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POAD 9100
RESEARCH PROJECT IN POLICY AND MANAGEMENT
ACCOUNTABILITY FOR PERFORMANCE IN LOCAL GOVERNMENT
IN INDONESIA: SUSTAINABILITY BALANCED SCORECARD
APPROACH FOR BETTER PRACTICES OF CORPORATE
GOVERNANCE
Jermi Haning
2013986
Submitted in partial fulfilment of the requirements for the degree of
Master of Policy and Administration
FLINDERS INSTITUTE OF PUBLIC POLICY AND MANAGEMENT
FLINDERS UNIVERSITY
2003
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TABLE OF CONTENT
TABLE OF CONTENT .....................ERROR! BOOKMARK NOT DEFINED. EXECUTIVE SUMMARY ................................................................................... IIIDECLARATION ................................................................................................... IV
ACKNOWLEDGEMENT ...................................................................................... VABBREVIATION ................................................................................................. VI
1. INTRODUCTION ............................................................................................. 11.1.
BACKGROUND OF THE STUDY ..................................................................... 11.2. LIMITATION OF THE STUDY ......................................................................... 21.3.
OUTLINE OF THE STUDY .............................................................................. 32. LITERATURE FRAMEWORK ....................................................................... 4
2.1. CORPORATE GOVERNANCE ......................................................................... 42.2.
ACCOUNTABILITY AND PERFORMANCE ....................................................... 52.2.1. What is Accountability? .................................................................. 5
2.2.2.
The Changing Focus of Accountability ........................................... 72.2.3. Relating Accountability to Performance ....................................... 102.2.4. Establishing Accountability Framework for Performance ............ 12
2.3. A SUSTAINABILITY BALANCED SCORECARD (SBSC) APPROACH TOPERFORMANCE .......................................................................................... 13
2.3.1.
What is SBSC? .............................................................................. 132.3.2. SBSC as Organizational Strategy for Performance ....................... 142.3.3.
The Incorporation of SBSC ........................................................... 163. THE ACCOUNTABILITY SYSTEM IN LOCAL GOVERNMENT IN
INDONESIA ................................................................................................... 183.1. THE LEGISLATURE AS THE PRINCIPAL OF ACCOUNTABILITY ..................... 183.2.
THE GOVERNMENT AS THE AGENT OF ACCOUNTABILITY ......................... 203.2.1. Providing Information/Reporting .................................................. 21
3.2.1.1.Annual Budget ......................................................................... 233.2.1.2.Annual Report ......................................................................... 243.2.1.3.Performance Information ........................................................ 26
3.2.2.
Providing Explanation/Justification .............................................. 283.2.3. Reviewing and Revising ................................................................ 293.2.4.
Granting Redress or Imposing Sanction ........................................ 303.3. AUDITING AND ACCOUNTABILITY ............................................................. 31
3.3.1. The New Focus of Auditing .......................................................... 32
3.3.2.
Auditing in Local Government in Indonesia ................................. 344.
RESEARCH METHODOLOGY .................................................................... 375.
A SUSTAINABILITY BALANCED SCORECARD (SBSC) APPROACHTO PERFORMANCE ..................................................................................... 385.1. I NTRODUCTION.......................................................................................... 385.2. COMMUNITY-ORIENTED MANAGEMENT ................................................... 38
5.2.1. Satisfying Costumers and Communities Needs ............................ 385.2.2.
Putting Governance into Practice .................................................. 415.3. I NTERNAL BUSINESS PROCESS .................................................................. 44
5.3.1.
Benchmarking ............................................................................... 445.3.2. Quality Assurance ......................................................................... 47
5.3.3.
Quality Assurance ......................................................................... 485.3.4. Other Measures .............................................................................. 48
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5.4.
FINANCIAL PERFORMANCE MANAGEMENT ............................................... 485.4.1. Budgeting System .......................................................................... 495.4.2. Contemporary Financial Accounting ............................................ 525.4.3. Asset Management ........................................................................ 54
5.5. I NNOVATION AND LEARNING MANAGEMENT ............................................ 56
5.5.1.
Managerialsm ................................................................................ 585.5.2. Reward and Recognition ............................................................... 595.5.3.
Training ......................................................................................... 605.6. SUSTAINABILITY MANAGEMENT ............................................................... 61
5.6.1.
The Urgency of Sustainability ....................................................... 615.6.2. Sustainability in Local Government .............................................. 635.6.3.
Some Challenges to Its Sustainability ........................................... 666. DISCUSSION................................................................................................. 697. CONCLUSION AND RECOMMENDATION .............................................. 70
LIST OF APPENDIX
APPENDIX 1. LGA INDEX SUBJECTIVE WEIGHT BY CRITERIA ........... 74APPENDIX 2. ACCOUNTABILITY – DEFINITION, ORIENTATION AND
PROCESSES .............................................................................. 75APPENDIX 3. MAIN CHANNELS OF ACCOUNTABILITY IN LG IN
INDONESIA .............................................................................. 76APPENDIX 4. A POSSIBLE CHECKLIST OF ACCOUNTABILITY
INSTRUMENTS FOR LG ......................................................... 77APPENDIX 5. ACCOUNTABILITY MECHANISM AVAILABLE TO THE
DPRD IN RELATION TO THE AUDITING ........................... 78APPENDIX 6. AN ORGANIZATION'S RIPPLE EFFECT .............................. 79APPENDIX 7. THE MAGICAL 7 STEPS (PLUS OR MINUS 2) IN
BENCHMARKING ................................................................... 80APPENDIX 8. A MAP OF PARTICIPATION TYPES ..................................... 81APPENDIX 9. A SUMMARY OF SER PRACTICES ...................................... 82APPENDIX 10. COMPARISON OF COMMON TYPES OF PERFORMANCE
AUDITS ..................................................................................... 83APPENDIX 11. APPROACH TO EFFECTIVENESS AUDITING .................... 84APPENDIX 12. APPROACH TO EFFICIENCY AUDITING ............................ 85
REFERENCE ........................................................................................................ 86
LIST OF TABLETABLE 1. CHANGING IDEAS OF ACCOUNTABILITY ................................. 10TABLE 2. A SBSC TO ACCOUNTABILITY FOR PERFORMANCE IN LG .. 17TABLE 3. ACCOUNTABILITY RELATIONSHIPS IN A LG CONTEXT ....... 21TABLE 4. LADDER OF ACCOUNTABILITY .................................................. 23TABLE 5. SERVICE QUALITY DETERMINANTS ......................................... 40TABLE 6. VARIETIES OF JOINED-UP WORKING......................................... 43
LIST OF FIGUREFIGURE 1. ACCOUNTABILITY PROCESS IN THE PUBLIC SECTOR .......... 5FIGURE 2. THE ACCOUNTABILITY FRAMEWORK .................................... 13
FIGURE 3. LG BUDGETARY CYCLE .............................................................. 24
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EXECUTIVE SUMMARY
This study aims to understand the nature of accountability which has experienced profound changes as the new focus on accountability has made an impact. Public
sector reforms that have taken place in some western countries, and recently insome developing countries, are acknowledged to have redefined the emphases ofaccountability. The new foci of accountability are on performance, in terms ofresults or outputs and outcomes, instead of on inputs, process and complying withrules (Kluvers 2001; Osborne & Gaebler 1993), on satisfying the customers ratherthan the citizens, on managerial accountability rather than public accountabilityand on financial aspects rather than the whole aspects of organizations (Glynn &Murphy 1996; Parker and Gould 1999).
Many argue that public sectors, especially local governments in Indonesia, have been experiencing significant reforms similar to those in the western countries
(AF 2002; MOF 2001; Turner 2000). It formally started when the newly electedgovernment introduced a “big bang” policy of decentralisation which devolvedmost of public service responsibility and delivery to local governments in 2001.Two significant laws that reshape and empower local governments are Law 22 of1999 on Local Government and Law 25 of 1999 on Fiscal Balance betweenCentral and Local Governments and among Local Governments.
