Chapter 4 – Financial Provisions in Public Sector Accounting

Financial provisions are specified in Article 96 to Article 112 of the Federal Constitution in relation to all
three levels of government in Malaysia. There are17 articles in the provisions which act as the basis for
managing financial aspects of the government.

Objectives of Financial Positions

• Establish the general framework for the control of public expenditures by the legislators.

• Provide good financial management systems.

• Govern the methods of which public funds are to be administered and accounted for.

• Define the borrowing powers of federal and state governments.

• Provide guidelines on the maintenance of specified consolidated funds for the federal and state
governments.

• Provide guidelines on the preparation of budget and annual statements of assets and liabilities.

Revenues

Federal government and state government have their own source of revenues. (Read details below
under budget section) . The explanation below is more on grants which is annual financial assistance
from the Federal Government to the state government. Four major types of grant: Capitation Grant,
State Road Grant, State Reserve Fund, and Revenue Growth Grant. (Grant from federal government
to State government)

1. Capitation Grant: in virtue of Article 109 (1) (a) of the Federal Constitution. Allocated to assist
the states in their operating expenditure. The computation of the capitation grant is based on
the population of a particular state. Therefore, the state with the most populace will receive
the highest grant.
2. State grant: the grant is given for the purposes of maintaining the state roads in the state. The
grant. The grant is based on Article 109 (1) (b).
3. State Reserve fund: allocated under article 109 (6) under the Federal constitution. Given to
states upon application not given automatically. The purpose is to assist any state government
that has deficits in the current accounts or for development purpose.

Expenditures

• Article 98 of the Federal Constitution states that expenditures, including any grant, remuneration
or other money charged by other article or federal law, shall be charged to the consolidated
funds.

• Supply Bill – providing for the issue from the Consolidated Fund of the sums necessary to meet
that expenditure and the appropriation of those sums for the purposes specified therein.

• Contingencies fund – An urgent and unforeseen need for expenditure, where there is no other
provisions allowing for such purpose under the Constitution.

Control and Management of Funds

1. Consolidated Funds are established in order to administer and regulate the financial
provisions of the constitution. According to the Section 3 Article 97 of the Federal Procedure
Act 1957, consolidated funds means the federal consolidated fund and the consolidated fund
of the states as mentioned in Article 97 (1) and 97 (2) of the Federal Constitution.
2. Both relate to the three types of funds, consolidated revenue account, consolidated loan
 account and consolidated trust account.
3. Borrowings by the government are strictly regulated as this will increase the public debts and
have major implications on the ability of the government to meets its objectives. By virtue of
Article 111 (1) and (2) of the Federal Constitution, the federal government shall not borrow
except under the authority of federal law.
4. The state government are further restricted to borrow only from the federal government.
They are permitted to borrow from bank or financial institution approved by the federal
government if the borrowings are for periods of less than 5 years.

Borrowings

• Federal government shall not borrow except under the authority of federal law.

• State government are further restricted to borrow only from the federal government or from
bank or financial institution approved by the federal government if the borrowings are for
periods less than 5 years.

• Federal Constitution restricts a state from giving any guarantee except under the authority of
state law and with approval of federal government. (Article 111(3))

• Sabah and Sarawak to borrow under the authority of the state law within the state with Bank
Negara Malaysia’s approval (Article 112B).

Chapter 5 Management Accounting in Public Sector (Performance Management)

Performance management is the process by which organizations set strategy and device governance,
values, processes and controls to direct people a money to deliver their strategic objectives in cost -
effective way in due regards to risk and opportunities. Performance measures are being actively
developed in Malaysia at both the federal and provincial government levels to improve the performance
of the public sector and to achieve greater accountability. The interest on performance measurement
in the public sector can be observed through the introduction of various types of performance
measurement initiatives such as key performance indicators (KPIs), balanced score card and others to
enhance its services and promote transparent and accountable government.

The process of performance management involves observing and evaluating staff members
performance in the work-place with relation to pre set standards. It consists of three interrelated
elements: -

i. Individuals measures that quantify the efficiency and effectiveness of actions

ii. a set of measures that combine to assess the performance of an organization as a whole
iii. a supporting infrastructure that enables data to be acquired, collated, sorted, analysed,
interpreted and disseminated.

In order to create an accurate, effective and efficient performance measurement system in the public
sector, we need to have a good performance measurement framework. Some of the commonly used
performance measures includes:

 Inputs (funds, personnel, equipment and other resources)

 Workload or activity level (applications processed, inspections carried out and services rendered)
 Outputs (e.g. the number of children vaccinated, miles of road built, tons of trash picked up, and
students graduated)
 Outcomes of products or services (e.g. illnesses prevented, percentage of taxes collected, clean
air levels achieved, accident free workplaces attained, and poverty alleviated).
 Productivity (e.g. cases investigated per detective, applications processed per person, and
 emergency calls handled per dispatcher)
 Costs (e.g. average costs to build one kilometer of highway, educate one child, and maintain
public roads)
 Customer satisfaction (e.g. number of complaints received, results of surveys, and use of
participative processes)
 Service quality and timeliness (e.g. police response times, ability to contact an agency by
telephone, compliance with transportation timetables, breakdown rates, and service
availability).

