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JOURNAL OF RESEARCH IN NATIONAL DEVELOPMENT VOLUME 6 NO 2, DECEMBER, 2008

BUDGETING AS A TOOL FOR CONTROL AND PERFORMANCE EVALUATION IN THE PUBLIC SECTOR

F. Olurankinse, P.O. Yabugbe and L.A. Ibadin
Department of Accounting,  Adekunle Ajasin University, Akungba Akoko, Nigeria

 

Abstract
The study was carried out to determine whether budgeting is an effective mechanism for control and performance evaluation in the Nigerian public sector. The objectives of the research were to find out whether the persistent deviation of the actual expenditure from budgeted expenditure constitutes inefficiency; to demonstrate that effective financial management is a measure of good governance and to confirm, if truly, effective budgeting serves as a mechanism for control and performance evaluation in the public sector. In order to achieve these objectives, primary and secondary data were used. The methodology adopted involved field survey using structured questionnaires. The data collated were analyzed using the SPSS 7.5 package for Microsoft Windows and displaying tables, percentage frequencies, regression analysis and ANOVA. The finding of the research included that poor and ineffective budgeting processes adopted by the public service were the major factors responsible for failure of budgeting in serving as a mechanism of control and performance evaluating. The paper recommended that budgets should be presented in a clear form and with sufficient detail to be easily understood by all, decentralization of budgeting process which should be subjected to adequate effective control and supervision by a control body.

Keywords: Budgets, Control, Performance, Evaluation


Introduction
In the Nigerian Public Sector today, there is a lack of performance oriented budgeting, which promotes target setting as well as proper performance evaluation. Besides, there is a poor data and accounting culture, which allows for system leakage and corruption. This situation necessitates the need to develop models for effective control and performance evaluation criteria. Control and performance evaluation potential can be better understood by recognizing the importance of good governance and a sound public sector in the national economy.

Performance measurement is a valuable exercise not least because it provides an opportunity and a framework for asking fundamental question such as what are you trying to achieve. What does "success" look like? How will you know if or when you've achieved it? As Baird (1998:4) said:

"No public sector can afford to overlook the importance of clearly defining its objectives and priorities, assessing performance against well-defined benchmarks, and changing the bureaucratic culture into one that stresses client service and achievement of results... rather than an imposed requirement of donor agencies, evaluation now becomes a key instrument of good governance and institutional development within the country. We all have responsibility to make sure this function is nurtured and supported.

An assessment of the budgeting process in the public sector leaves much to be desired. The practice today is that a certain percentage is added to previous period's budget to arrive at current budget figures without reference to the environmental inhibitions being encountered or the realities of present day situation. The budgets are centrally prepared and the result passed down the line for all and sundry to implement without questions.

The product of this practice cannot be objectives or realistic. Therefore, it cannot be relied upon to achieve any meaningful analysis or interpretation of the performance of the units involved. In the circumstances, it is not possible to talk to the budget being used as a tool for performance evaluation. It is for this reason that this study is focused on examining the current budgeting system in the public sector with the view of making appropriate recommendations so that remedial actions can be taken to make the budgeting system a

tool for effective control and for performance evaluation.

Objectives And Methodology

The objectives of the study are to find out whether persistent deviation of actual expenditure from budgeted expenditure constitutes inefficiency, to demonstrate that effective financial management is a measure of good corporate governance and to confirm, if truly, effective budgeting serves as a mechanism for control and performance evaluation in the public sector. For the above purposes, the following two hypotheses were formulated. Hypothesis One
H0:       Budgeting is not a control mechanism in the public sector
H1:       Budgeting is a good measure of public sector performance Hypothesis Two
H0:       Budgeting is not a good measure of public sector performance     
H1:       Budgeting is a good measure of public sector performance
30 respondents were selected at random from among the top management staff of the Federal Civil Service at the Federal Secretarial Akure, Ondo State. The sample size was adequate as the total management staff were 48 and the respondents constituted 62.5% of them.

The respondents were served with well-structured questionnaires. 29 of them returned completed ones which were analyzed using the SPSS 7.5 package for Microsoft Windows. Specifically, the univariate time series modeling (a first order autoregressive (ARI) model was used. Then Friedman and Krushal-Wallis tests were used to test hypothesis two.