This study, therefore, looks at the adoption of the Sustainability BalancedScorecard (SBSC) which consists of six aspects: financial, community, internal
business, innovation and learning, social and environment (Elkington 1998;Kaplan & Norton 1992) in balancing accountability for performance beyond the
financial dimension. It is argued that accountability for performance should not beconfined to financial aspects only if organizations are to survive. The otheraforementioned aspects are significant to be pursued in an integrated approach.Public sectors are especially challenged to adopt SBSC as they are inherentlythere to serve the public and not to make profits.
In exploring how the elements of SBSC have been addressed, this study tried tolook at the academic work and experiences of both public and private sectors indeveloped countries. While in harmony with international practices, this studyfound that to some extent local governments in Indonesia have followed thefootsteps of local governments in some developed countries in managing publicorganizations. Some local governments have become aware of and addressed theelements of SBSC; however they have not addressed them in an integratedmanner. It is, however, acknowledged that adapting and adopting best practicesdesigned for one environment to place in another is not easy and can beunsuccessful. At a glance the environments may look similar, but further analysismay reveal significant differences. Therefore, pilot projects and researchconcerning the transfer of international practices to the Indonesian contexts arestrongly recommended.
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DECLARATION
I certify that this thesis does not incorporate without acknowledgement any
material previously submitted for a degree or diploma in any university; and that
to the best of my knowledge and belief it does not contain any material previously
published or written by another person except where due reference is made in the
text.
Jermi Haning
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ACKNOWLEDGEMENT
I would like to thank Dr. Janet McIntyre and Dr. Colin Sharp for their patient
supervision, AusAID and Australian Taxpayers for the Scholarship, Indah
Jacqueline Lisa Emery for her amazing love, laughter, tears and prayers, and
finally my ultimate gratitude and praise to the Heavenly Father for everything He
has been doing in my life.
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ABBREVIATION
AG : Auditor General
BSC : Balanced Scorecard
CC : Citizen‟s Charter
CSC : Customer Service Charter
CCT : Competition Contracting and Tendering out
CSR : Corporate Social Responsibility
DPRD : Dewan Perwakilan Rakyat Daerah (Local Parliament)
EHS : Environmental Health and Safety
JUG : Joined-Up GovernmentIG : Inspectorate General
ISO : International Standard for Organization
LAKIP : Laporan Akuntabilitas Kinerja Instansi Pemerintah (Public Sector
Reporting on Accountability for Performance)
LG : Local Government
NGO : Non-Government Organization
NPM : New Public Management
PAC : Parliamentary Audit Commission
PO : Public Opinion
PQ : Parliamentary Question
PPP : Public Private Partnership
PTUN : Pengadilan Tata Usaha Negara (Administrative Appeals Tribunal)
SAMSAT : Sistem Administrasi Satu Atap (One Stop Administration)
SBSC : Sustainability Balanced Scorecard
SER : Social Environmental Reporting
TBL : Triple Bottom Line
TQM : Total Quality Management
VFM : Value for Money
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Chapter 1
INTRODUCTION
1.1. Background of the Study
The public sector reforms that swept western countries some decades ago were
meant to achieve two goals: efficiency and accountability of the public sector
(Gregory 1999; Power 1999). The focus is on how to make governments, their
agencies and officials, more accountable to the citizens, while providing better
efficient services. The reforms have been done in various ways, inter alia, by
adopting and adapting private sector management models into public sectors. The
private sector models are deemed as more efficient, effective and productive.
Despite the success, it also has profound weaknesses. Performance, in terms of
efficiency, for example, has been increased but it has been criticized as it is
achieved at the expense of other values such as quality, fairness and equity. It has
also changed the fundamental orientation of public sector accountability, among
other things, public accountability for the many dimensions of public sector
activity has been narrowed down to one of accountability for financial outcomes
to be exercised mostly within the hierarchy of public sector organizations
themselves (Denhardt & Denhardt 2003; Kluvers 2001; Mulgan 2000a; Parker &
Gould 1999; Sinclair 1995).
It is acknowledged that public sectors in Indonesia have experienced a
constellation of profound public sector reforms similar to those in other western
countries (AF 2002; MOF 2001; Turner 2000). In local government (LG) level,
the reform has been going since the government introduced Law 22 and 28 of
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1999 which unprecedentedly devolves almost all responsibility of policy making
and public services from central government to LG. LG in Indonesia refers to the
third level of government.
The decentralization aims to increase efficiency and accountability of the public
sector. Yet, the central government has not produced supporting guidance and
directives for LG in discharging the inundating responsibilities (Alm, Aten &
Bahl 2001). Insufficient qualified human resources, weak leadership and high
incidence of corruption are also other ongoing basic problems challenging the
decentralisation policy. The consequences, as found by some, are the worsening
performance of the public service (SMERU 2002), the domination of power by
local elites (AF 2002; Antlov 2002) which leads to the marginalisation of
powerless groups and so forth.
This study aims to: firstly, explore and understand the nature of accountability
which has changed as the consequence of the public sector reforms; secondly,
expose how accountability is addressed in public sectors as an approach to deliver
performance at the LG level; thirdly, explore how a Sustainability Balanced
Scorecard (SBSC) is used as a framework theory to address, balance
accountability for performance, and explore what approaches have been used to
deliver the focus of each perspective; finally, to explore how applicable the
international practices of accountability are to the context of LG in Indonesia.
1.2. Limitation of the Study
This study is based on a literature review by drawing on guides and lessons from
both academic work, private and international practices. It relies on secondary
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data which were gathered from various sources. No field research has undertaken.
As such, the information gathered cannot reflect the real situation of all LGs as a
whole. It is acknowledged that by the time this study is finished the ongoing
public sector reform in Indonesia may have rendered some of this information out
of date. In exploring SBSC, this study does not try to implement it nor analysis
how its elements interact with one another, nor does it try to explore how
management issues such as leadership, planning, controlling and so on should be
addressed to successfully implement SBSC. This study only analyses how
elements of SBSC have been addressed to balance exclusive focus on financial
aspects with other aspects. Finally, it is acknowledged that lack of both literature
and practical views on the topic of accountability in LG in Indonesia and on the
use of SBSC as both a concept and an approach to accountability poses huge
difficulties on the application of the concept in the LG context.
1.3. Outline of the Study
The study has been organized into six chapters. Chapter 1, Introduction, is about
the background, the objectives, limitations and outline of the study. Chapter 2,
Literature Review, looks at Corporate Governance, Accountability and
Accountability for Performance, and Sustainability Balanced Scorecard. Chapter
3, Accountability Systems in Local Government, covers the DPRD, Executive
branch of government and Auditing Institutions. Chapter 4 is about Research
Methodology used in conducting the study. Chapter 5 especially looks at how the
perspectives in the Sustainability Balanced Scorecard have been addressed in
local governments, both in Indonesia and other countries. Chapter 6, Conclusion
and Recommendation, concludes the study and expresses some recommendations.
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Chapter 2
LITERATURE FRAMEWORK
2.1. Corporate Governance
The term “corporate governance” has increasingly been used in the public sector
for the last few years. It is defined as “the system by which companies or
organizations are directed and controlled” (Cadbury Report 1992:14). In local
government it is seen as “the system by which local authorities direct and control
their functions and relate to their communities” (CIPFA 2001:1). For Barrett
(2001: 5) the foci of corporate governance are on “structures and processes for
decision-making and with the controls and behaviour that support effective
accountability for performance outcomes/results”.
