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Article Article June 2nd, 2015

Bringing financial management to the fore

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Many government delegations visited New Zealand in the 1990s to learn about its public-sector transformation

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Ian Ball: We wanted to be able to hold chief executives accountable for the delivery of their outputs

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Ian Ball: Knowing what your outputs cost and your financial position on a monthly basis is what you look for

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Ian Ball kicks off our conversation with something of a confession.

“I didn't study accountancy at school,” he admits. This revelation is hardly likely to damage his standing within the government financial management community, however. His academic bona fides are more than satisfied by degrees from Victoria University of Wellington and a PhD from the University of Birmingham in England, and he is now happily ensconced as Chairman of CIPFA International, where he draws on his extensive international experience of designing and managing public-sector financial systems and implementing government financial reforms.

His current role, which is focused on improving financial management in governments around the world, serves as something of a reminder of his first taste of life in the public sector in New Zealand's Treasury Department. There is no question that his experiences there have shaped much of his approach to financial management reform, and what it takes to deliver effective impact.

New Zealand, new government

New Zealand does not lack for foreign visitors. Its climate, landscapes and hospitality have long attracted tourists from all over the world. But in the early 1990s, its magnetic allure was extended to a succession of government delegations, all of whom were keen to learn more about the country's innovative public-sector transformation programme. “We had overseas groups visiting Treasury once a week, if not more,” recalls Ball.

The reforms involved the sweeping modernisation of the government's accounting and financial management systems and the implementation of new performance management and accountability arrangements. The scale of the changes - as demonstrated by the overseas interest - was ground-breaking and, Ball stresses, much needed. “When I joined Treasury I wasn't directly engaged with the reform programme straight away,” he recalls. “I was originally asked to work with several individual departments and it soon became clear that they were working within a financial system that was dysfunctional. We definitely needed to start from scratch. Ministers recognised there was huge scope for improvement, and officials were given a remarkably blank sheet of paper to design a system that could engender performance.”

The reform programme itself sought to clarify this public accountability by specifying government outputs, putting in place contractual agreements for services, and turning government departments into smaller agencies - a radical departure from what had gone before and what became known as ‘New Public Management‘. Under this system, policies would be justified by their outcomes, as opposed to how much they cost or the number of people they employed. Ministers were responsible for choosing the outcomes and the departmental chief executives - who were given fixed-term contracts to sharpen accountability - were responsible for producing the outputs and for the organisation of their agencies.

The first challenge, though, was to define what was meant by 'performance‘, a task that was not as straightforward as in the private sector, which focuses on items such as profit, loss and return on capital. “We started by looking at what we meant by ‘performance' in the context of the public sector and this is what we built into the whole system,” he says. “A government department needs to deliver services but they also need to maintain their capital - both human and financial. The second thing in defining performance was starting with outcomes and how can we achieve the outcomes we want. We wanted to be able to hold chief executives accountable for the delivery of their outputs, as well as maintenance of the capital.”

Pathway to reform: the role of the chief executive

The reforms depended on a number of different - and interlinked - factors, says Ball, who stresses that if one was missing, then it wouldn't work. “One of the things we tried to do was to make sure that the whole system was tied together,” he says. “The outputs that were specified in the chief executive's performance agreement with the State Service Commission were the same as in the departmental budget and appropriations, and so on. And the same outputs were reported at the end of the year in the department's statement of service delivery, which was an audited part of the financial statement and available for public scrutiny.”

Ball is also clear that the chief executives were given plenty of authority to do their job effectively, free from excessively detailed input controls and the influence of ministers or others on matters of organisational management. “It was no good holding a chief executive accountable for outputs if they didn't have sufficient authority to manage inputs,” he says. “We never described it this way but effectively the previous civil service model was destroyed, with the abolition of the Public Service Manual and the emasculation of Treasury Instructions, as the authority was handed over to the chief executives. This is because running the New Zealand Defence Force is not the same as running the Ministry for Social Policy, and hiring a secretary in Dunedin is not the same as hiring one in Auckland. It was far better to give the chief executives the freedom to do the job as they saw fit.”

Incentives, too, were important. The fact that chief executives, who had to manage the delivery of service and manage the balance sheet, were on fixed-term contracts with annual performance agreements, which helped show whether they delivered or not. “They were also motivated by the fact there was a performance element in their pay and if it was clear that they hadn't delivered then it would cost them,” he says. “The incentives were there for them to get this right and we could see at the reporting stage whether they had achieved against their performance agreement or not - and the truth is that they all pretty much delivered.”

Given the extent of the changes, interestingly there was actually very little resistance. In part, this was because other parts of the economy had already undergone substantial reform. “Every other sector had experienced changes and so by the time it was the public sector's turn it was really hard to argue against,” says Ball. “This meant that there was real freedom to act. Looking at the reforms today, the vast majority are still in place. Those that have been wound back slightly was not to do with their performance but more about the different changes of government since they were first implemented, and the political pendulum is always swinging one way or the other. When we designed the reforms it was on the basis that there was always going to be some unwinding over time - so when you think about what authorities you can give a chief executive they were given just about everything possible, on the basis that centralist tendencies within government are always going to be strong.”

Accounting for government: accrual reality

Alongside this wider programme of public sector reform, there were also some fundamental changes in the way the New Zealand government managed its budgets, moving from cash-based accounting to accrual. “You can't measure capital or the cost of services without accrual accounting,” says Ball. “This is the consequence of how performance was defined for government agencies.” Accrual accounting measures resource inflows and outflows, which gives a more accurate picture of an organisation's financial position, and Ball is a strong advocate for this move to accrual accounting.

“I think accrual accounting is now accepted as the benchmark because you really can't tell much about a government's real position from just cash information,” he says. “Having said that, the quality of much of the information internationally really isn't that good. For example, the US government produces accrual-based accounting statements which don't even get an audit opinion because the information provided is so unreliable. So there is still a huge amount to be done.”

As chairman of CIPFA International, he now focuses much of his attention on persuading more governments to implement accrual accounting and embrace wider reforms, and to work in support of other professional accountancy bodies internationally. “The sovereign debt crisis exposed poor accounting and audit practices, underlining the role of stronger financial management in ensuring a stable fiscal policy and public services,” he says. “Knowing what your outputs cost, knowing your financial position on a monthly basis - this is what you look for and we are a long way from there at the moment. But in the long run we are certainly moving in the right direction. The first country in the developed world to emerge from the financial crisis and raise its interest rates and be back in surplus was New Zealand. In the final analysis it all leads back to the quality of the financial management.”



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