Theoretical Framework
           
The world "budget" is derived from the old French word "BOUGETTE" meaning a small bag or pouch. It was first used in England to describe a white leather bag or pouch that held the seal of the medieval court of the EXCHEQUER. He carried the small bag which also contained his proposal for financing government expenditure otherwise now known as his budget. When presenting his proposal to parliament, he was therefore said to open his budget "a phrase first used in 1733". (Guardian unlimited review: 2004). Gradually, the word came to be used for his proposals themselves and hence for any statement of plans and expectation for a future period whether of government, public bodies,

commercial companies or private individuals. The word had now been incorporated into many languages (California department of Finance 1999).

The practice of budgeting, as it is now understood, originated in the central government of Great Britain. It later developed gradually, as a result of parliament's struggle to obtain control over the finance of the crown. In 1217, it was declared in Magna Charta that "No cottage or aid shall be imposed in the kingdom unless by the common council of realm........................After the revolution of 1688, parliament now assented the right to authorized expenditure by the crown as well as taxation apart from items in the sovereign's civil list, which was gradually reduced until it covered only the personal expenses of royal family". Parliament now began to fix government total expenditure and to prescribe or appropriate the amount to be spent for parliament purposes (California Department of Finance 1998).

Horngreen, (1977:123) said a budget is a quantitative expression of a plan of action and an aid to co-ordinate and control. According to Omolehinwa (2000:309) "a budget can be viewed as the plan of dominant individuals in an organization expressed in monetary terms and subject to the constraints imposed by other participants and the environment indicating how the available resources may be utilized to achieve whatever the dominant individuals agreed to be the organization's priorities". Meigs and Meigs, (1984) defined budget as "a comprehensive financial plan, setting forth the expected route for achieving the financial and operational goals of an organizations". According to the Chartered Institute of Management Accountants (1982:58) budget is "a financial and or quantitative statement prepared and approved prior to a definite period of time for the purpose of attaining given objectives". According to Johnson, (1992) "budgeting in the early stage of its evolution was primarily concerned with serving the purpose of legislative accountability "Jones and Bendiebury" (1984) argued that the origin of a budget could be traced back to Britain when the parliament attempted to exercise control over the activities of central government.

According to Jones and Bendlebury, (1984) budget had "developed into an indispensable management aid for directing coordinating and controlling the activities of public and private sectors". Shittinglaw (1977) simply defined budge "as a quantitative expression of plan".

 Reasons for Budgeting
Anthony and Young (1984) identified the following five reasons for budgeting:
i.          Periodic Planning
Budgeting aims to ensure the effective and efficient use of resources by determining the best way to achieve the objectives of the organization.
ii.         Co-ordination, Co-operation and Communication
iii.        Qualification and Cost Awareness
Due to the limited supply of resources, organizations must compare costs and benefits of each potential activity and select those that are considered to result in the most optimal resource allocation.
iv.        Performance Evaluation and Control
Budgeting performance reflects estimates of future events and what is considered acceptable performance. Comparing actual results for the total organization with budgeted results

(measured on the same volume basis) provides meaningful information and indicates the need to analyze and investigate the variances.
v.         Goal orientation
Ideally the budget process is a means of implementing major policy decisions. If a long-range plan exists, this will govern the preparation of short-term budgets. The long-range plan shows the estimated revenues and expenses.

 

Data Analysis
Essentially, the budgeting process is in two phases (a) planning of revenue (income) and (b) planning for expenditure. In pursuit of this study the product of the exercise in the public sector is examined.

In table 1 below is analyzed the result of the budgeting exercise for the Nigerian Public Service between 1985 and 2004.


 

Table 1            Structure of Expenditures and Budget Deficits 1985 -2004 (N Million)


Year

Actual Expenditure

Budget

Budget Deficit

% of Deficit over budget

1985

11,413.7

7,511.60

-3902.1

51.95

1986

11,923.2

5,819.10

-6104.1

104.90

1987

9,636.5

6,272.00

-3364.5

53.64

1988

9,927.6

7,267.20

-2660.4

36.61

1989

13,041.1

10,001.40

-3039.7

30.39

1990

6,223.7

7,969.40

-8254.3

103.57

1991

22,018.7

16,164.40

-5854.3

36.22

1992

27,749.5

15,588.60

-12160.9

78.01

1993

41,028.3

56,163.00

-15134.7

-26.95

1994

60,268.2

38,152.10

-22116.1

57.97

1995

66,584.4

30,829.20

-35755.2

115.98

1996

92,890.2

53,264.90

-39625.3

74.39

Source: Derived from CBN statistical Bulletin and Annual Report and Statement of Accounts

The table above shows how unrealistic the budgeting process can be and how budgets are increased arbitrarily from year to year to satisfy the whims and caprices of those responsible for preparing them.  The incremental budgeting system in force produces deficit

 

budgets which are worthless and cannot be used for control purposes or for performance evaluation.