Corporate governance ensures that all involving parties are aware of their roles,
responsibilities and accountabilities (IFAC 2000). It provides the structure
through which those who exercise ultimate authority are accountable for
organizational performance in a transparent manner. Transparency is about being
open and inclusive in the processes and documents (Thurmaier 2003). So, it
concerns providing assurance to stakeholders that the management runs the
organization properly with care (Ryan & Ng 2000).
In the public sector, as shown in Figure 1, corporate governance defines the
function of the legislature and executive branch of the government. The
legislature provides the authority for the acquisition and use of resources while the
executive branch of the government is responsible for specific resourcing,
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planning, directing and controlling of public sector operations. As the principal,
the legislature has the right and responsibility to hold the government, the agent,
accountable for its management of public sector activities. Accountability can be
assured by reporting and auditing.
Figure 1. Accountability process in the public sector (IFAC 2000:10)
2.2. Accountability and Performance
2.2.1.
What is Accountability?
The notion of “accountability” is contested (Mulgan 1997; Parker & Gould 1999;
Sinclair 1995). Accountability in the public sector is different from that of the
private sector. It involves complex multifaceted relationships, many roles and
tasks with differing risks, uncertainties, and diverse and often conflicting
expectations (Kluvers 2003; Mayston 1993). Accordingly, attempting to find a
simple, working definition of accountability with a public sector context has
proven to be difficult (Corbett 1996).
In a specific sense, Caiden (1988:25) argues that “To be accountable is to answer
for one‟s responsibilities, to report, to explain, to give reason, to respond, to
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assume obligations, to render a reckoning and to submit to an outside or external
judgment.” In simpler terms, accountability is about giving an account on what,
how and why resources are allocated for certain purposes, how authority is
exercised and the relationship between the exercised authority and the expected
and achieved results (Stewart 1984). Here accountability serves three purposes: to
avoid further misuse of power, to provide assurance that things are done as
intended and to encourage improved performance.
Key common elements of accountability are giving account for actions taken and
being held to account for those actions (Gray et al 1996; Stewart 1984).
Accountability, therefore, not only consists of the giving and receiving of
information, but also the action of holding to account. The former enables the
principals to examine and to respond to the agents (e.g. rewards, punishment).
However, it is not enough for the principal to control the agents. A concern
associated with reporting is how to ensure that information is true? The
information asymmetry arises as the principals find that it is difficult and costly to
get information about the agent‟s performance (Mulgan 2000a; Watt, Richards &
Skelcher 2002).
Some key elements of accountability summarized from various sources (AGBC
1995; Coy, Fischer & Gordon 2001; Gray et al 1996; Parker & Gould 1999; Watt
et al 2002; Stewart 1984) are as follows:
Accountability is a relationship; it is a two-way relationship between the
principal and the agent. It is described as a contract between two parties.
Accountability is results-oriented; current public management does not look at
inputs and processes but outcomes.
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Accountability requires reporting and assessment; through reporting principals
can assess whether the agencies have met the targeted plans.
Accountability is associated with consequences; the assessment tells the
principals how they should respond to it, for example imposing rewards and
sanctions, or requiring an act of explanation or making suggestions for
remedy.
Accountability improves performance; the principal‟s response is meant to
improve and meet intended targets.
2.2.2. The Changing Foci of Accountability
New Public Management (NPM) has changed the nature of public sector
accountability. The focus of accountability is on performance in terms of results
or outputs and outcomes, instead of on complying with rules as it used to be
(Kluvers 2001; Osborne & Gaebler 1993). In this approach, principal and agent
together plan, define and negotiate performance expectations and needed
resources. They are both also mutually involved in evaluating and making
correction as necessary. The separating line has become blurred as politicians
increasingly rely on the managers for policy advice (Peters 2001, Dixon, Kouzim
& Kakabadse 1998). This phenomenon poses a new challenge to the line of
accountability in a politico-administrative system, in which civil servants are
responsible to ministers, who are responsible to parliament, and then, in turn,
responsible to the public. As Walsh (1995) argues, in transferring accountability
for outputs from politicians to officials the danger is that accountability becomes
reduced to meeting pre-stated performance targets, rather than the pursuit of
desired outcomes, and activity could be manipulated to show these targets have
been achieved. Secondly, it is hard for citizens to hold bureaucrats accountable as
“there (was) no means by which local people can hold them to account” through
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the electoral process (Stewart 1995:292). The politicians, on the other hand, are
“judged less on the basis of results than for loyalty to their political superiors”
(Deleon 1998:548).
The private sector model sees a market consisting of individual customers who act
to serve their self-interest (Denhardt, & Denhardt, 2003; Peters 2001). Its focus is
on how to offer the best choices to the customers to meet their preferred services,
rather than to the citizens. Accountability is narrowed down to how to satisfy
customer‟s needs (Parker & Gould 1999). This poses an attack on the tradition of
democratic accountability and denies citizens‟ rights as the owners of the power
and the fact that citizens have paid tax before the needed services are provided
(Peters 2001). It argues that accountability can be achieved by the invisible hand
of market (Mayston 1993; Peters 2001), so that if users are dissatisfied with the
provided services they will find other providers, leaving it at loss. However, this is
only possible in a really competitive market. Furthermore, accountability in the
public is focused more on exercising the voice of citizens rather than on finding
other exits (Mulgan 2000a). This means that citizens have the right to dictate their
voice, and the providers are obliged to listen to citizens.
The private sector model has also changed the fundamental orientation of public
sector accountability from one of accountability to the public at large for the many
dimensions of public sector activity to one of accountability for financial
outcomes to be exercised mostly within the hierarchy of public sectors themselves
(Glynn & Murphy 1996; Parker and Gould 1999). This can be seen from the
gradual decreasing of the governments‟ public accountability for their action.
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Table 1. Changing Ideas of Accountability
Accountability Pre-Reform Post-Reform
Political
(overall publicaccountability
Broad ranging,
linking ministers‟directly to servicedeliveryresponsibility
Public
Remains, but the responsibility has
been silently and subtly changed to being acquitted on the basis that theexecutive enables and chiefexecutives deliver.
Consumers
Financialaccountability
Focus on the notionof compliance
Remains but broadened to addressissues of efficiency andeffectiveness which has led to afocus on the need for supportingdata and/or control systems.
Professionalaccountability
Inward focused, self-regulated multipleagency with services
Radically changes, less self-regulation but differences within
professions (e.g. teachers vs.clinicians).
Administrativeaccountability
Watchdogs on compliance(financial and otherwise).
Managementaccountability
New and varied but with a focus onachievement of delegated targets.
Source: Glynn & Murphy (1996:130)
2.2.3.
Relating Accountability to Performance
The performance-oriented approach of accountability is meant to improve results
and not to ensure the compliance with rules. Rules are there to shape and guide
the managers, but they are only means, and not the ends. This is important given
the fact that not all areas of responsibility can be specified in the rules. It is very
possible that some areas fall under the cracks, as responsibilities have not been
specified so that managers are sometimes unsure of what they are responsible for.
“Legislation, for example, is often vague since to spell out its intended goals too
clearly is likely to alienate some groups of potential supporters“ (Deleon 1998:
547). As such, managers need discretion that can enable them to take risks in
addressing those unspecified responsibilities (O‟Faircheallaigh, Wanna, and
Weller 1999). In addition, too much emphasis on rules can inhibit innovation,
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pose administrative burdens, consume large amounts of resources and divert the
attention of the managers from the real ends. Some managers may simply be
reluctant to adhere to the burdensome rules if they believe that compliance will
not deliver intended results but will instead lead to criticism particularly if they
are faced with a fast-required response situation (Denhard & Denhard 2003;
Peters 2001). As a consequence, delivering performance may be able to be
achieved at the expense of rules, ethical values and other factors.
