Accountability for Performance in Local Government in Indonesia

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POAD 9100

RESEARCH PROJECT IN POLICY AND MANAGEMENT

ACCOUNTABILITY FOR PERFORMANCE IN LOCAL GOVERNMENT

IN INDONESIA: SUSTAINABILITY BALANCED SCORECARD

APPROACH FOR BETTER PRACTICES OF CORPORATE

GOVERNANCE

Jermi Haning

2013986

Submitted in partial fulfilment of the requirements for the degree of

Master of Policy and Administration

FLINDERS INSTITUTE OF PUBLIC POLICY AND MANAGEMENT

FLINDERS UNIVERSITY

2003


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TABLE OF CONTENT

TABLE OF CONTENT .....................ERROR! BOOKMARK NOT DEFINED. EXECUTIVE SUMMARY ................................................................................... IIIDECLARATION ................................................................................................... IV

ACKNOWLEDGEMENT ...................................................................................... VABBREVIATION ................................................................................................. VI

1. INTRODUCTION ............................................................................................. 11.1.

BACKGROUND OF THE STUDY ..................................................................... 11.2. LIMITATION OF THE STUDY ......................................................................... 21.3.

OUTLINE OF THE STUDY .............................................................................. 32. LITERATURE FRAMEWORK ....................................................................... 4

2.1. CORPORATE GOVERNANCE ......................................................................... 42.2.

ACCOUNTABILITY AND PERFORMANCE ....................................................... 52.2.1. What is Accountability? .................................................................. 5

2.2.2.

The Changing Focus of Accountability ........................................... 72.2.3. Relating Accountability to Performance ....................................... 102.2.4. Establishing Accountability Framework for Performance ............ 12

2.3. A SUSTAINABILITY BALANCED SCORECARD (SBSC) APPROACH TOPERFORMANCE .......................................................................................... 13

2.3.1.

What is SBSC? .............................................................................. 132.3.2. SBSC as Organizational Strategy for Performance ....................... 142.3.3.

The Incorporation of SBSC ........................................................... 163. THE ACCOUNTABILITY SYSTEM IN LOCAL GOVERNMENT IN

INDONESIA ................................................................................................... 183.1. THE LEGISLATURE AS THE PRINCIPAL OF ACCOUNTABILITY ..................... 183.2.

THE GOVERNMENT AS THE AGENT OF ACCOUNTABILITY ......................... 203.2.1. Providing Information/Reporting .................................................. 21

3.2.1.1.Annual Budget ......................................................................... 233.2.1.2.Annual Report ......................................................................... 243.2.1.3.Performance Information ........................................................ 26

3.2.2.

Providing Explanation/Justification .............................................. 283.2.3. Reviewing and Revising ................................................................ 293.2.4.

Granting Redress or Imposing Sanction ........................................ 303.3. AUDITING AND ACCOUNTABILITY ............................................................. 31

3.3.1. The New Focus of Auditing .......................................................... 32

3.3.2.

Auditing in Local Government in Indonesia ................................. 344.

RESEARCH METHODOLOGY .................................................................... 375.

A SUSTAINABILITY BALANCED SCORECARD (SBSC) APPROACHTO PERFORMANCE ..................................................................................... 385.1. I NTRODUCTION.......................................................................................... 385.2. COMMUNITY-ORIENTED MANAGEMENT ................................................... 38

5.2.1. Satisfying Costumers and Communities Needs ............................ 385.2.2.

Putting Governance into Practice .................................................. 415.3. I NTERNAL BUSINESS PROCESS .................................................................. 44

5.3.1.

Benchmarking ............................................................................... 445.3.2. Quality Assurance ......................................................................... 47

5.3.3.

Quality Assurance ......................................................................... 485.3.4. Other Measures .............................................................................. 48


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5.4.

FINANCIAL PERFORMANCE MANAGEMENT ............................................... 485.4.1. Budgeting System .......................................................................... 495.4.2. Contemporary Financial Accounting ............................................ 525.4.3. Asset Management ........................................................................ 54

5.5. I NNOVATION AND LEARNING MANAGEMENT ............................................ 56

5.5.1.

Managerialsm ................................................................................ 585.5.2. Reward and Recognition ............................................................... 595.5.3.

Training ......................................................................................... 605.6. SUSTAINABILITY MANAGEMENT ............................................................... 61

5.6.1.

