NAME : Ni Luh Putu Amara Prabasari (119211078)

Made Ayu Anggi Puspitadewi (119211136)

CLASS : Accounting IC / 4th Semester
SUBJECT : Public Sector Accounting
LECTURER : Putu Putri Prawitasari, S.E., M.Si., Ak.

PERFORMANCE MEASUREMENT
Services provided free at the point of delivery and financed by taxation are the distinctive
concern of public sector accounting. If the services were sold in competitive markets, sales
revenues would provide financial measures of how much the service users valued the services
delivered: income measurement, the province of accounting, would be a relevant performance
measure. Tax revenues cannot provide such measures. The unrelenting demand for performance
measurement in the public sector is met with non-financial measures. These kinds of measures
provide distinctive challenges for public sector accounting.
A. Non-financial Performance Measurement
Governments exist to govern; how they perform is a matter of legal, political,
economic, social and historical judgements. These judgements might refer to their
performance during historically significant periods, such as war, or of a major policy,
such as a national health service, or of a particular term of office of a political party or a
political leader. In making these judgements, data are naturally used and sometimes
measured, depending on the particular methodology adopted.
Performance measurement requires the planning, execution and monitoring of the
government’s service provision to include measurement of the specific services.
Moreover, the specificity of performance measurement requires the measures to be
partial, which, in the absence of a unifying metric such as money, means that, taken
together, they are necessarily incomplete. There is no complete set of performance
measures – no absolute measure of performance of an organisation, a programme or a
government as a whole. Sensible judgements of these measures are all comparative as
they are about marginal changes over time and marginal differences between other
organisations.
In any organisation, accounting provides measures of performance, in the sense of
measures of whether the changes in revenues, expenses, assets, liabilities and cash flows
during the period were as expected. In a for-profit organisation, however, accounting’s
use of money also provides a direct measure of the value of goods and services provided.
The fact that the operating revenues are willingly paid by customers in competitive
markets means that those revenues are objective measures of what the for-profit provides.
Cash flows in to and out of the entity, including distinctions between operating
and capital flows, provide important measures of the success of the entity. Revenues
minus expenses, expressed as a per centage of capital employed, however, are an even
 more fundamental measure of the performance of the entity – of its ability to use
resources (labour, materials, property, plant and equipment, money) to satisfy the need
for its goods and services.
When services are provided free at the point of delivery, the recipients do not
express their preferences by accepting or rejecting a price for the services. Money does
not, therefore, provide an observable measure of the services and products provided. The
other uses of money are common to government, however in particular, money provides
an observable measure of what the organization buys in order to provide a service.
In performance measurement, it is useful to think of the following distinct
elements of performance:
 inputs, being resources consumed by the government, measured primarily using
costs but also non-financial measures – commonly, the number of employees
 outputs, being the services provided, measured primarily using non-financial
measures
 outcomes, also being the services provided, but primarily using unmeasured,
qualitative judgements, though when the judgements of outcomes are
systematically gathered from service recipients, typically based on interviews or
questionnaires, they can be measured and statistics of satisfaction produced.
Non-financial inputs, outputs and outcomes of government services are best
thought of as being hierarchical. At the low levels of the hierarchy there are easily
counted surrogate measures of input, while at the higher levels there are easily counted
surrogate measures of output, then easily counted output measures, then counted
measures of service recipient satisfaction and, at the highest level, unmeasurable
outcomes. The lowest levels in the hierarchy, while they can be reliably measured, are
furthest away from what the government services are ultimately trying to achieve; at the
highest level they are what the services are ultimately trying to achieve, but cannot be
measured.
None of the levels in the hierarchy of outputs and outcomes is the natural
responsibility of accounting. In the provision of government services (as in non-profits),
outputs and outcomes are matters for others – in this case, service professionals and
politicians. That includes the measurement of outputs and outcomes. Such measurement
can be easy and related to matters of fact, but questions of what to measure, how to
measure and what use to make of the resultant measures are not neutral, so accountants
are not free to answer them.
B. Challenges of Performance Measurement
There are six serious challenges facing performance measurement in the definitive
government case:
 measurement of costs
 reliability of output measures
 causal relationships between inputs and outputs
 narrowness of output measures
  comprehensiveness versus concision in reporting measures
 control ability of performance.
In performance measurement, costs must be measured using a full accrual basis
cash bases cannot measure the cost of the service provided. One challenge that
governments share with for-profits and non-profits is that of distinguishing between the
cases where full costs are required typically perhaps in the financial reporting context
and those where full costs are not relevant – typically for short-term decisions. A
particular challenge for governments is the typically large proportion of costs that are not
naturally traced to outputs and outcomes, thereby involving significant amounts of
arbitrarily allocated costs.
The second challenge is that of recording and communicating non-financial
output measures reliably, which includes being capable of being audited. In comparison
with accounting systems, databases of non-financial information are less reliable. Internal
control systems for controlling money in to and out of the system are elaborate.
The third challenge relates to causal relationships. The outputs and outcomes
determined by the service professionals and politicians fundamentally affect the inputs
that are the primary concern of accounting. The non-financial measures may be easy to
count and should be reliably measured. Nevertheless, it is profoundly difficult for
everyone involved to establish causal relationships between inputs, outputs and
outcomes.
The fourth challenge relates to the nature of non-financial output measures: they
are not comparable between services. The measurement is easy because it focuses on
very specific characteristics. Introduce all the other services that a government might
provide and it is clear that performance measurement primarily using non-financial
output measures is necessarily diffuse.
The fifth challenge, then, is to determine a balance between the natural need to
generate very many performance measures and the equally natural demand from service
recipients, politicians and the population at large to be given a simple understanding of
performance.
The sixth challenge relates to the controllability of government performance. In a
rational control system, the performance measurement only relates to those matters that
the government can control. The measures that are used are used throughout the planning,
execution and monitoring cycle of the government. Accounting requires the measures to
be systematically linked to costs and capable of being audited in some sense, so focuses
on the measures to be included in the annual budget and in the audited financial
statements.
Measurement itself is about simplifying the world. It is about reducing the
complexities that we observe into simple objective components so that we can then deal
with their essences with greater precision. Its extraordinary success in science and
technology, notwithstanding the contestability at the margins, hasnot been repeated for
settings in which people are inextricably involved, including organisations. In the
medical sciences, we have been far more successful in dealing with people in physical
terms than psychological terms.
The rational approach to managing organisations always competes with, and can
be domiated by, continually changing, grounded, ad hoc, trial-and-error approaches that
is, by muddling through. There is general acceptance of the premise of performance
measurement. That notwithstanding, it is important to understand any such system must
be judged not only in the terms set by the system itself but also by the lived experience of
those who provide and those who receive government services. We must at least allow
that this could be very different from what the systems portray.