1

Week 6: Accountability and

Controls
Public Health Accounting and Budgeting
Lili Elkins-Thompson
 2

Internal Control Systems and Triple

Bottom Line
Triple Bottom Line

 Organizations should be concerned about and

measure
 financial performance beyond the organization,
 environmental performance—the impact of its
actions throughout the life cycle of its products
and services, and
 social performance—consider the
interdependencies among the organization and
individuals and society as a whole.
Internal Controls

• Actions or policies to protect the organization’s assets

and to verify the reliability of accounting data
▫ Accounting internal controls: ensure that expenditures are legal
and properly authorized
▫ Administrative Internal Controls: encourage operational
efficiencies and monitor staff compliance with managerial
policies
Internal Controls – Feed Forward
• Prevents anticipated problems before actual occurrences of
the problem.
• Focuses on detecting undesirable material, financial, or
human resources that serve as inputs to the transformation
process.
• Focus on staff, materials, financial resources
• Examples
▫ Cash Flow Projection
▫ Budget
▫ Financial and Personnel Internal Controls
▫ Drug screening staff pre-employment
▫ Inspecting raw materials
Internal Controls - Concurrent
• A control that takes place while the monitored activity is in
progress.
• Focuses on the transformation process to ensure that it is
functioning properly.
• Monitors ongoing activities for consistency with
performance standards
• Examples:
▫ Managing off a variance report
▫ Financial Statement Ratios (i.e. Liquidity Analysis, Days Cash,
Days in Receivables, Current Ratio)
▫ Total quality management
▫ Balanced scorecard review
▫ Direct supervision: management by walking around.
Internal Controls - Feedback
• A control that takes place after an activity is done.
 Focuses on discovering undesirable output and implementing
corrective action.
• Corrective action is after-the-fact, when the problem has
already occurred.
• Advantages of feedback controls
▫ Provides managers with information on the effectiveness of their
planning efforts.
▫ Enhances employee motivation by providing them with information
on how well they are doing.
• Examples:
▫ Audits and Ratios from Audits
▫ Economic Value Added, Market Value Added
▫ Analyzing sales per employee
Elements of Internal Control
• Important elements of an internal control system:
▫ Control cues
▫ Policy Communication
▫ Segregation of Duties
▫ Record Keeping
▫ Budgets
▫ Reporting
• Taken together, policies should:
▫ Sketch the acceptable boundaries for financial decisions
▫ Govern the way resources are allocated
▫ Provide information for evaluation
▫ Define the processes to be used in carrying out the organization’s
mission
Operations Control

• Two Components
▫ Financial Control
 Proper actions and records in place to maintain
financial integrity
▫ Performance Control
 Focused on the staff: are you getting the work of
the organization done
 Checks for efficient use of resources
Financial Controls
• Organization has limited spending authority
▫ Government grants, gifts, amounts approved by the Board
▫ Line item vs. program or responsibility center controls
▫ Need for some line item controls
• Spending Authority Issues
▫ Needs to be top down; issues:
 Compartmentalized funds, money that is not flexible
 Funds from Several Sources
▫ Budget Adjustments
 Contingency Allowances
 Revisions
Financial Controls Cont.
• The Accounting System
▫ Key to information on internal operations
▫ Money helps measure what is happening: measure of
inputs
▫ Donor Restrictions
▫ Consistency with Budget
▫ Need for Integrated Systems
▫ Audit is a tool for financial control
Performance Control
• Concern here is with day to day operations
• Adhering to the Policy and Procedure Manual
▫ This manual will help you delegate
▫ Policies and Procedures:
 Standardize actions
 Identify accountability and responsibility
 Free you to be creative, visionary and sleep at night
▫ Look at other organizations to help develop a manual
Quality Control

 Cost of Quality Report

 Prevention costs
 Appraisal costs
 Internal failure costs
 External failure costs

 Total Quality Management

Quality Control Charts

Financial Management for Public, Health, and Not-for-Profit Organizations, 4th Ed. © Pearson Education 2013
Accounting Tools for Financial Control
Variance Analysis

 Variance analysis investigates differences (variances)

between planned and actual results. It help managers:

- prepare budgets for the coming year,

- control results in the current year, and
- evaluate the performance of operating units.