Performance Measurement and the Concept of Three Es

i. Efficiency
– Efficiency is measured by comparing output with input.
– The more output for input, the more efficient the organisation will be.
– Input is often measure in units of currency, whereas output can be measured in either
monetary amounts or physical units for the public sector organisations.
– If the organisation was efficient, it means that it has achieved its objectives at a
satisfactory cost

ii. Effectiveness
- Effectiveness concerned only with outputs.
- It refers to the success or failure in achieving the organization’s objectives.
- Achievement of entities of its objectives or providing better alternatives and strategies so
that the flow of the process is way smoother than the previous years.

iii. Economy
- Economy is concerned only with inputs.
- Lowest possible expenditure of funds within the appropriate standard ( performance in
relation to expenditure) by using certain evaluation criteria based on the principle of doing
things inexpensively.

Performance Measurement may be able to assist public sector organization to perform the
following organizational functions

a. Strategy formulation, determining what the objectives of the organization and how the
organization and how to achieve them
b. Manage the implementation process, by examining whether an intended strategy is being put
into practice as planned.
c. Challenge assumptions, by focusing not only on the implementation of an intended strategy
but also on making sure that’s its content is still valid.
d. Check position, by looking at whether the expected performance results are being achieved.
e. Comply with the non-negotiable parameters, by making sure that the organization is achieving
the minimum standards needed, if it is to survive
f. Communicate direction to the rest of the employees by passing on information about what
are the strategic goals individuals are expected to achieve.
g. Communication with external stakeholders
h. Provide feedback by reporting to employees how they are, their group and the organization
as a whole is performing against the expected goals.
i. Evaluate and reward behaviour in order to focus employees’ attention on strategic priorities
and to motivate them to take actions and make decisions, which are consistent with
organizational goals.
j. Benchmark the performance on different organizations, plants, departments and individuals
k. Inform managerial decision making process
l. Encourage improvement and learning.
Types of performance management

1. Micro Accounting System

- The guidelines on costing of government services in Malaysia called Micro Accounting
System or the acronym SPM (Sistem Perakaunan Mikro).
- Special division was established in the Accountant General's Department (AGD) to
organize and monitor SPM implementation and develop supporting computer systems.
- Developed on the concept of ABC, is introduced to enhance the efficiency in financial
management as well as public sector productivity.
- Aim was for managers to plan, implement, monitor and evaluate activities and
programmes to ensure effective use of public funds and the meeting of Programme
Agreements.

- Designed to achieve the following objectives

• Facilitate the collection, processing and preparation of the cost
information
• Prepare information on cost efficiently and in a more flexible manner
• Produce reliable cost information
• Contribute to the optimization of the use of resources

- Among the benefits of SPM are:

• To instil cost awareness for the management
• To allow comparison between actual costs and planned costs
• To assist in planning process, executions, control and evaluation
• To be aware of the direction of changes component of the output costs
• The basis for determining the price for a particular output

2. Key Performance Indicators

- Measurable values that demonstrate how effective an organization is in achieving its key
business objectives.
- Organizations use KPIs to evaluate their success at reaching targets.
- Characteristics of KPI either public or private sectors
a. Non financial measures
b. Measured frequently
c. Acted on by the CEO and senior management team
d. Clearly indicate what action is required by staff
e. Measures that tie responsibility down to a team
f. Have a significant impact
g. Encourage appropriate action.

3. Common problems
- The public sector’s provision of services is hugely complicated by shared or sometimes
conflicting objectives, the demands of stakeholders and the influence of politicians.
- The public sector faces numerous challenges when it comes to performance management
regardless whether in terms of the attitude of employees towards their job or the
implementation of proper performance management system in the organization.
- Some common problems faced by the public sector in performance management:

a. Lack of commitment from senior management

• The level of passion and commitment demonstrated by the top
management of an organization towards performance management
system is the upmost important.
 • If those in senior positions do not show commitment, the employees in
the lower management positions will also not take heed of the system.
• Once system is implemented, those in higher management should
practicing it and only then expect those in the lower management to
follow suit.

b. Lack of knowledge and skill

• This may be due to weakness of the performance management system
itself.
• The system might be poorly designed and there must be insufficient
training for staff on implementation of particular new system.
• Proper communication to ensure understanding and commitments of all
staffs.

c. Resistance to change
• Unwelcoming to changes & normal human behavior to resist changes.
• Comfortable with the existing work culture.
• Everyone in the organization must be aware of the new system and
understand that the changes is meant for the betterment of the
organizations.
• To include reward system to encourage them to become better

d. Ineffective performance evaluation practices

• Evaluation must be done using quality and reliable performance data.
• To successfully measuring dimensions and appropriate key behaviors in
the performance plan. – its critical to classify behavioral examples.
• Avoid politics and bias

e. Keeping the systems active

• Most employees get complacent (comfortable/satisfy) after a certain
period of time
• It is crucial to ensure that the system is periodically monitored ad
revised if necessary.

f. Linking performance management to job descriptions

• Job description should include activities that if executed well, will help
fulfil the vision and mission.
• The heads of departments need to ensure that the job descriptions and
objectives are aligned with the organization’s strategic objectives.
• The objectives must be achievable with expected outcomes,
performance standards and time scales linked to each objective.