The ineffectual nature of Public Sector budgets is further amplified when we analyze the average annual growth rates of government revenues and expenditures for the period. The table below does exactly that.


Table 2:  Analysis of Average Annual Growth Rates of Government Revenues and Expenditures 1985 -2004.


Period

%Increase    in Revenue

%       Increase       in Expenditure

%       Increase       of Expenditure      over Revenue

1985-89

1.20

36.18

34.98

1990-94

54.25

45.02

-9.23

1995-99

45.06

21.32

-23.74

2000 – 04

1.58

9.20

7.64

Source: Computed from CBN statistical bulleting and Annual Reports and Accounts


Note: Average growth rates were computed over the period indicated. On the whole, the figures above clearly reveal budgetary indiscipline by all those involved in the budgeting process. In the circumstances, the budgets so prepared cannot be said to be veritable tools for control or for performance evaluation.

Test of Hypothesis

Hypothesis one
H0:       Budgeting is not a control mechanism in the public sector
H1:        Budgeting serves as a control mechanism in the public sector
To test hypothesis one an exponential smoothing of the deviation of the actual expenditure from the budgeted expenditure was carried out using the SPSS 7.5 package for Microsoft Windows. The result is summarized below:
Model: mod 1
Result EXSMOOTH procedure for variable DEVIATN
MODEL       =              NN(No trend, no seasonally)
Initial values:               Series                           Trend
62576.30476               Not used
DFE = 20
The SEE is:     Alpha                           SSE
.1000000                                 336236834473
The following new variables are being created:
NAME                         LABEL
Fit - 1               fit for DEVIATN from EXSMOOTH, MOD 1NNA. 10 ERR-                         error for deviant from EXSMOOTH, MOD     1NNA. 10

From the statistics summarized above, given the low alpha value        (d = 0.1000) with the very large standard error of estimate                          (SSE = 336236834473), we accept the null hypothesis (Ho) that Budgeting is not a control mechanism in the public sector.
Hypothesis Two
H0:       Budgeting is not a good measure of public sector performance
H1:       Budgeting is a good measure of public sector performance.

To test hypothesis two, the researcher used the primary data collected for the purpose via the questionnaire designed for the study.   The test was done by the use of both the Friedman and Kruskal-Wallis methods. NPar Tests


Friedman Test

 

Mean rank

Budgeting control has significantly improved decision-making in public sector

2.93

Budgeting control is significantly related to performance evaluation

2.92

Does good budgetary control improves the performance in public sector?

2.90

Does the authority concern check performance against budget?

2.93

Can budget be compared with actual performance in Public sector?

3.32

 

Test Statistics


N

30

Chi-square

2441

Df

4

A system sio

655

a.         Friedman
KRUSKAL -WALLIS TEST
Ranks


Budgeting Control Has

N

Means
Rank

Budgeting control is                     Yes
Significantly related to                  No
Performance evaluated                   Total

16
13

15.50
14.38

Does Nigerian Government generally view a budget  Yes
 Deficit as an Indicator of poor performance?              No
                                                                                  Total

16
13
29

15.69
14.50

Does government use budget related                           Yes
Information as basis of evaluation of performance?    No
                                                                                  Total

16
13
29

13.78
16.50

Can budget be compared with actual performance      Yes
In Public sector                                                              No
                                                                                  Total

16
13
29

15.50
14.31

 


From the above analysis, the mean rank of both the Friedman and the Kruskal-Wallis tests is very low showing that Budgeting as constituted today is not a good measure of public sector performance.
 
