BACHELOR OF ACCOUNTING WITH

HONOURS

MAY
2020

BBPC
4103

PUBLIC SECTOR
ACCOUNTING

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N CONTEX PAGE
O T

accountability in public sector.

2 Discussion on the internal control mechanisms in public 5 -

sector. 10

3 Discussion on the recommendations to enhance the 11 -

quality of internal control in the effort to improve the 13 2
4 Summary 14

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Explanation on the definition and importance of public
accountability in public sector.

Accountability is acknowledged as one of the essential principles and an

integral component of good administration. The rules governing
accountability are essential and imperative in the public sectors and thus,
they have to be observed and practiced by all civil servants in Malaysia.
Accountability is significant in the public sector since it involves public
money. If these precepts are not given the due priority in the management of
public services in Malaysia, financial fraud, wrongful conduct, corruption
and abuse of power could easily occur. The nexus to the principles of
accountability has a significant contribution to the quality of service and
image of governmental authorities and departments. The highest benefits
accruing from good accountability practices are ‘waste reduction’ of both
financial and other resources .The Malaysian government is committed to
uphold public sector accountability, not merely because of its responsibility
to the public, but to maintain public trust and confidence in the government.

Accountability is defined as a clearly identified employee obligation for the

quality conduct of a specified function and be answerable for performance
achievement. The public anticipates higher ethical expectations from the
public servants as they represent the government and work for the benefit of
the public. These expectations extend beyond the demarcations of fiscal
accountability to include respecting the rights and dignity of all the citizens
and stakeholders. Codes of ethics, standards of conduct, and other internal
guidelines for quality work serve as regulatory measures for channeling and
influencing the behaviour of employees in the provision of services is an
accountability practices perspectives that evaluating this perspectives could
reduce the mistrust in the government’s delivery system.

Various new approaches and transformation programmers were introduced

to improve the operations and accountability of the public sector in
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Malaysiana. For example, the government has followed the global trend by
introducing results-based management by adopting the concept of ‘new
public management’ and managerial ism in the early

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1990s.The government has introduced various quality enhancement
programmers for its agencies and departments. The programmers include
the Productivity Improvement Initiatives in 1991, Total Quality
Management in 1992, Client’s Charter in 1993, ISO in
1996, Benchmarking in 1999, Key Performance Indicators (KPIs) for
government-linked companies in 2004, Key Performance Indicators (KPIs)
for all other government agencies in 2005, Treasury Strategic Results Area
and Strategic KPIs in 2007, Auditor General’s Star Ratings on Financial
Management or Accountability Index in 2007, MAMPU’s Star Rating
System on Public Management in 2008, Government Transformation
programmers in 2009 and Key Performance Indicators (KPIs) for the
ministers and the ministries in 2009.

The objectives of these programmers are premised on providing a sound

foundation for government agencies to deliver quality service to the public.
These plans were initiated to raise the capacity of government departments
to deliver quality management and services
. High administrative costs are incurred to undertake these
programmers and the expenditure continues to increase.

Accountability in the public sector requires public participation and

cooperation. The public plays a significant role indirectly in notifying any
negligence, misconduct, dereliction of duty or mismanagement by civil
servants in undertaking their responsibilities and duties. A department
known as the Public Complaints Bureau (PCB) was established to resolve
complaints from the public and it represents one of the responsibilities of the
Government to the public to ensure that they always receive excellent and
quality services from government departments and agencies. Through PCB,
the public or interested parties could forward their complaints or grievances
regarding the quality of the services of government agencies such as
unprofessional conduct, mismanagement, negligence and misuse of power
and seek remedial measures on their complaints from the relevant agencies.

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Another measure launched by the government of Malaysia to improve
accountability of civil servants is the establishment of Malaysian Anti-
Corruption Commission (MACC) in

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2008, formerly known as the Anti-Corruption Agency. This Commission
plays a major role in combating corruptions in order to guarantee
independence and transparency of public sector’s services. Since then,
MACC has revealed and solved many cases involving corruptions in the
public sector of Malaysia.

Accountability is an important element of good government. It is about the

relationship between the State and its citizens, and the extent to which the
State is answerable for its actions. The concept of accountability refers to
the legal and reporting framework, organizational structure, strategy,
procedures, and actions to help ensure that any organizations that use
public money and make decisions that affect people's lives can be held
responsible for their actions.

Public sector accountability is not led by any one agency but a range of
entities, agencies, and institutions. For example, accountability for
overseeing how public resources are
used involves members of Parliament, public entities, courts and tribunals,
inquiry agencies, and, often, monitoring by civil society groups and the
media.The principles and concepts important to public sector accountability
include transparency, fairness,
integrity, and trust.