The emphasis of accountability is to do “things right” rather than do the “ri ght
things” (Barrett 2001). However, the emphasis of accountability for performance
could decrease accountability for finances, fairness and social justice (Parker and
Gould 1999). In fact, accountability holders would not simply focus on
performance and ignore finance and other issues. Auditors are interested more on
ensuring that spending is within an approved level and for authorized purposes in
order to curb organized crime and corruption (Gendron, Cooper & Townley
2001).
An effective system of accountability for government and its public sectors for
delivering their responsibilities is one which can demonstrate that:
The outcomes of government was mandated to deliver by the citizens are
being achieved by various policies, programs and services developed and
implemented to do so;
The tax payers are getting value for money, government initiatives undertaken
to deliver the outcomes are efficient, that is, maximum output for every dollar
spent;
Government is conducting its business in a fair, legal and ethical way (AGBC
1995:15).
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2.2.4.
Establishing an Accountability Framework for Performance
The contested concept of accountability requires the establishment of an
accountability framework in order to make clear the accountability relationships
and to avoid conflict of interests that can pose barriers to the organizational
effectiveness. The framework can guide and give a common understanding of the
accountability concept by putting principles that frame accountability
relationships.
Based on the accountability framework developed by Desautels (1997), and the
AGC and the TBS (1998), Stanbury & Priest (1998:4) suggest some key
principles to the effective framework for accountability that characterizes
accountability relationships:
1. Clear and agreed expectationsa.
Are the common objectives agreed to?
b.
Are the expected results clear?c. Are the operating principles and procedures to be followed clear and
agreed to?d. Have human resource management issues been addressed?e.
Has provision been made for adequate financial control?2. Clear roles and responsibilities
a.
Are agreed roles and responsibilities clear? b. Have adequate decision-making processes been established?
3. Balanced expectations and capacitiesa. Have the partners the capability to do what they expect?
4. Credible reporting
a.
Is provision made for adequate reporting? b. Is information for Parliament sufficient?c.
Is the reporting credible?5. Reasonable review, program evaluation and audit
a. Has provision be made for reasonable internal audit and programevaluation?
b. Is sufficient monitoring underway?c.
Is sufficient learning taking place?d. Are procedures in place to follow if things go wrong?
e. Has provision been made for audit?
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The following is the accountability process which is based on the aforementioned
principles of effective accountability (AGC & TBS 1998). Two aspects of
accountability that influence accountability process are accountability framework
and holding to account. The former‟s elements are based on the principles of
effective accountability. The latter, whereas, is about making sure that the agent
provides adequate reporting and undertake sufficient review of information
reported so that it can make adjustment or change and especially understand the
consequence of its performance.
Figure 2. The Accountability Framework
(Source: AGC & TBS 1998:8)
2.3. A Sustainability Balanced Scorecard (SBSC) Approach to Performance
2.3.1.
What is SBSC?
Public sector reforms have diverted the accountability and performance to focus
more on financial aspects to senior executives of public organizations rather than
PERFORMANCE
To meet expectations usingro er means
Holding to Account
Accountability Framework
Roles and Responsibilities
Expected Performance
Balance Expectation and Capacity
Re ortin Re uirements
PUBLIC SECTOR VALUES AND ETHICS
Review and AdjustmentCredible Reporting of
Performance
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the others, and on outputs and outcomes than on inputs and processes and more on
the customer rather than to the Parliament and the public. To address this, Kaplan
and Norton (1992) propose “Balanced Scorecard (BSC)” to widen accountability
and performance beyond financial dimensions towards an integrated approach that
consists of four perspectives: (1) financial, (2) customer satisfaction, (3) internal
business process, and (4) learning and growth perspectives. BSC is to restructure
the exclusive emphasis of organizations on the financial perspective with the other
perspectives (Nickols 2000). However the effectiveness of BSC may be limited by
judgmental effects. If auditing still prioritizes financial over non-financial
indicators, it may discourage managers to balance the four perspectives.
Another model developed to address accountability for performance is “Triple
Bottom Line (TBL)” (Elkington 1998). This model covers economic, social and
environmental aspects of an organization. Kaplan and Norton (2001) refer it to
environmental, health and safety (EHS) dimensions. Recently the incorporation of
BSC and TBL has become more popular; it is known as “Sustainability Balanced
Scorecard” (SBSC) (Brignall 2002; Dabhilkar & Bengtsson 2002). The concept of
sustainability itself is used to point to the current activities of
humanity/organizations which consider the same opportunity of the future
generations in meeting their needs (WCED 1987). Two aspects or organization
that account for sustainability are social and environment.
2.3.2. SBSC as Organizational Strategy for Performance
Kaplan and Norton (1996) relate BSC to the translation of the organization‟s
vision and strategy into reality. BSC helps managers both in defining significant
indicators of each perspective, establishing necessary action to achieve these
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objectives and in linking leading indicators to lagging indicators. As the focus is
on both financial and non-financial aspects, all managers of an organization are
required to understand, communicate, link and align their strategy with other parts
of organization. BSC promotes inclusiveness, openness, interdependence and
coordination of all parts of the organization. There is also interdependence among
the four perspectives.
Kaplan and Norton (1996) argue that relationships of four perspectives are a
cause-effect one. This one-way linier cause and effect relationship - starting with
innovation, learning and growth perspective and culminating in the financial
results for shareholders - helps the managers in implementing corporate strategy.
The financial and customer dimensions are classified as results, whereas internal
business processes and innovation and learning are the determinant dimensions.
Action in learning and growth, for example, will have impact on internal
processes and lead to better quality of service which, in turn, increases customer
satisfaction and produces a better financial return. However, Norreklit (2000)
refutes this argument, claiming that relationships between perspectives are
interdependent and not only a cause-effect one. He suggested that the quantity of
research for innovation, for example, is influenced by financial results and
likewise research and innovation will produce financial results. As such, there are
iterative cycles of communication and interdependence of relationships which
consequently require a systematic or holistic approach. Furthermore, the time
scale during which an organization experiences change is another thing that may
influence the cause-effect relationship. Change in learning and growth, for
example, may take a while before change in other perspectives happens. During
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this time scale, there may be some other effects due to the change (Norreklit
2000:71).
SBSC also acknowledges the diversity of stakeholders. Three key organizational
stakeholders, according to the SBSC, are shareholders (financial, sustainability),
customers (customers) and employees (organizational innovation, learning and
growth, sustainability). This variety of an organization‟s stakeholders reflects the
various accountability relationships. The focus of accountability in satisfying the
needs of various stakeholders is on how to integrate strategies and response to the
needs and requirements of stakeholders. This model, however, fails to address
other stakeholders whose needs for performance-related information are essential.
In the public sector, stakeholders are unlimited (Deleon 1998; Peters 2001).
Public sectors are having not only accountability relationship customers, but also
with citizens. Citizens are the holders of the rights and legal status which have a
right to hold public sectors accountable. The stakeholders include those who have
concerns over environmental and social matters that need to be taken into account.
2.3.3. The Incorporation of SBSC
The incorporation of social and environmental matters into BSC reflects how
organizations demonstrate accountability for the stakeholders. Whether it is fully
or partly incorporated, it will have a different impact on its effectiveness (Bieker,
Dyllick, Gminder & Hockerts 2001). Some apply SBSC in the some perspectives
of BSC that most expose to sustainability issues (known as partial SBSC). Some
apply it in all four perspectives (transversal SBSC) while others add it as the fifth
perspective (additive SBSC). Commenting on the addition of the fifth perspective,
Epstein and Wisner (2001) argue that it requires top management to recognize the
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strategic value of the new perspective. The recognition will not only give signals
to the whole organization of the value of it and the management‟s concern, but
also will direct the attention of managerial and employees to see it as a main value
of organizations. The addition also makes sustainability as important as other
perspectives, especially for organizations that expose and allocate a large resource
to social and environmental issues.