Findings and Discussion
To evaluate the impact of budgeting as a mechanism of control and performance evaluation in the public sector, the least square linear regression technique and the Mailord's algorithm autoregressive (ARl) process were used in estimating the model below.
DEVIATIONt   =          f (DEVIATIONt-l)
DEVIATINt     =          ao + al DEVIATINt-l + u      (5.1)
Definition of terms and variable used
Deviatnt           =          Deviation of actual expenditure from budgeted expenditure
Budget             =          Budgeted expenditure


Fitting the end of the year data from December 1985 to December 2004 into equation (5.1) above we obtained the result summarized below.
Variable:          Deviant
Repressors:      Deviatn 1 Initial values:
ARl                                          0.00
DEVIANT 1                            0.20054

CONSTANT                            54133.79
FINAL PARAMETERS:
Number of residuals                20
Standard error              109855.07
Log likelihood             -260.29463
AIR                                          626.29463
SBC                                         529.28183


Analysis Of Variance

 

DF

SUM OF SQUARES

RESIDUAL VARIANCE

Residuals

17

232437195869.5

12068136503.3

Variables in the Model

 

B

SEB

T-RATIO

APPROX. PROB

AR1

-95794

.44052

-2.1745482

.04407288

DEVIANT 1

1.00542

.144891

6.7516790

.0000339

CONSTANT

16521.15942

15065.46867

1.0966243

.28809756


The result summarized in tables above represents the data coefficient for the deviation of the actual from the budgeted expenditure. A close look at this table shows that the slope coefficient estimate was greater than unity.
(1)        This indicates that the deviation of the actual expenditure from the budgeted expenditure is very volatile. This suggests that there is sufficient scope for fiscal prudence and accountability.
Using the ordinary least square linear regression method we obtained

Multiple                                  =         203
R square                                  =          .014
Adjusted R square                   =          .012
F Statistic Durbin                     =          .771
Durbin                         =          2.053


Variables in the Model

 

B

Std. error

T-RATIO

APPROX. PROB

CONSTANT

54133.787

32318.332

1.630

.121

DEVIANT 1

.201

.228

.878

.391

 

The regression result summarized in the table above (table 2) amplified the conclusion above. The slope coefficient estimate is statistically distant zero. The Durbin h-statistic is calculated using
H                     =         1 - l/2d       1-N(Var)
     N
Where d           =          computed Durbin Watson d-statistic
Var                  =          variance of the lagged variable
N                     =          number of observations
T0 test for the serial correlation.
The estimated Durbin h-statistics is small but negative. This lead to the acceptance of the hypothesis that there is no serial correlation of the first orders I the regressed equations. The goodness of fit of the regressed equations as indicated by the R-square shows that the equation has a low coefficient of determination. The R-square of 0.41 indicate that only 4.1 per cent of the variation in the dependent variable was explained by the explanatory variable. And the test of significance of the R-square was done by use of the analysis of variance (ANOVA) technique. Given the very large value of the computed f-statistic compared to the critical f-statistic value for V1 = K-l and V2 = n-k (that is, 1 and 18) degrees of freedom at 95 percent level of confidence (fk (1.18) + 4.4.139) we accept the null hypothesis that the regressed equation is not significant and that the R-square is not statistically different from zero.
Implication
There is lack of fiscal discipline and control, which resulted in greater spending on expenditure.

 Conclusions
This research examined the role of budgeting as a mechanism of control and performance evaluation in the public sector., Control and performance evaluation provide good information to decision-makers, allocate properly the existing limited resources and support Nigerian government accountability. Budgeting is as practiced today not a means of control mechanism and performance evaluation in Nigeria's public service.
This study also shows that control of government expenditure has been non­existent. The lack of proper budgeting processes is responsible for the failure of budgets. This has permitted corruption to grow in Nigeria. Virtually every agency in the public sector is affected. The study argues that there is need for budget reforms.

Recommendations

For budgeting to serve as a mechanism of control and performance evaluation, the following recommendations are suggested:
*          Since budget provides an overall vision of state policy, it should include all items and sectors of expenditure foreseen for the period and all sources of revenues, including taxes, duties, grants and gifts.
*          Drawing up a budget should be based on through evaluation of revenue and needs.
*          A bottom-up budgeting process should be put in place where all relevant officers will partake. Such measure will ensure that resulting budgets are objective and realistic.
*          A budget which emerges as a consequence of all the reforms recommend above will be an effective tool.

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