 Variance analysis focuses on material differences to help

managers correct problems and capitalize on opportunities.
Some Variance Terms
 Variance analyses can be prepared for costs, revenues,
and profits/(losses).
- Lower than expected costs or higher than expected
revenues or profits result in favorable variances.
– Favorable variances are designated with a capital “F.”

- Higher than expected costs or lower than expected

revenues or profits result in unfavorable variances.
– Unfavorable variances are designated with a capital “U.”

- Some organizations treat favorable variances as positive

numbers, and some treat them as negative numbers. The
same is true for unfavorable variances.
Variance Mechanics
The budgeted and actual costs and the resulting month and
Y-T-D variances for the Hospital for Ordinary Surgery
illustrate an unfavorable cost variance.

This Month
Actual Budget Variance
$9,200,000 $8,800,000 $400,000 U

This Year
Actual Budget Variance
$25,476,000 $25,150,000 $326,000 U
 Department and Line Item Variances
Variances at most levels of an organization represent
aggregations of variances from other levels. For example: total
organizational expense variances represent the sum of
departmental variances, whereas departmental variances are
made up of line item variances.

Radiology
Department Actual Budget Variance
Salary $400,000 $395,000 $ 5,000 U
Supplies 400,000 205,000 195,000 U
Total $800,000 $600,000 $200,000 U

Suppose the supply variance was $50,000 F and the salary

variance was $50,000 U. What would the total variance be?
Should it be investigated?
Flexible Budget Variance Analysis
 Flexible Variance Analysis allows managers to identify what
portion of a total variance is due to:

- differences between the budgeted and actual volume of

some output (Volume Variance),

- differences between the budgeted and actual price (or rate)

of each unit of input or output (Price or Rate Variance), and

- differences between the budgeted and actual quantities of the

resources used per unit of output (Quantity or Use Variance).
Volume, Price, and Quantity Examples

School Cost Example Hospital Revenue Example

Total Cost of Textbooks Total Oncology Patient
Revenue
Volume Number of third grade Number of oncology
students patients
Quantity Number of textbooks Days of stay per oncology
per third grade student patient
Price Cost per textbook for Price per day of stay per
third grade students oncology patient
Variance Definitions

Flex Budget or Flexible Budgets

• Provide budgets for different levels of activity
• Variance analysis for flexible budgets by recognizing that at
least part of the total variance for any line item is often the
result of changes in the level of activity

VQA Budget
• Uses actual quantity instead of budgeted quantity
Variance Computations
Volume Variance:
Original Budget: Budgeted Volume x Budgeted Quantity x Budgeted Rate
- Flex Budget: Actual Volume x Budgeted Quantity x Budgeted Rate

Quantity or Use Variance:

Flex Budget: Actual Volume x Budgeted Quantity x Budgeted Rate
- VQA Budget: Actual Volume x Actual Quantity x Budgeted Rate

Price or Rate Variance:

VQA Budget: Actual Volume x Actual Quantity x Budgeted Rate
- Actual: Actual Volume x Actual Quantity x Actual Rate

Total Variance: Volume + Quantity + Price Variances

Variance Analysis Cautions
 Aggregation can hide meaningful variances and lead managers
to misinterpret the condition of the organization.
 Exception Reports should be prepared for all material
variances that warrant management’s attention.
 Fixed costs should not result in volume variances, because they
are not expected to change with volume.
 Expense and Revenue variances often have to be analyzed
together. For example, an unfavorable expense volume variance
may be good for the organization if it is accompanied by an even
larger favorable revenue volume variance.
The Sarbanes-Oxley Act