Table 2. A Sustainability Balanced Scorecard Approach for Performance in LG
(adapted from Ballantine, Brignall & Model 1998; Bieker et al 2001; Fitzgerald et
al 1991; Kaplan & Norton 1992; 1996; Kloot and Martin 2000).
Performance Perspectives The focus of the perspectives
Primary objectives orresults to be achievedFinancial
Community
Secondary objectives ordeterminants of successInternal Business Process
Innovation and Learning
Sustainability (Social andEnvironment)
To succeed how should LG appear to itsstakeholders?
To achieve its vision how should LG appear to itsstakeholders?
To satisfy its stakeholders what business processesmust LG excel at?
To achieve its vision how should LG sustain itsability to change and improve?
To succeed how should LG secure long-termadvantages?
Source: (Ballantine, Brignall & Model 1998; Bieker et al 2001; Fitzgerald et al1991; Kaplan & Norton 1992; 1996; Kloot and Martin 2000).
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Chapter 3
THE ACCOUNTABILITY SYSTEM IN LOCAL GOVERNMENT
IN INDONESIA
The accountability system in LGs in Indonesia consists of few relationships (See
Appendix 3, 4 and Table 3). In practice, however, it is mostly dominated by two
separated independent entities: an executive branch of government and DPRD
(Dewan Perwakilan Rakyat Daerah). The former is the core of LG which consists
of Mayor and Local Departments/Agencies. This section, therefore, will explore
the accountability relationship between the two entities and the role of the Auditor
General (AG - external), which is a nation-wide independent auditing
organization, and Inspectorate General (IG - internal) at LG. In this study, the
terms Legislature, DPRD and Local Parliament are used interchangeably with one
another. Similarly, instead of using Executive branch of government, this study
often refers only to government.
3.1. The Legislature as the Principal of Accountability
In a democratic government, it is the citizens who give mandate to the
government to act on their behalf. The government, in turn, is accountable to the
citizens. However, given the fact that the public is not an organization, there is an
obvious problem here in terms of organizing accountability. DPRD therefore
should act on behalf of the public. But the current model of democracy in LG in
Indonesia does not give power to the public to directly nominate the Mayor. It is
still the DPRD that nominates the Mayor and then holds the Mayor accountable.
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Therefore, DPRD can be seen both as the principal in relationship with the
executive and as the agent in relationship with the public.
As distinct from previous eras, during the reform era, DPRD has assumed a
greater role. According to LG Act 22/1999, DPRD is independent and has equal
power to the government. The law even empowers it to impeach the government
should it fail or abuse its power. Yet many argue that DPRDs are still facing a
very basic problem – insufficient capability (Syahruddin and Taifur 2002).
Another challenge is how does the public ensure that DPRD is itself accountable?
The public can hold DPRD accountable every 5 years, but with the current
electoral system it is quite impossible to vote a member out. The current electoral
system allows only a party to nominate its members. Voters indirectly nominate a
member and the ultimate authority is with the party. As a short-term solution,
pending a direct electoral system, it is better to have an independent institution
that oversees the DPRD on behalf of the voters.
Others have argued for the existence of an effective and active Parliamentary
Audit Commission (PAC) to hold the government accountable (De Martinis &
Clark 2001). PAC plays important roles in assuring the work and accountability of
both internal and external audits (Bowerman & Hawksworth 1999). De Martinis
and Clark (2001) point out some more detail of the roles of PAC in relation to
internal and external audits as follows: approving strategic and annual work plans;
taking an active role in the appointment of the Chief Internal Auditor, overseeing
the internal audit function and its liaison with the external audit and management;
reviewing progress against plan; reviewing internal audit reports and management
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responses; and following up the implementation of internal audit
recommendations.
In spite of its power, it should be ensured that both PAC and Auditors have
mutual trust, confidence and understanding of each other‟s role and functions.
Above all, independence, cooperation and continuos learning environments are
promoted and guaranteed (De Martinis & Clark 2001). As Krafchik (2002:1)
argues:
AGs and PACs have traditionally developed a close relationship thatmight be described as mutual dependence or symbiosis. Parliament‟soversight over the budget is most effective when it can rely oninformation from the AG. In turn, the AG is most effective inimproving budgetary oversight when it can rely on parliament to
promote its recommendations with the executive.
3.2. The Government as the Agent of Accountability
As the agent, executive branch of the government is entitled to discharge
delegated responsibilities and then accountable to the DPRD and citizens.
However, the current indirect electoral system has hindered it. It is the DPRD that
nominates the executives rather than the public. This system only strengthens
accountability relationship between the government and legislature. This seconds
Gray, Owen, and Adams‟ (1996:44) argument that the principal-agent relationship
“can run the other way; so each party can be both an agent and a principal to the
other”. Therefore, instead of being controlling by the public, the government can
control the public. AF (2002) finds out that many LGs see local non-government
organizations (NGO) as a nuisance as the latter often play an opposition role to
the former. Almost similarly, most LGs also do not really take into account the
regional government roles, although it has significant roles.
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Table 3. Accountability relationships in a LG context in Indonesia
Who For What To Whom How To WhatOutcome
Elections
PQs/debates ExplanationLegislation MPs Letters Information
Mayor Policy /Systems
Public(Electorate)
JudicialReview,Enquiries
Acknowledment
Outputs /Functions
DPRD Review
ChiefExecutives/Head ofAgency orDepartment
Administrative processes,Value formoney,Costs
SelectCommittees,Ombudsmen,Audit Office
AnnualReports,
No Contracts
Revision
Individualmembersof public
Public/privateventures
Redress
Sanction
Source: Barberis (1998:467).
It is clear here that there are several aspects of accountability that may occur
within one relationship (Barberis 1998). These aspects of accountability are
specified by Law 22, 25 and 28 of 1999, as will be elaborated next.
3.2.1. Providing Information/Reporting
Providing information or reporting is the essence of answerability; being
accountable means having the obligation to provide information and to answer
questions regarding decisions and/or actions (Stewart 1984). Providing
information is simply to be informed; this might include budget information,
annual report, evaluation of performance, websites, newsletters or bulletins and so
forth. Law 22 of 1999 requires the government to provide information to the
public, the parliament, provincial and central governments (see Appendix 4). It
states that the Mayor must present annual reports to the DPRD and at the end of
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his/her service period (Article 44, 3). In this section later, the first three potential
sources of information are examined further.
In providing information, the government does not only focus on financial
information, but also more on non-financial matters. There should be an
indication of what type of performance measures (inputs, outputs, efficiency and
outcomes) should go into the reports (Neale & Anderson 2000). Complete
information covers all aspects of the organization‟s performance (performance
measures, capability and areas such as risk management) as well as reporting the
dimensions of quality, quantity, timeliness, and location and cost as applicable.
Steward (1984) argues that accountability information should cover all levels of
the accountability ladder (see Table 4). It should also be relevant and
understandable in the sense that it is comparable over time and with other
organizations. Lastly, it should meet standards that are generally accepted by
professional groups, or other similar reporting organizations. Furthermore,
meeting these criteria for providing information is not, in itself, sufficient for
accountability (Stewart 1984). After all, there is no guarantee that the provided
information is accurate (Kluvers 2003). Thurmaier (2003), therefore, argues that
accountability requires greater transparency of processes and documents. This
implies that processes and their documentation, for example, should be open and
accessible to the public and the press.
However, most of the reports by LGs provide financial information only on the
inputs and outputs measures as reflected in the traditional budget (Fachrudy 2001;
Raditya, Hermawan & Rizki 2002). Law 22 of 1999 does not specify in detail the
breadth and content of an accountability report. It does require transparent
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processes and documents, but this is also another issue that has been widely
demanded by NGOs and international organizations (Raditya et al 2002).