The Urgency of Sustainability ....................................................... 615.6.2. Sustainability in Local Government .............................................. 635.6.3.

Some Challenges to Its Sustainability ........................................... 666. DISCUSSION................................................................................................. 697. CONCLUSION AND RECOMMENDATION .............................................. 70

LIST OF APPENDIX

APPENDIX 1. LGA INDEX SUBJECTIVE WEIGHT BY CRITERIA ........... 74APPENDIX 2. ACCOUNTABILITY – DEFINITION, ORIENTATION AND

PROCESSES .............................................................................. 75APPENDIX 3. MAIN CHANNELS OF ACCOUNTABILITY IN LG IN

INDONESIA .............................................................................. 76APPENDIX 4. A POSSIBLE CHECKLIST OF ACCOUNTABILITY

INSTRUMENTS FOR LG ......................................................... 77APPENDIX 5. ACCOUNTABILITY MECHANISM AVAILABLE TO THE

DPRD IN RELATION TO THE AUDITING ........................... 78APPENDIX 6. AN ORGANIZATION'S RIPPLE EFFECT .............................. 79APPENDIX 7. THE MAGICAL 7 STEPS (PLUS OR MINUS 2) IN

BENCHMARKING ................................................................... 80APPENDIX 8. A MAP OF PARTICIPATION TYPES ..................................... 81APPENDIX 9. A SUMMARY OF SER PRACTICES ...................................... 82APPENDIX 10. COMPARISON OF COMMON TYPES OF PERFORMANCE

AUDITS ..................................................................................... 83APPENDIX 11. APPROACH TO EFFECTIVENESS AUDITING .................... 84APPENDIX 12. APPROACH TO EFFICIENCY AUDITING ............................ 85

REFERENCE ........................................................................................................ 86

LIST OF TABLETABLE 1. CHANGING IDEAS OF ACCOUNTABILITY ................................. 10TABLE 2. A SBSC TO ACCOUNTABILITY FOR PERFORMANCE IN LG .. 17TABLE 3. ACCOUNTABILITY RELATIONSHIPS IN A LG CONTEXT ....... 21TABLE 4. LADDER OF ACCOUNTABILITY .................................................. 23TABLE 5. SERVICE QUALITY DETERMINANTS ......................................... 40TABLE 6. VARIETIES OF JOINED-UP WORKING......................................... 43

LIST OF FIGUREFIGURE 1. ACCOUNTABILITY PROCESS IN THE PUBLIC SECTOR .......... 5FIGURE 2. THE ACCOUNTABILITY FRAMEWORK .................................... 13

FIGURE 3. LG BUDGETARY CYCLE .............................................................. 24


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EXECUTIVE SUMMARY

This study aims to understand the nature of accountability which has experienced profound changes as the new focus on accountability has made an impact. Public

sector reforms that have taken place in some western countries, and recently insome developing countries, are acknowledged to have redefined the emphases ofaccountability. The new foci of accountability are on performance, in terms ofresults or outputs and outcomes, instead of on inputs, process and complying withrules (Kluvers 2001; Osborne & Gaebler 1993), on satisfying the customers ratherthan the citizens, on managerial accountability rather than public accountabilityand on financial aspects rather than the whole aspects of organizations (Glynn &Murphy 1996; Parker and Gould 1999).

Many argue that public sectors, especially local governments in Indonesia, have been experiencing significant reforms similar to those in the western countries

(AF 2002; MOF 2001; Turner 2000). It formally started when the newly electedgovernment introduced a “big bang” policy of decentralisation which devolvedmost of public service responsibility and delivery to local governments in 2001.Two significant laws that reshape and empower local governments are Law 22 of1999 on Local Government and Law 25 of 1999 on Fiscal Balance betweenCentral and Local Governments and among Local Governments.

This study, therefore, looks at the adoption of the Sustainability BalancedScorecard (SBSC) which consists of six aspects: financial, community, internal

business, innovation and learning, social and environment (Elkington 1998;Kaplan & Norton 1992) in balancing accountability for performance beyond the

financial dimension. It is argued that accountability for performance should not beconfined to financial aspects only if organizations are to survive. The otheraforementioned aspects are significant to be pursued in an integrated approach.Public sectors are especially challenged to adopt SBSC as they are inherentlythere to serve the public and not to make profits.