 SOX: 2002 law passed in wake of Enron, Tyco, and

other corporate scandals.
 Applies to for-profit organizations; NFPs are under
pressure from regulators, insurers, lenders, and so
on, to apply SOX provisions.
 Enhances role of Board Audit Committee.
 Key managers must certify financial results.
 Higher level of accountability for all of the
organization’s managers.
Internal vs. External Audits
• Internal Audits
▫ Examine the strengths and weaknesses of the nonprofit entity
▫ Is the staff competent? Is the technology up to date? Can the
organization adapt to changing developments?
• External Audits
▫ Looks at the opportunities and threats critical to the organization
▫ Assures financial statements are accurate and that fiduciary
responsibilities are being carried out
▫ Tests the accounting system, determines the adequacy of internal
checks and balances, checks on compliance with proper
accounting principles, confirms account balances and evaluates
documentation
Levels of an Independent Audit
• Compilation
▫ Lowest Level of Audit
▫ Gathering financial records into a standardized, readable format
• Review
▫ Next Step Up
▫ Accountant complies the information into standardized formats
and then performs quick analyses to assess internal consistency
• Audit
▫ Deepest level of consideration
▫ Auditors test management’s representations according to pre-
established protocols
▫ Prolonged exposure to the books gives the auditors the
opportunity to spot errors and omissions and make suggestions
for improvements
Relationships in an Audit
• An audit is supposed to be an opinion on the reliability
of the management’s financial statements
• Management is supposed to prepare statements for
review by auditors

Auditor = Auditing
Management = Bookkeeping

• If management doesn’t complete basic financial tasks,

the auditors will need to do it
• If auditors have to prepare financial statements, the
audit will be more costly and time consuming
Selecting an Auditor

• Must use a CPA

• Elements of Auditor Choice
▫ Level to which an auditor understands your industry
- Industry experts will be able to execute an audit
more effectively and efficiently
▫ Your Board should make your selection of an auditor
and should meet with the auditors once a year to get
a first hand account of the financial situation
▫ In reality, this often falls to the Executive Director
Designing an RFP for an Auditor

• Components to address in RFP

▫ Describe the organization thoroughly
▫ State what you need
▫ Request qualifications
▫ Describe timetable, decision process and selection
criteria
• Distribute RFP to auditors who understand your
industry
• Be prepared to meet candidates in person
• Provide sufficient time to respond – 4 to 8
weeks
Other Auditing Issues

• Maximize the Value of Your Audit - Request a

management letter – the auditors have learned a good
deal from your audit, so should you

• Be aware of any particular audit requirements you must

comply with
 38

Other Internal Controls

Financial Control Policies
• Cash: bond everybody, segregate recording, depositing
and reconciling
• Receivables: segregate inventory and check writing
• Debt Policy: who? How much?
• Check signatures: who, dollar amounts
• Petty Cash
• Contracts – who has to approve
• Reporting – who gets what & when
• Confidentiality
Functional Segregation of Duties
APPROVAL

CUSTODY SEGREGATE RECORDING

Critical Financial Controls
• Duties should be segregated
• Checks received should be restrictively endorsed
upon receipt
• Checks should be deposited the same way they are
received
• Invoices should be approved before payment
• Only original invoices should be paid to avoid
duplication
• Each invoice should be marked “paid” when the
check is prepared
• Checks should have accompanying documentation
Critical Financial Controls
• Two signatures should be required for large checks
• Assets should be safeguarded (i.e. proper security
should be used)
• Internal control policies and procedures should be
documented
• Supporting documentation should exist for
transactions such as deeds for buildings and loan
agreements for debt incurrence
• Authorized levels of staffing and budgeting should
exist
• Policies should be communicated throughout the
entity.
Personnel Policies
• Protect yourself from litigation, age, sexual harassment, unjust
termination
• Publish an employee handbook
• Make sure it is understood and up to date
• Typical Contents
▫ Employment, Performance Review and Termination
▫ Hours and Conditions
▫ Salaries and Wages
▫ Employee Benefits including Insurance and Retirement
▫ Grievance Procedure, Sexual Harassment, Equal Employment
Opportunities
▫ Drug Testing and Drug Use
▫ General Policies
▫ Office Policies
Other Policy and Procedure Topics
• Media Policies – designate a spokesperson and make
that your single voice
• Volunteer Policies
• Quality Assurance
• Program Policies
• Risk Management
• Disaster Policies
Code of Ethics
• Include a preamble
• Conflict of Interest
▫ Have a policy, define a conflict
▫ Distribute a statement and require disclosure on any business
transactions
▫ Applies to board, employees and volunteers
• Policy on accepting gifts
• Respect towards customers
• Tips on Writing Your Code
▫ You need to write it, not the consultant (include every level of the
organization)
▫ Inspiration versus regulation – both
▫ Consider how it will be enforced
▫ Make it a statement of your core values – with specific examples
▫ Pilot the code – test it out
 46

Balanced Scorecards
What is a Balanced Scorecard?
• The balanced scorecard is a strategic management
system (not only a measurement system) that enables
organizations to clarify their vision and strategy and
translate them into action.