Table 4. Ladder of Accountability
Accountability information Concerning
Policy accountability: Goals and objectives
Programme accountability The achievement of goals and objectives
Performance accountability The achievement of required standards
Process accountability Ensuring adequate procedures and efficiency
Accountability for probity andlegality
The avoidance of malfeasance and illegality
Source: Stewart (1984:16-17).
3.2.1.1.
Annual Budget
Budget plays an essential role in enhancing accountability for performance
(Kluvers 2001). Budget is more than a technical tool for resources allocation and
performance measurement (Thurmaier 2003). It reflects the political will of the
government which determines and shapes public life, public organizations and the
relations between the two (Kluvers 1999). As such, transparency and publicity of
the budget processes and documents are deemed essential to accountability as
they enable the citizens to access the information and therefore to hold the
government accountable (Corbett 1996).
Cagatay, Lal, Keklik and Lang (2000) argue that accountability is not only about
assuring that the budget is allocated and spent appropriately, but also about
assuring that resources are targeted for social equitable purposes to meet the needs
of a broad range of citizens especially marginalised groups. This increased
accountability of budgetary processes increases citizen participation and equitable
use of resources. Some countries have shown that a participatory budget which
involves citizens in establishing budget priorities, allocating investments and
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monitoring results has significantly enhanced accountability (Navarro 1998;
Posner 2003).
Accountability in terms of holding the government accountable is exercised in
almost all stages during the budget cycle (see Figure 3) especially when the
budget bills are presented to DPRD for debate and review for the expenditure of
funds raised from general revenues. Difficulties may arise where private sectors
are involved in partnership with public sectors, the scrutiny by DPRD might never
happen as the income raised does not necessarily come from appropriateness, but
it comes from tolls and other charges (Grimsey & Lewis 2002).
Figure 3. LG Budgetary Cycle
(Source: Buku 4 SAKD 2002 cited in Eriantono 2003:33)
3.2.1.2. Annual Report
A public sector annual report is generally prepared to serve two objectives:
accountability and decision-making. It is deemed to be a primary medium of
accountability, although not reporting on the overall accountability (Steccolini
2002). The annual report is the main vehicle for reporting program performance.
4. Reporting(Calculatingof BudgetExecution)
5. Auditing theAccountabilityReport
3. Accounting
& Calculation
Operational &CapitalSpending
Operation
Income
Execution
1. Budget
Preparation
2. Budget
Authorisation
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However, some dispute its ability to discharge accountabilities and question its
value and usefulness, whereas others highlight the use of other communication
means by public organizations (Mack, Ryan & Dunstan 2001; Ryan, Stanley, &
Nelson 2002).
In Indonesia, ICDHRE (2002) argues that lack of demand and requirement for the
publication of the report, limited users, limited information and the inexistence of
a general framework and performance standards are among some basic problems
of annual reports. Some other problems found by the author during his work in
LGs are lack of knowledge and interest from DPRD of the report itself. In
addition, Law 22 of 1999 (article 44, 3) requires the government to report to only
regional and central governments. There is no requirement to publish and
disseminate it.
Steccolini (2002), for example, finds that most annual reports do not seem to
serve the general purpose of the report - satisfying the information needs of the
potential users - but rather to meet the law requirement which is mainly to serve
internal stakeholders. This is related to her findings that citizens are not likely to
be interested in reading annual reports, while internal users are interested in more
specific and frequent monthly or quarterly reports (Steccolini 2002:19). To
overcome these problems, Cárcaba-García, López-Díaz, & Pablos-Rodríguez
(2002:27) suggest the elaboration of “special reports” to meet the specific needs
of different users. While for the detailed content of the annual report, Ryan,
Stanley, & Nelson (2002) present a general framework that has been used in local
governments in Queensland (see Appendix 1).
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What is included in the annual report and how it is published are two central
issues that have also been highlighted (Steccolini 2002). Ryan, Stanley, & Nelson
(2002) argue that the content of the annual report is closely related to the
difficulty and embarrassment it might cause. Similarly Coy and Pratt (1998:541-
2) argue, “the content and presentation of annual reports may have less to do with
what are the best technical approaches, and be more a result of political
compromises between the various interested parties”. Another issue that has
significant impact on the quality of the report is its timeliness and its
comprehensiveness. Any delay in the publication will consequently undermine its
role in the local democratic process (Ryan, Stanley, & Nelson 2002:264).
3.2.1.3. Performance Information
Performance information is critical for performance accountability improvements
and resource allocation particularly in accrual-based accounting (Pallot 1999;
Ryan, Stanley, & Nelson 2002). It is broader than performance indicators, and the
collected evidence (Guthrie & English 1997). Barrett (1996: 97) argues “the
concept covers the setting of objectives, the development of strategies or means to
achieve the objectives, the use of both qualitative and quantitative indicators,
targets, standards (including values and ethics) and benchmarking”. Performance
reports must include information on performance trends and comparisons over
time rather than just a snapshot at a point in time which may be misleading
(Bartos 1995). There has been also increase auditing of performance reporting
(Barrett 1996).
Barrett (1996: 103) identifies some of the principles that have been applied in the
Australian Public Sector:
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performance information should measure all part of the objective set forthe programs or services;
there should be an appropriate balance of indicators to address economy,efficiency and effectiveness;
targets and standards should be developed which motivate appropriate
behaviour and assist the achievement of objectives; where cost effective benchmarking exercises should be undertaken to
test actual performance; and reports, in particular the annual report, should include outcome oriented
performance information which allow the assessment of program performance.
The provision of performance information requires wide involvement of the
public to identify and evaluate their needs and satisfaction (Barrett 1996). This
implies that the performance information goes beyond the one-way obligation of
public sector organization to provide information on the performance of the public
programs. The difficulty in identifying users, aggregating their information needs
equitably and assessing their criteria for judging performance are among some
problems justifying public participation (Brusca Alijarde 1997; Steccolini 2002).
As explained earlier, Law 22 of 1999 does make clear the aforementioned
requirements. Central government has actually provided LAKIP (Public Sector
Reporting of Accountability for Performance). However, Tamin (2002) argues
that this centrally designed framework has been abandoned by many LGs. Some
problems associated with LAKIP are inadequacies of reporting, lack of incentive
to report more than required, inexistence of enforcement mechanism, tension
between parliamentary and managerial accountability, variety of performance
reporting on outputs, imbalance focus among outputs, outcomes and capability,
and incapability of recipients to assess performance information (ICDHRE 2002;
Yudoyono 2001).
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3.2.2.
Providing Explanation/Justification
This type of accountability moves beyond reporting. It asks for explanations and
justifications; that is, why and not what (Brinkerhoff 2001). Law 22 of 1999 states
that the government must present accountability reports to the DPRD for certain
matters on the request of the DPRD (Article 45, 2). The requests by DPRD are
done on either its own initiative or on request from the community, Audit Office
and the Ombudsman. It can take place in various ways, from internal dialogue
between the legislature and particular agency to more public arenas such as
parliamentary questions and hearings, or city hall meetings where local officials
hold dialogue with residents.
AF (2002) finds that there has been increased dialogue held between local
governments and their citizens ever since the implementation of the
decentralisation policy. In fact, dialogue is seen as an effective means to address
accountability concern as participants listen and respond emphatically to one
another, trying to understand what others think and feel equally without coercion
(Roberts, 2002). Most importantly, the public context of the dialogue, especially
when there is a free press reporting on participants‟ every move, can help to make
participants accountable to one another and to build relationships on mutual
listening and learning (Dryzek, 2000). There is nowhere to hide if things go
wrong. It also enables the participants to commit themselves to working together.