In exploring how the elements of SBSC have been addressed, this study tried tolook at the academic work and experiences of both public and private sectors indeveloped countries. While in harmony with international practices, this studyfound that to some extent local governments in Indonesia have followed thefootsteps of local governments in some developed countries in managing publicorganizations. Some local governments have become aware of and addressed theelements of SBSC; however they have not addressed them in an integratedmanner. It is, however, acknowledged that adapting and adopting best practicesdesigned for one environment to place in another is not easy and can beunsuccessful. At a glance the environments may look similar, but further analysismay reveal significant differences. Therefore, pilot projects and researchconcerning the transfer of international practices to the Indonesian contexts arestrongly recommended.


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DECLARATION

I certify that this thesis does not incorporate without acknowledgement any

material previously submitted for a degree or diploma in any university; and that

to the best of my knowledge and belief it does not contain any material previously

published or written by another person except where due reference is made in the

text.

Jermi Haning


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ACKNOWLEDGEMENT

I would like to thank Dr. Janet McIntyre and Dr. Colin Sharp for their patient

supervision, AusAID and Australian Taxpayers for the Scholarship, Indah

Jacqueline Lisa Emery for her amazing love, laughter, tears and prayers, and

finally my ultimate gratitude and praise to the Heavenly Father for everything He

has been doing in my life.


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ABBREVIATION

AG : Auditor General

BSC : Balanced Scorecard

CC : Citizen‟s Charter

CSC : Customer Service Charter

CCT : Competition Contracting and Tendering out

CSR : Corporate Social Responsibility

DPRD : Dewan Perwakilan Rakyat Daerah (Local Parliament)

EHS : Environmental Health and Safety

JUG : Joined-Up GovernmentIG : Inspectorate General

ISO : International Standard for Organization

LAKIP : Laporan Akuntabilitas Kinerja Instansi Pemerintah (Public Sector

Reporting on Accountability for Performance)

LG : Local Government

NGO : Non-Government Organization

NPM : New Public Management

PAC : Parliamentary Audit Commission

PO : Public Opinion

PQ : Parliamentary Question

PPP : Public Private Partnership

PTUN : Pengadilan Tata Usaha Negara (Administrative Appeals Tribunal)

SAMSAT : Sistem Administrasi Satu Atap (One Stop Administration)

SBSC : Sustainability Balanced Scorecard

SER : Social Environmental Reporting

TBL : Triple Bottom Line

TQM : Total Quality Management

VFM : Value for Money


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Chapter 1

INTRODUCTION

1.1. Background of the Study

The public sector reforms that swept western countries some decades ago were

meant to achieve two goals: efficiency and accountability of the public sector

(Gregory 1999; Power 1999). The focus is on how to make governments, their

agencies and officials, more accountable to the citizens, while providing better

efficient services. The reforms have been done in various ways, inter alia, by

adopting and adapting private sector management models into public sectors. The

private sector models are deemed as more efficient, effective and productive.

Despite the success, it also has profound weaknesses. Performance, in terms of

efficiency, for example, has been increased but it has been criticized as it is

achieved at the expense of other values such as quality, fairness and equity. It has

also changed the fundamental orientation of public sector accountability, among

other things, public accountability for the many dimensions of public sector

activity has been narrowed down to one of accountability for financial outcomes

to be exercised mostly within the hierarchy of public sector organizations

themselves (Denhardt & Denhardt 2003; Kluvers 2001; Mulgan 2000a; Parker &

Gould 1999; Sinclair 1995).

It is acknowledged that public sectors in Indonesia have experienced a

constellation of profound public sector reforms similar to those in other western

countries (AF 2002; MOF 2001; Turner 2000). In local government (LG) level,

the reform has been going since the government introduced Law 22 and 28 of


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1999 which unprecedentedly devolves almost all responsibility of policy making

and public services from central government to LG. LG in Indonesia refers to the

third level of government.

The decentralization aims to increase efficiency and accountability of the public

sector. Yet, the central government has not produced supporting guidance and

directives for LG in discharging the inundating responsibilities (Alm, Aten &

Bahl 2001). Insufficient qualified human resources, weak leadership and high

incidence of corruption are also other ongoing basic problems challenging the

decentralisation policy. The consequences, as found by some, are the worsening

performance of the public service (SMERU 2002), the domination of power by

local elites (AF 2002; Antlov 2002) which leads to the marginalisation of

powerless groups and so forth.