• When fully deployed, the balanced scorecard

transforms strategic planning from an academic
exercise into the nerve center of an enterprise.
What is a Balanced Scorecard?
• Combines a “balance” of financial measures and
operational measures to assess program performance
and success
• A set of measures that gives top managers a fast but
comprehensive view of the business
▫ Includes financial measures that tell the results of actions
already taken
▫ Complements them with operational measures on customer
satisfaction, internal processes, or the organization's
innovation and improvement activities – operational
measures that are drivers of future financial performance
Balanced Scorecard
• Provides the answers to four basic questions:
▫ How do customers see us (customer perspective)?
▫ What must we excel at? (internal perspective)?
▫ Can we continue to improve and create value? (innovation
and learning perspective)
▫ How do we look at shareholders? (financial perspective)
• Minimizes information overload by limiting the
number of measures used
• Forces managers to focus on the handful of measures
that are most critical
Balanced Scorecards Meet Managerial
Needs
• Brings together, in a single management report,
many of the seemingly disparate elements of a
company’s competitive agenda:
▫ Becoming customer oriented;
▫ Shortening response time;
▫ Improving quality;
▫ Emphasizing teamwork;
▫ Reducing product launch times; and,
▫ Managing for the long term.
• Guards against sub-optimization.
▫ Forces managers to look at all important operational
measures together
▫ Allows them to see whether improvement in one area may
have been achieved at the expense of another.
Public-Sector/Nonprofit Balanced
Scorecard
MISSION

Customers &
Stakeholders

Internal
Financial STRATEGY Processes

Employee
Learning &
Growth
Public-Sector/Nonprofit Balanced
Scorecard MISSION

Objectives

Measures

Targets

Initiatives
Customers
Who do we
define as our
customer? How
do we create
value for our
customer?
Internal
Financial
Objectives

Measures

Targets

Initiatives

Objectives

Measures

Targets

Initiatives
Processes
How do we add
To satisfy
value for
customers while
customers while
controlling
STRATEGY meeting budgetary
constraints, at what
costs?
business processes
must we excel?

Employee
Objectives

Measures

Targets

Initiatives

Learning &
Growth
How do we enable
ourselves to grow
and change,
meeting ongoing
demands?
Balanced Scorecard Logic
Customers MISSION

VISION
CORE VALUES

GOALS

Perspectives STRATEGY Focus Areas

STRATEGIC MAP
OBJECTIVES
MEASURES
TARGETS

INITIATIVES
Why Use Balanced Scorecards
• Move From  Move Towards
Compliance and
Control: Performance
▫ Rules- Accountability:
governed  Mission Driven
▫ Limited  Customer
Flexibility Driven
▫ Non-
preventative  Employee
(rework based Responsive
on feedback)  Flexible
▫ Negative  Preventive
Focus
 Positive, Team
▫ Control of
Individuals Focus
Steps to Creating and
Implementing a Balanced Scorecard

ASSESS. EVALUAT.

STRATEGY CASCADE

OBJECTIVES AUTOMATION

STRATEGIC
INITIATIVES
MAP
PERFORM.
MEAS.
STEP 1: ORGANIZATIONAL
ASSESSMENT
• Look at:
▫ Capacity Building
▫ Strategy
▫ Needs
▫ Mission, Vision, Values
▫ Outcomes
▫ Goals
• Develop Goals
• Determine Citizen’s Needs and Wants
Step 2: Define Strategies
MISSION

VISION

STRATEGIC THEMES
1) Strategic Theme 1
2) Strategic Theme 2

STRATEGIES:
• Strategy 1
• Strategy 2
• Strategy 3
Example of Strategic Framework

Theme 1: Theme 2: Theme 3: Theme 4:

Perspective: Effective Social, Community Growth
and Efficient Educational Health & Management
Government & Economic Safety &
Opportunity Environment
Customers