However, dialogue is not enough to hold the agents accountable. Accountability
reflects an unequal relationship of authority between principals and agents in
which the latter comply with the former‟s direction including sanction for any
failure (Mulgan 1997; 2000b; Ryan, Dunstan & Brown 2002). As such, dialogue
which reflects equal relationship between involving parties does not enable the
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principal to exercise its sovereign right to some extent. It might involve
information sharing and assessment or verification, but there is no direction or
control and sanctions can be imposed.
3.2.3. Reviewing and Revising
Reviewing of the government‟s reports is aimed at giving assurance of the fairness
of the information (Stewart 1984). Reviewing enables those accountable to
examine performance, system or practices, and if necessary, make changes to meet
the expectations of stakeholders. Whereas for the principal it will help diminish
information asymmetry as a result of its incapacity to monitor and understand in
detail everything that the agent has done or is doing. Information asymmetry also
exists when the agent produces information, in order to satisfy the system but it
may be misleading (Broadbent, Dietrich and Laughlin 1996).
In Indonesia the political culture of “keeping the boss happy” - meaning not to
upset or cause any problems, or even be novel - has a profound impact on the
authenticity of disclosed information (Antlov 2002). The main mechanism for
reviewing is auditing (described later in detail). DPRD also review the
performance of the government by querying it during question period or by
debating its annual estimates. Another forum to hold the executive accountable is
through legislature committees that allow members of the DPRD to explore in
more detail matters that need further justification. However, concerns have also
been raised as legislature committees have a great number of weaknesses, such as
their authority, effectiveness, and the insufficiency of time (Syahruddin & Taifur
2002).
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3.2.4.
Granting Redress or Imposing Sanction
Accountability is not complete after receiving information from the executive.
Feedback as well as reward or sanction should be provided. If there are no
consequences attached to performance information, it will not affect the corporate
culture (Brinkerhoff 2001). For any activity to change the way people act, it must
affect them directly. If good performance is not reported publicly, reviewed,
appreciated and rewarded, those involved will realize that it does not matter if
they do not put in extra effort or have little incentive to learn and improve.
Law 22 of 1999 clearly states about imposing sanctions on the Mayor whose
report has been rejected twice (Article 46). The Mayor must submit annual
progress reports to the DPRD, and if these reports prove insufficient and cannot
satisfy the DPRD twice, they could dismiss the Mayor. In some regions, Mayors
have been impeached by DPRD for failing to discharge their responsibility
(Syahruddin & Taifur 2002). Given this fact, it is important that the
accountability requirements for impeachment should be clearly specified. They
should be transparent, clear, realistic, and not burdensome so that they will not be
used as political tools for threatening the mayor with dismissals. Stakeholders also
need to liken the accountability requirements. Sometimes, the Auditor General,
for example, promotes efficiency, whereas the Information Commissioner favours
access to information.
Care must be exercised with regard to sanctions. It must take into account both the
agent‟s performance and the likely responsiveness of the agent to the sanction.
After all, the goal of accountability is to ensure the improvement of performance
not to shackle the agent. The focus that is pursued is on how to change the
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organizational culture from merely complying with legislation to one that favours
flexibility for continuous learning and improvement. Furthermore, there are other
factors that might contribute to the failure of the agent, such as inadequate
instruction, powers and resources (e.g., outdated legislation, failure to provide
policy direction), and appointments of incompetent members (Standbury & Priest
1998:19; Syahruddin & Taifur 2002).
3.3. Auditing and Accountability
Auditing is a significant component of accountability. It legitimises the
information and assures the trust on which accountability, control and power rest
(Gendron et al 2001; Lee 1998). “Politics is replaced by management, which in
turn, is replaced by audit” (Walsh 1995:250). For public servants an audit helps
them to understand the dimension of programs and processes, to harness the
provided information for decision-making and to asses the cost-benefit of the
collected information (Baker & Wallage 2000; Barrett 1996). For the principals,
an audit helps them in holding the agents accountable, and influences the ability
of the former in controlling the latter. As such, the ability of the principal to
control the agent depends heavily upon auditor, whose role is to ensure that the
principal is informed of the agent‟s activities (Gendron et al 2001).
This essential role has drawn public attention to its credibility and integrity which
are often attributed to its independence (Gendron et al 2001), competence (Lee
1998) accountability (Hollingworth, White, & Harden 1998), funding and a
comprehensive mandate (English & Guthrie 2000; Funnell & Cooper 1998) which
are intertwined but dilemmatic in their characteristic. Furthermore, auditing
institutions do not work secludedly. Mulgan‟s (1997) model of accountability (see
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Appendix 5) describes several complementary agencies, processes, and channels
of accountability which are interdependently inevitable and together will deliver
better outcomes (Barberis 1998; Brinkerhoff 2001; Wilkins 2002). The focus,
then, is on how to provoke other channels of accountability to respond
appropriately on the auditing activities (Mulgan 1997).
3.3.1.
The New Focus of Auditing
Another challenge facing auditors in the NPM era is the shift of the focus of the
auditing. Initially the focus was on the financial control and compliance with
rules and regulations (Gendron et al 2001). Now the focus is on results and
includes areas of scrutiny beyond financial assurance such as performance,
probity, accountability, authority and value for money (Buchanan 2001; Gendron
et al 2001; Glynn 1985).
Performance audit is used to describe a wide range of activities and aims to
evaluate the performance of governments (Pallot 1999). It covers efficiency,
effectiveness and management capacity audits (Barzelay 1996; See Appendix 10).
Others point to the “Value for Money (VFM)” which includes economy,
efficiency and effectiveness audits (Gendron et al 2001; Glynn 1985; Guthrie
1990a; Parker 1986; 1990; Power 1999; Rouse 1999). Economy refers to the
“resource acquisition”, efficiency refers to the “resources usage” and effectiveness
refers to the “ends-oriented rather than means-oriented concept” (Parker 1986:13).
There are, however, some critics of VFM audit across western countries. It is
linked to the short-term foci on the quantitative data and performance
measurements which do not take into account the environmental influences,
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interdependence between organisational processes, and long-term impacts (Parker
1990). Pallot (1999) links it to the unintended impacts on the managers‟
motivation, innovation and reliability on the performance measures - evidence
such as the number of letters to the minister - which overshadows its usefulness.
Pallot (1999:45) therefore, argues that auditors need to examine further the
relevance, completeness, understandability and reliability of information. The
emphasis on the quantified phenomena might overshadow unquantified aspects of
performance (Smith 1995). The challenges auditors face are to develop and
implement performance measurement schemes that do not run the risks and to
identify inadequate performance measures. Smith (1995:304), therefore, suggests
involving “staff at all levels in the development and implementation of
performance measurement scheme” to encourage creative thinking and dialogue
between auditors and auditees on the performance criteria and other unintended
consequences.
Auditors also need to examine whether the established performance goals are
reasonable, as illustrated in Figure 2. This is essential to avoid unintended
consequences of the publication of poor performers. Auditors are expected to be
able to assist management in understanding its programs and problems; thereby
auditors focus on continuous improvement to achieve higher goals and objectives.
However, auditors have to be careful not to overburden management with
additional requirements and not to overstep the authority and domain of the
management (Barzelay 1996). Kluvers (2001) finds in Victorian LG that
management tends to reject performance audits and the gathered information due
to these problems.
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Additionally, Parker (1986) points to the powerlessness of AG to do effectiveness
audits which require essential political judgement in which they should not be
involved. It is hard to distinguish between the effectiveness of achieving the goals
of a policy and the question of the worthwhileness of the policy (Gendron et al
2001). It is debatable whether auditing should focus on the implementation of
policy and stay away from the formulation of the policy (Glyn & Murphy 1996).