This study aims to: firstly, explore and understand the nature of accountability

which has changed as the consequence of the public sector reforms; secondly,

expose how accountability is addressed in public sectors as an approach to deliver

performance at the LG level; thirdly, explore how a Sustainability Balanced

Scorecard (SBSC) is used as a framework theory to address, balance

accountability for performance, and explore what approaches have been used to

deliver the focus of each perspective; finally, to explore how applicable the

international practices of accountability are to the context of LG in Indonesia.

1.2. Limitation of the Study

This study is based on a literature review by drawing on guides and lessons from

both academic work, private and international practices. It relies on secondary


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data which were gathered from various sources. No field research has undertaken.

As such, the information gathered cannot reflect the real situation of all LGs as a

whole. It is acknowledged that by the time this study is finished the ongoing

public sector reform in Indonesia may have rendered some of this information out

of date. In exploring SBSC, this study does not try to implement it nor analysis

how its elements interact with one another, nor does it try to explore how

management issues such as leadership, planning, controlling and so on should be

addressed to successfully implement SBSC. This study only analyses how

elements of SBSC have been addressed to balance exclusive focus on financial

aspects with other aspects. Finally, it is acknowledged that lack of both literature

and practical views on the topic of accountability in LG in Indonesia and on the

use of SBSC as both a concept and an approach to accountability poses huge

difficulties on the application of the concept in the LG context.

1.3. Outline of the Study

The study has been organized into six chapters. Chapter 1, Introduction, is about

the background, the objectives, limitations and outline of the study. Chapter 2,

Literature Review, looks at Corporate Governance, Accountability and

Accountability for Performance, and Sustainability Balanced Scorecard. Chapter

3, Accountability Systems in Local Government, covers the DPRD, Executive

branch of government and Auditing Institutions. Chapter 4 is about Research

Methodology used in conducting the study. Chapter 5 especially looks at how the

perspectives in the Sustainability Balanced Scorecard have been addressed in

local governments, both in Indonesia and other countries. Chapter 6, Conclusion

and Recommendation, concludes the study and expresses some recommendations.


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Chapter 2

LITERATURE FRAMEWORK

2.1. Corporate Governance

The term “corporate governance” has increasingly been used in the public sector

for the last few years. It is defined as “the system by which companies or

organizations are directed and controlled” (Cadbury Report 1992:14). In local

government it is seen as “the system by which local authorities direct and control

their functions and relate to their communities” (CIPFA 2001:1). For Barrett

(2001: 5) the foci of corporate governance are on “structures and processes for

decision-making and with the controls and behaviour that support effective

accountability for performance outcomes/results”.

Corporate governance ensures that all involving parties are aware of their roles,

responsibilities and accountabilities (IFAC 2000). It provides the structure

through which those who exercise ultimate authority are accountable for

organizational performance in a transparent manner. Transparency is about being

open and inclusive in the processes and documents (Thurmaier 2003). So, it

concerns providing assurance to stakeholders that the management runs the

organization properly with care (Ryan & Ng 2000).

In the public sector, as shown in Figure 1, corporate governance defines the

function of the legislature and executive branch of the government. The

legislature provides the authority for the acquisition and use of resources while the

executive branch of the government is responsible for specific resourcing,


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planning, directing and controlling of public sector operations. As the principal,

the legislature has the right and responsibility to hold the government, the agent,

accountable for its management of public sector activities. Accountability can be

assured by reporting and auditing.

Figure 1. Accountability process in the public sector (IFAC 2000:10)

2.2. Accountability and Performance

2.2.1.

What is Accountability?

The notion of “accountability” is contested (Mulgan 1997; Parker & Gould 1999;

Sinclair 1995). Accountability in the public sector is different from that of the

private sector. It involves complex multifaceted relationships, many roles and

tasks with differing risks, uncertainties, and diverse and often conflicting

expectations (Kluvers 2003; Mayston 1993). Accordingly, attempting to find a

simple, working definition of accountability with a public sector context has

proven to be difficult (Corbett 1996).