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Discussion on the internal control mechanisms in public sector.

Internal control consists of five interrelated components:

• control environment

• risk assessment

• control activities

The control environment sets the tone of an organization, influencing the

control consciousness of its staff. It is the foundation for all other
components of internal control, providing discipline and structure. Elements
of the control environment are:
(1) the personal and professional integrity and ethical values of
management and staff, including a supportive attitude toward internal
control at all times throughout the organization;

(2) commitment to
competence; (3)
organizational structure;
(4) human resource policies and practices.

The personal and professional integrity and ethical values of management

and staff The personal and professional integrity and ethical values of
management and staff determine their preferences and value judgments,
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which are translated into standards of behavior. They should exhibit a
supportive attitude toward internal control at all times throughout the
organization.
Every person involved in the organization among managers and employees
has to maintain and demonstrate personal and professional integrity and
ethical values and has
to comply with the applicable codes of conduct at all times. For example,
this can include the disclosure of personal financial interests, outside
positions and gifts (e.g. by elected officials and senior public servants), and
reporting conflicts of interest.

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Commitment to competence

Commitment to competence Commitment to competence includes the level

of knowledge and skill needed to help ensure orderly, ethical, economical,
efficient and effective performance, as well as a good understanding of
individual responsibilities with respect
to internal control. Managers and employees are to maintain a level of
competence that allows them to understand the importance of developing,
implementing, and maintaining good internal control and to perform their
duties in order to accomplish the general internal control objectives and the
entity’s mission. Everyone in an organization is involved in internal control
with his own specific responsibilities.

Organizational structure

The organizational structure of an entity provides:

• assignment of authority and responsibility;

• empowerment and accountability;

• appropriate lines of reporting.

The organizational structure defines the entity’s key areas of authority and
responsibility. Empowerment and accountability relate to the manner in
which this authority and responsibility are delegated throughout the
organization. There can be no empowerment or accountability without a
form of reporting. Therefore, appropriate lines of reporting need to be
defined. In exceptional circumstances, other lines of reporting have to be

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possible in addition to the normal ones, such as in cases where management
is involved in irregularities.
Human resource policies and practices include hiring and staffing,
orientation, training (formal and on-the-job) and education, evaluating and
counseling, promoting and compensating, and remedial actions. An
important aspect of internal control is personnel. Competent, trustworthy
personnel are necessary to provide effective control. Therefore, the methods
by which persons are hired, trained, evaluated, compensated, and promoted,
are an important part of the control environment. Hiring and staffing
decisions should therefore include assurance that individuals have the
integrity and the proper education

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and experience to carry out their jobs and that the necessary formal, on-
the-job, and ethics training is provided. Managers and employees who
have a good understanding of internal control and are willing to take
responsibility, are vital to effective internal control.

Risk assessment is the process of identifying and analyzing relevant

risks to the achievement of the entity’s objectives and determining
the appropriate response. It implies:
(1) risk identification: • related to the objectives of the entity; •
comprehensive; • includes risks due to external and internal factors, at both
the entity and the activity levels;

(2) risk evaluation: • estimating the significance of a risk; • assessing the

likelihood of the risk occurrence;

(3) assessment of the risk appetite of the

organization; (4) development of responses:
• four types of responses to risk must be considered: transfer, tolerance,
treatment or termination; of these, risk treatment is the most relevant to
these guidelines because effective internal control is the major
mechanism to treat risk;
• the appropriate controls involved can be either detective or preventive.

As governmental, economic, industry, regulatory and operating conditions

are in constant change, risk assessment should be an ongoing iterative
process. It implies identifying and analyzing altered conditions and
opportunities and risks (risk assessment cycle) and modifying internal
control to address changing risk.

Risk identification

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 A strategic approach to risk assessment depends on identifying risks
against key organizational objectives. Risks relevant to those objectives
are then considered and evaluated, resulting in a small number of key
risks. Identifying key risks is not only important in order to identify the
most important areas to which resources in risk

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assessment should be allocated, but also in order to allocate
responsibility for management of these risks.

Risk evaluation

In order to decide how to handle risk, it is essential not only to identify in

principle that a certain type of risk exists, but also to evaluate its
significance and assess the likelihood of the risk event occurring. The
methodology for analyzing risks can vary, largely because many risks are
difficult to quantify (e.g. reputation risks) while others lend themselves to a
numerical diagnosis (particularly financial risks). For the former, a much
more subjective view is the only possibility. In this sense, risk evaluation is
more of an art than a science. However, the use of systematic risk rating
criteria will mitigate the subjectivity
of the process by providing a framework for judgments to be made in a
consistent manner

Assessment of the “risk appetite” of the organization

An important issue in considering response to risk is the identification of

the “risk appetite” of the entity. Risk appetite is the amount of risk to
which the entity is prepared to be exposed before it judges action to be
necessary. Decisions about responses to risk have to be taken in
conjunction with an identification of the amount of risk that can be
tolerated.