Business
Processes DESIRED OUTCOMES
Financial
Value

Learning
and
Capacities
Step 3: Strategic Objectives
Increase Increase Safety Increase
Customers Involvement Satisfaction

Reduce Grow Tax

Budget Costs Base

Improve Reduce
Internal Business Procurement
Process Cycle Time
Steps

Learning & Increase

Improve Network
Growth Skills Capacity
Step 4: Strategic Map
Increase Increase Safety Increase
Customers Involvement Satisfaction

Reduce Grow Tax

Budget Costs Base

Improve Reduce
Internal Business Procurement
Process Cycle Time
Steps

Learning & Increase

Improve Network
Growth Skills Capacity
Step 5: Performance Measures
• Performance Measures Should Help Us Decide Are
We Doing the Right Thing?
▫ Business Planning – How
 Input: Resources, including cost and workforce
 Process: Activities, efforts, workflow
▫ Strategic Planning – What
 Outputs: Products and services produced
 Outcomes: Results, accomplishments, impacts
• For each theme/desired outcome goal, ask how you
will know if the goal is being achieved
• Identify how each goal should be measured
• Examine baseline data (when available) to set
schedules and targets
Example of Strategic Plan

STRATEGY MAP

PERFORMANCE
MEASURES

TARGETS

STRATEGIC
INITIATIVES
Measures Before Projects!
Strategy Objectives Measures Targets Initiatives

“The strategic planning process should use initiatives to help the

organization achieve its strategic objectives, not as ends in
themselves.

Public sector and nonprofit organizations are especially guilty of

often confusing initiative completion as the target rather than in
improvements in mission objectives and agency effectiveness.”
-Kaplan and Norton, 2001
Step 6: Develop Strategic Initiatives
• Candidate  Prioritized
Initiatives: Funding
▫ Outreach Initiatives:
Programs 1.
Selection
▫ Citizen Criteria: 2.
Surveys • Resources 3.
▫ Partnerships Required 4.
▫ Process • Impact 5.
Improvement potential 6.
▫ Training ranking on
Courses strategy
▫ Knowledge • Multiple
Building objectives
▫ Policy Analysis covered
• Time
▫ R&D Efforts required -
▫ Communicatio needed
n Plan
▫ Performance
Based Budget
Linking Scorecard Components
What strategy Performance
must be Expectation
achieved and
what is critical
to success?

Objectives Measure Target Initiatives

Customers
How success
will be
Financial measured and
tracked Key action
programs
required to
Employee achieve
Learning & objectives

Growth
Internal
Processes
Step 7: Automation
• As options progress they require more time, costs and enterprise requirements to
implement

• Consumer Off The Shelf (COTS) Database

▫ Few measures
▫ Simple Reports
▫ Small Office
• PMIS
▫ Numerous Measures
▫ Advanced Charting
▫ Multiple Locations
▫ Web Publishing
▫ Analysis and Commentary
• Data Warehouse
▫ Enterprise-wide data
▫ Composite Measures
▫ Many data/reporting locations
▫ Advanced executive reporting
▫ Web Publishing
▫ Advanced Analysis
▫ Dynamic links to legacy system
Step 8: Cascaded Scorecards to
Support Strategy

• Different levels of scorecards:

▫ Individual
▫ Team
▫ Business Units/Support Units
▫ Corporate
• Communicate strategy to all business units
Step 9: Evaluate and Change

• Once process has been Implemented, you must

evaluate the system and make changes as
appropriate
Performance Management System
Challenges
• Fear of measurement and new systems
• Lack of common definitions and terms
• Inconsistent or weak buy-in and lack of understanding
• Visions and strategies that are poorly defined and understood,
not actionable, and not linked to individual actions
• Treating budgeting as separate from strategy development
• Measures that are set independently of the performance
framework, or measures with no ownership
• No performance targets, or targets that are set too high or too
low
• Little or no strategic feedback
• Lack of meaningful employee involvement
Best Practices
• Limit the number of measures
• Include measures for all perspectives and all strategies
• Seek balance among measures
• Develop solid baseline data
• Develop measures for past, present and future
• Don’t over-rely on output, process and input measures
• Set stretch targets
• Watch for unintended incentives
• Hold people accountable for results