In a specific sense, Caiden (1988:25) argues that “To be accountable is to answer

for one‟s responsibilities, to report, to explain, to give reason, to respond, to


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assume obligations, to render a reckoning and to submit to an outside or external

judgment.” In simpler terms, accountability is about giving an account on what,

how and why resources are allocated for certain purposes, how authority is

exercised and the relationship between the exercised authority and the expected

and achieved results (Stewart 1984). Here accountability serves three purposes: to

avoid further misuse of power, to provide assurance that things are done as

intended and to encourage improved performance.

Key common elements of accountability are giving account for actions taken and

being held to account for those actions (Gray et al 1996; Stewart 1984).

Accountability, therefore, not only consists of the giving and receiving of

information, but also the action of holding to account. The former enables the

principals to examine and to respond to the agents (e.g. rewards, punishment).

However, it is not enough for the principal to control the agents. A concern

associated with reporting is how to ensure that information is true? The

information asymmetry arises as the principals find that it is difficult and costly to

get information about the agent‟s performance (Mulgan 2000a; Watt, Richards &

Skelcher 2002).

Some key elements of accountability summarized from various sources (AGBC

1995; Coy, Fischer & Gordon 2001; Gray et al 1996; Parker & Gould 1999; Watt

et al 2002; Stewart 1984) are as follows:

Accountability is a relationship; it is a two-way relationship between the

principal and the agent. It is described as a contract between two parties.

Accountability is results-oriented; current public management does not look at

inputs and processes but outcomes.


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Accountability requires reporting and assessment; through reporting principals

can assess whether the agencies have met the targeted plans.

Accountability is associated with consequences; the assessment tells the

principals how they should respond to it, for example imposing rewards and

sanctions, or requiring an act of explanation or making suggestions for

remedy.

Accountability improves performance; the principal‟s response is meant to

improve and meet intended targets.

2.2.2. The Changing Foci of Accountability

New Public Management (NPM) has changed the nature of public sector

accountability. The focus of accountability is on performance in terms of results

or outputs and outcomes, instead of on complying with rules as it used to be

(Kluvers 2001; Osborne & Gaebler 1993). In this approach, principal and agent

together plan, define and negotiate performance expectations and needed

resources. They are both also mutually involved in evaluating and making

correction as necessary. The separating line has become blurred as politicians

increasingly rely on the managers for policy advice (Peters 2001, Dixon, Kouzim

& Kakabadse 1998). This phenomenon poses a new challenge to the line of

accountability in a politico-administrative system, in which civil servants are

responsible to ministers, who are responsible to parliament, and then, in turn,

responsible to the public. As Walsh (1995) argues, in transferring accountability

for outputs from politicians to officials the danger is that accountability becomes

reduced to meeting pre-stated performance targets, rather than the pursuit of

desired outcomes, and activity could be manipulated to show these targets have

been achieved. Secondly, it is hard for citizens to hold bureaucrats accountable as

“there (was) no means by which local people can hold them to account” through


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the electoral process (Stewart 1995:292). The politicians, on the other hand, are

“judged less on the basis of results than for loyalty to their political superiors”

(Deleon 1998:548).

The private sector model sees a market consisting of individual customers who act

to serve their self-interest (Denhardt, & Denhardt, 2003; Peters 2001). Its focus is

on how to offer the best choices to the customers to meet their preferred services,

rather than to the citizens. Accountability is narrowed down to how to satisfy

customer‟s needs (Parker & Gould 1999). This poses an attack on the tradition of

democratic accountability and denies citizens‟ rights as the owners of the power

and the fact that citizens have paid tax before the needed services are provided

(Peters 2001). It argues that accountability can be achieved by the invisible hand

of market (Mayston 1993; Peters 2001), so that if users are dissatisfied with the

provided services they will find other providers, leaving it at loss. However, this is

only possible in a really competitive market. Furthermore, accountability in the

public is focused more on exercising the voice of citizens rather than on finding

other exits (Mulgan 2000a). This means that citizens have the right to dictate their

voice, and the providers are obliged to listen to citizens.

The private sector model has also changed the fundamental orientation of public

sector accountability from one of accountability to the public at large for the many

dimensions of public sector activity to one of accountability for financial

outcomes to be exercised mostly within the hierarchy of public sectors themselves

(Glynn & Murphy 1996; Parker and Gould 1999). This can be seen from the

gradual decreasing of the governments‟ public accountability for their action.


