful in future for avoiding the audit observations. As a result, year after year similar audit observations were made and the offices remained insensitive to them. We assigned zero efficiency to all offices on this count.

On account of recoveries pointed out by audit, all offices were making those recoveries. Thus the efficiency index was equal to 1 in each office.

5.8 Reported Frauds We were interested to know if any of the account office had encountered a fraud during the last five years. The idea was to see if the internal controls were functioning properly and if the similar frauds were taking place year after year. But from our sample data we did not come across any reported fraud. Therefore we were satisfied about the application internal controls.

We assigned an efficiency index of one to all offices on this count.

6. OVERALL ASSESSMENT Our overall assessment can be seen from Table 12 below.

Table 12 OVERALL EFFICIENCY LEVELS Indicator

AGPR

Pak PWD

PPO

0.17

Pakistan Railways 0.97

Receipt of monthly account in HO Despatch of monthly account Completenes s of account Suspense balance Year-end adjustments Reconciliati on with spending departments Reconciliati on with

0.41

0.14

0.67

0.67

0.13

0.20

0.99

1.00

0.99

0.95

0.00

0.87

0.00

1.000

0.97

0.99

0.99

NA

1.00

1.00

0.67

0.92

0.92

0.67

0.67

NA

Bank Budgetary 0.96 0.98 0.97 0.77 control Pre-audit 0.99 0.81 0.98 0.67 checks Scale audit 0.00 0.00 0.00 0.00 of payroll Broad sheets 0.00 0.00 0.00 0.00 GPF 0.68 0.73 0.48 0.87 Pension 0.43 0.53 0.79 0.54 Payslips 0.30 0.54 0.54 0.84 LPC 0.24 0.95 0.82 1.00 History of 0.77 0.00 0.00 0.73 services Responsiven 0.00 0.00 0.00 0.00 ess to audit Recoveries 1.00 1.00 1.00 1.00 made in response to audit report Reported 1.00 1.00 1.00 1.00 frauds Over all 0.58 0.67 0.55 0.44 efficiency Table 12 above shows that none of the office was operating at full efficiently. The highest efficiency rate was that of Pakistan Railways and that too only 67%. The AGPR came next with an efficiency index of 58%. Pak PWD had an efficiency index of 55%. Pakistan Post Office was the worst of all, with an efficiency index of 44%.

7. CONCLUDING REMARKS But we shall like to mention a caveat: the present measurement of efficiency was highly crude as it summed up averages at different levels.

The more we use averages rather than the absolute figure, the greater are the chances of error in estimation. Therefore, the present results are, at best, crude indicators. Secondly, during our study we realised that a really reliable efficiency measurement will require auditing of the information provided by the account offices themselves. The time frame of the present study did not allow us to go that deep into the data provided by the offices.

Another important conclusion is that in the present scenario, the debate whether the departmentalised account offices are more efficient or those being run by the Auditor General’s Department, was superfluous. None of the offices could termed as exemplary in efficiency. All of the offices needed improvement.

One such area of improvement is computerisation, which is already on the anvil. But the use of information technology like e-mail for transferring data from remote areas to the head office computers was most imminent.

Similarly, there was a great need for creating a system of on-line computerisation rather than transferring data through batch-files. All the offices needed to improve their client-service. They needed to change their focus from procedures and processes to outputs. They should clearly realise that if their clients were not well served, the entire effort of maintaining books of account and following procedures was meaningless.

1

Beside myself, the other members of the team were: Liaquat Ali Choudhry, Mr. Javed Jehangir, Haq Nawaz, and Abdul Malik Usmani.