Development of responses The result of the actions outlined above will be

a risk profile for the organization. Having developed a risk profile, the
organization can then consider an appropriate response.

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Control activities are the policies and procedures established to address
risks and to achieve the entity’s objectives. To be effective, control
activities must be appropriate, function consistently according to plan
throughout the period, and be cost effective, comprehensive, reasonable and
directly relate to the control objectives. Control activities occur throughout
the organization, at all levels and in all functions. They include a range of
detective and preventive control activities as diverse, for example, as:

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(1) authorization and approval
procedures; (2) verifications;
(3) reconciliations;

(4) reviews of operating performance;

1. Authorization and approval procedures

Authorizing and executing transactions and events are only done by persons
acting within the scope of their authority. Authorization is the principal
means of ensuring that only valid transactions and events are initiated as
intended by management. Authorization procedures, which should be
documented and clearly communicated to managers and employees, should
include the specific conditions and terms under which authorizations are to
be made. Conforming to the terms of an authorization means that employees
act in accordance with directives and within the limitations established by
management or legislation
2. Verifications

Transactions and significant events are verified before and after processing,
e.g. when goods are delivered, the number of goods supplied is verified
with the number of goods ordered. Afterwards, the number of goods
invoiced is verified with the number of goods received. The inventory is
verified as well by performing stock-takes. 5. Reconciliations Records are
reconciled with the appropriate documents on a regular basis, e.g. the
accounting records relating to bank accounts are reconciled with the
corresponding bank statements.
3. Reconciliations

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Records are reconciled with the appropriate documents on a regular basis,
e.g. the accounting records relating to bank accounts are reconciled with the
corresponding bank statements.
4. Reviews of operating performance

Operating performance is reviewed against a set of standards on a regular

basis, assessing effectiveness and efficiency. If performance reviews
determine that actual

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accomplishments do not meet established objectives or standards, the
processes and activities established to achieve the objectives should be
reviewed to determine if improvements are needed

Monitoring

Internal control systems should be monitored to assess the quality of the

system’s performance over time. Monitoring is accomplished through
routine activities, separate evaluations or a combination of both.
(1) Ongoing monitoring

Ongoing monitoring of internal control is built into the normal, recurring

operating activities of an entity. It includes regular management and
supervisory activities, and other actions personnel take in performing
their duties. Ongoing monitoring activities cover each of the internal
control components and involve action against irregular, unethical,
uneconomical, inefficient and ineffective internal control systems.
(2) Separate evaluations

The scope and frequency of separate evaluations will depend primarily on

an assessment of risks and the effectiveness of ongoing monitoring
procedures. Specific separate evaluations cover the evaluation of the
effectiveness of the internal control system and ensure that internal control
achieves the desired results based on predefined methods and procedures.
Internal control deficiencies should be reported to the appropriate level of
management.
Monitoring internal control is aimed at ensuring that controls are operating
as intended and that they are modified appropriately for changes in
conditions. Monitoring should also assess whether, in pursuit of the entity’s
mission, the general objectives set out in the definition of internal control are
being achieved. This is accomplished through ongoing monitoring activities,
separate evaluations or a combination of both, in order to help ensure that
internal control continues to be applied at all levels and across the entity,
and that internal control achieves the desired results. Monitoring the internal
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control activities themselves should be clearly distinguished from reviewing
an organization's operations which is an internal control activity

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Discussion on the recommendations to enhance the quality of internal
control in the effort to improve the public accountability

1. Clarifying what public services citizens get for their money

Currently, there is too little independent challenge and scrutiny of the link
between the funding allocated to public services, how well they perform,
and how sustainably they can run. Responsibilities for most policy areas are
overlapping, with ministers and other political leaders deciding what
services should be provided. Meanwhile, the Treasury decides how much
money to allocate, and local leaders such as police chiefs and hospital
executives determine how a service is run. This arrangement commonly
results in failure to consider how spending affects performance. To address
this, we propose that government and Parliament should ensure that
transparent, authoritative information and
data underpins the spending review process, which sets departments’
budgets for the next three to five years.