This is an old issue in politics – deciding the boundaries between administration
and policy-making. The difficulty facing AG as an officer of the Parliament may
reduce as the Parliament has gradually shifted its role from lawmaker to
supervisory body (Guthrie 1990b). Furthermore, effectiveness auditing requires
particular expertise which may cause difficulty and the wrong conclusion if it is
done by non-expert auditors (Glynn, Gray, & Jenkins (1992). Cost-benefit
analysis, for example, is deemed appropriate to be done by experts. Given these
difficulties, some public sectors tend to focus on more economy and efficiency -
something easily measurable - rather than effectiveness (Palmer 1993). Glynn
(1987) and Butt and Palmer (1985) provide a framework for efficiency and
effectiveness auditing (see Appendix 11, 12).
3.3.2. Auditing in Local Government in Indonesia
There are two auditing institutions at LG: IG and AG. As mentioned earlier, the
independence of auditing is essential to maintain credibility and legitimacy. The
extent to which they can adequately scrutinise and audit very much depends on
their accountability relationships with both DPRD and the government (see
Appendix 5). The IG operates separately from those organizations that are
responsible for the activities under review. Therefore, it must be independent from
both DPRD and the executive branch of government. However, this is not the case
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in relation to the government in LG in Indonesia. The IG has been viewed and
positioned as partial auditor to LG (World Bank 2000). As it finds that “… there
is currently a lack of clarity in the mandate, scope, independence and roles of …
and Inspectorate Generals…” (World Bank 2000: 21). Appendix 5 illustrates that
IG has no accountability relationship with Legislature. Similarly, according to
Law 22 of 1999, DPRD does have power to ask for auditing and have all audit
reports tabled in the DPRD. It is only the Executive branch of LG that can hold
the IG accountable.
DPRD can rely on the AG which can provide independent review and objective
information on the activities of the executive. Its independence originates from
three issues: the mandate to perform audits, independence from direction by the
executive, and funding (Buchanan 2001; English and Guthrie 2000). The "1945
Constitution" clearly specifies these issues, that is, AG is established to examine
state finances, its funding from the state annual budget, unless for special audits,
its unrestricted access to information of the audit function together with the right
to report any findings to DPRD, and its independence from both DPRD and the
executive branch of government. This independence has enabled the AG to
criticise the government, detect and prevent several cases of corruption of public
money both at central and LG levels (Masassya 2000; Sherlock 2002).
In addition to these auditors, there are various kinds of independent review
mechanism such as ombudsman, commissioners concerned with specific matters
of accountability such as access to information, human rights, respect for privacy,
and so on. However, the appearance of these multiple players does not necessarily
simplify accountability. In fact, just the opposite, as multiple players imply
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multiple views, multiple criteria and multiple standards (Aaltonen 1996). Their
independence has also been criticized (Hollingsworth, White & Harden 1998;
World Bank 2000). Issues such as the scope of their auditing, accountability
relationships and authority/responsibility can pose difficulties if not well
addressed (Clark & De Martinis 2003; English & Guthrie 2000).
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Chapter 4
RESEARCH METHODOLOGY
In this study the emphasis in the elements of the SBSC are changed to
acknowledge how local governments are different from private sectors. First,
public sectors have stakeholders - not only shareholders -with different interests
and conflicting relationships (Mayston 1993), for example the central and
provincial governments, parliament, ratepayers, local community, and consumers
including employees, and other private partners. A second change is to replace
customer with community as local governments‟ decisions affect the whole
community, not only its specific service users.
This study relies only on secondary sources, both theoretical and practical, such as
academic journals, research reports, books, electronic databases, and Internet
documents. Various methods of analysis such as description, comparison,
prescription, exploration and synthesis were employed to portrait, expose, explain
and support the findings. However, as it did not involve field research, it is
acknowledged that this study may not provide general situations and results.
This study will explore how accountability should be addressed in local
governments that can deliver performance, using a framework developed in Table
2. In addition to the developed questions in the Table 2, there are three other
questions to guide this project. Firstly, what approaches have been used to deliver
the focus of each perspective of SBSC? Secondly, to what extent LGs in
Indonesia keep up with international practices? Finally, how applicable are the
international practices to Indonesian local governments‟ context?
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Chapter 5
A SUSTAINABILITY BALANCED SCORECARD (SBSC) APPROACH TO
PERFORMANCE IN LOCAL GOVERNMENT
5.1. Introduction
As many authors have argued, accountability for performance should not only
focus on financial aspects to internal stakeholders, especially the management, but
also on other aspects such as community, internal process, employee‟s learning
and innovation, social and environment (Elkington 1998; Kaplan & Norton 1992).
This section, therefore, will explore how each aspect of the SBSC, both in
theoretical perspectives and especially practical, have been addressed in local
governments both in other countries and in Indonesia.
5.2. Community-Oriented Management
The focus of this perspective is on providing satisfying public goods and services,
improving overall customer service and managing relationships with the whole
community (Hafner 1998; Kaplan & Norton 1992; O‟Faircheallaigh et al 1999).
In the public sector, managing community and consumers are equally important.
Consumers do not represent the total stakeholders; therefore satisfying the needs
of the consumers does not necessarily satisfy those of the community. In other
words “consumers‟ responsiveness is no substitute for public accountability”
(Stewart 1995:290).
5.2.1. Satisfying Costumers and Communities Needs
Most of LGs‟ responsibilities are directly associated with satisfying the needs of
the community (Ballantine et al., 1998). It is important to assure that community
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management is directed to the question of how to satisfy community needs.
However, as stakeholders in public sectors are numerous with different and
conflicting interests, there is no “one-size-fits all” approach to satisfy their needs.
Satisfying some stakeholder‟s needs might happen at the expense of the others.
Therefore, satisfying stakeholders‟ needs is a matter of trade-off, negotiation and
balancing (Rouse 1999).
There are various measures with different advantages and disadvantages that can
be employed to increase and sustain the satisfaction of the community. Laking
(1995) suggests some measures such as regular meetings between senior
management and local customer groups, a customer service council, a published
customer charter with precise service standards, publicly available complaints
escalation procedures and customer participation in departmental output
evaluation and in output design. Navaratnam and Harris (1994) put forward some
key strategies for customer service, such as setting performance targets;
conducting customer surveys; conducting staff surveys; benchmarking; sustaining
customer satisfaction; and providing customer advice.
From the various measures, market research, for example, has been widely used to
measure the satisfaction of the community. Local governments in Indonesia have
involved a third party on a regular long-term basis to conduct survey and focus
groups (BIGG 2001b; Soenarto 2001). Some aspects of public services that have
been focused on are tangibility, reliability, responsiveness, assurance and empathy
(Rahayu 1997:11). Stevenson and Gibson (2002), however, warn that in
measuring the satisfaction of the community, it should be remembered that the
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community responses to the very general satisfaction items in community surveys
often do not correlate with more direct, objective measures of service delivery.
Table 5 shows some other detailed measures that influence the quality of public
services.
Table 5. Service Quality Determinants
Determinants Examples
Access “One-stop-shop” Handicapped facilities
Safe location with easy-to-spot logosStaggered office hours
Communication Provision of interpretersTelephone equipment for the hearing impaired
Newsletters, leaflets, educational programmes and seminarsConsumer hotlinesInformation centres
Courtesy Design and display customer service standardsConflict management training
Responsiveness Customer service trainingReferral servicesRespond to all telephone inquires within 24 hours and towritten correspondence within ten working daysAnswer all calls by first ring
Security Protection from discriminationPrivacy actElectronic benefits transfer
Source: Lin and Ogunyemi (1996:7).
The use of Compulsory Competitive Tendering and Contracting (CCTC) has also
increased in LGs in Indonesia (World Bank 2001). CCTC has various benefits
which lead to improved satisfaction. Some of the benefits are: (1) improved
management of public service and organisations (clearer objectives, better
standards and targets setting, better monitoring, reorganisation of work to improve
productivity, etc); and (2) increased capacity of the government to enforce
conformance and performance, achieved in response to the incentive of
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