Departments should publish statements at the end of each spending review

that set out any changes to planned spending, and how these will be
delivered in practice. These should be independently scrutinized to check the
quality of financial and performance models used by departments to
underpin the proposed statements. This proposal would ensure that decisions
are based more clearly on evidence. It would increase understanding of
spending decisions which otherwise may seem arbitrary, and encourage
continuous improvement in the data that underpins decision making.

2. Ensuring that accountability across public services works in practice

There are many examples of instances when accountability arrangements

have failed to protect the public. Specific accountability arrangements vary
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between policy areas, but sometimes accountability is not built in from the
start or is dismantled over time – in either circumstance, this can cause
harm to specific groups or individuals. However, ministers do not always
take responsibility for ensuring that policies have effective accountability
arrangements built into them: this should change.

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We propose that there should be a systematic way to assess the effectiveness
of accountability arrangements. To do this in the area of financial
management, the Treasury should further develop its guidance to assess the
quality of accounting officer system statements (the documents prepared by
each accounting officer which outline all the accountability arrangements
within the department and its agencies).To do this more widely, especially in
relation to policy, departments should review other accountabilities on an
ongoing basis. The findings from these reviews should be published and
signed off by the minister responsible. These changes would encourage
government departments
and agencies to ensure that effective accountability arrangements are put
in place and maintained. This would help to ensure that policies work as
intended.

3. Parliamentary scrutiny that promotes learning and improvement

Parliamentary select committees are the ultimate form of scrutiny, checking

the work of government. Yet scrutiny typically comes late and, too
frequently, at the point of political crisis. In doing so, it can miss
opportunities to drive improvement. This is partly due to lack of resources,
and the limited time that MPs have available. It also results in few issues
being followed up over the medium and long term. These inherent
weaknesses are compounded by the temptation for MPs to engage in
political theatre, rather than in-depth scrutiny.

There are two ways to promote improvements in scrutiny. Select

committees should apply scrutiny earlier – using the new information
generated by our proposed feasibility assessments, system statements and
strengthened ombudsman services, detailed elsewhere in this report – to get
issues onto their agendas before they escalate. Also, when failure happens
despite early intervention, committees should be able to follow up issues
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over the long term, to minimize the risk that similar failure might reoccur.
This would involve scrutinizing the Government’s efforts to implement the
recommendations made by public inquiries. To support these efforts, we
also recommend that the committees are given more staff resources. These
improvements would have several
benefits. Earlier scrutiny would prevent issues from developing into crises
that are solved

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by punishing those perceived to be responsible. This also would enable
committees to act as a forum where those responsible can learn from their
mistakes, and correct their course of action.

4.Strengthening scrutiny of the links between local public services

Government provides a wide range of services on which the public rely.

Many of these services have to be delivered in a joined-up way, on a routine
basis, to benefit the public. This is challenging, because decisions made in
some areas have an impact on others in ways that are not always well
understood. While responsibility for each service is vested in a particular
individual, there is no overall responsibility for examining the links
between services. This creates accountability gaps, which can be
detrimental to performance.

Our recommendation is that the Government should build up local

capacity to track the links between different local public services, and to
examine how these relationships influence the respective performance of
services. To do so, it should review the case for setting up local Public
Accounts Committees (PACs) – initially in combined mayoral authorities
– to serve as a forum to convene the local leaders responsible for different
services to discuss service performance and the links between services.

We also need capacity to track the links between different local public
services, and to examine how these influence service performance. This
could take the form of new performance assessment units, which could
aggregate data independently and share this information as part of a
network. These changes would not absolve local public service leaders of
their responsibilities, especially where services fail. However, they would
improve local leaders’ ability to pre-empt failure by enabling earlier
discussions about how services place pressure on each other. It also would
promote learning about how service leaders can work together better to
mitigate these challenges, and deliver better services to the public.

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Summary

Accountability is an important component of public sector reform.

Increased accountability can help put an end to waste, inefficient use of
resources and corruption, and can also improve delivery of services.
Information technology (IT) and information systems (IS) have had a
significant impact on the public sector, and there is an expectation that
they will create greater accountability.

The definition of the concept of internal control was summarized. The

legal framework that guides the internal control function was outlined in
detail. The reasons for implementation (objectives) and components of
internal control were treated in detail. Other aspects on internal control
were also discussed. These included characteristics, operational means,
possible problems and role players in internal control.

Recommend public accountability and when it works, it benefits everyone.

It enables people to know how the Government is doing, and how to gain
redress when things go wrong. It ensures that ministers and civil servants
are acting in the interests of the people that they serve. Accountability is a
part of good governance, and can increase the trustworthiness and
legitimacy of the state in the eyes of the public.

(3,300 words)

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