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Table 1. Changing Ideas of Accountability

Accountability Pre-Reform Post-Reform

Political

(overall publicaccountability

Broad ranging,

linking ministers‟directly to servicedeliveryresponsibility

Public

Remains, but the responsibility has

been silently and subtly changed to being acquitted on the basis that theexecutive enables and chiefexecutives deliver.

Consumers

Financialaccountability

Focus on the notionof compliance

Remains but broadened to addressissues of efficiency andeffectiveness which has led to afocus on the need for supportingdata and/or control systems.

Professionalaccountability

Inward focused, self-regulated multipleagency with services

Radically changes, less self-regulation but differences within

professions (e.g. teachers vs.clinicians).

Administrativeaccountability

Watchdogs on compliance(financial and otherwise).

Managementaccountability

New and varied but with a focus onachievement of delegated targets.

Source: Glynn & Murphy (1996:130)

2.2.3.

Relating Accountability to Performance

The performance-oriented approach of accountability is meant to improve results

and not to ensure the compliance with rules. Rules are there to shape and guide

the managers, but they are only means, and not the ends. This is important given

the fact that not all areas of responsibility can be specified in the rules. It is very

possible that some areas fall under the cracks, as responsibilities have not been

specified so that managers are sometimes unsure of what they are responsible for.

“Legislation, for example, is often vague since to spell out its intended goals too

clearly is likely to alienate some groups of potential supporters“ (Deleon 1998:

547). As such, managers need discretion that can enable them to take risks in

addressing those unspecified responsibilities (O‟Faircheallaigh, Wanna, and

Weller 1999). In addition, too much emphasis on rules can inhibit innovation,


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pose administrative burdens, consume large amounts of resources and divert the

attention of the managers from the real ends. Some managers may simply be

reluctant to adhere to the burdensome rules if they believe that compliance will

not deliver intended results but will instead lead to criticism particularly if they

are faced with a fast-required response situation (Denhard & Denhard 2003;

Peters 2001). As a consequence, delivering performance may be able to be

achieved at the expense of rules, ethical values and other factors.

The emphasis of accountability is to do “things right” rather than do the “ri ght

things” (Barrett 2001). However, the emphasis of accountability for performance

could decrease accountability for finances, fairness and social justice (Parker and

Gould 1999). In fact, accountability holders would not simply focus on

performance and ignore finance and other issues. Auditors are interested more on

ensuring that spending is within an approved level and for authorized purposes in

order to curb organized crime and corruption (Gendron, Cooper & Townley

2001).

An effective system of accountability for government and its public sectors for

delivering their responsibilities is one which can demonstrate that:

The outcomes of government was mandated to deliver by the citizens are

being achieved by various policies, programs and services developed and

implemented to do so;

The tax payers are getting value for money, government initiatives undertaken

to deliver the outcomes are efficient, that is, maximum output for every dollar

spent;

Government is conducting its business in a fair, legal and ethical way (AGBC

1995:15).


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2.2.4.

Establishing an Accountability Framework for Performance

The contested concept of accountability requires the establishment of an

accountability framework in order to make clear the accountability relationships

and to avoid conflict of interests that can pose barriers to the organizational

effectiveness. The framework can guide and give a common understanding of the

accountability concept by putting principles that frame accountability

relationships.

Based on the accountability framework developed by Desautels (1997), and the

AGC and the TBS (1998), Stanbury & Priest (1998:4) suggest some key

principles to the effective framework for accountability that characterizes

accountability relationships:

1. Clear and agreed expectationsa.

Are the common objectives agreed to?

b.

Are the expected results clear?c. Are the operating principles and procedures to be followed clear and

agreed to?d. Have human resource management issues been addressed?e.

Has provision been made for adequate financial control?2. Clear roles and responsibilities

a.

Are agreed roles and responsibilities clear? b. Have adequate decision-making processes been established?

3. Balanced expectations and capacitiesa. Have the partners the capability to do what they expect?

4. Credible reporting

a.

Is provision made for adequate reporting? b. Is information for Parliament sufficient?c.

Is the reporting credible?5. Reasonable review, program evaluation and audit

a. Has provision be made for reasonable internal audit and programevaluation?

b. Is sufficient monitoring underway?c.

Is sufficient learning taking place?d. Are procedures in place to follow if things go wrong?

e. Has provision been made for audit?


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The following is the accountability process which is based on the aforementioned

principles of effective accountability (AGC & TBS 1998). Two aspects of

accountability that influence accountability process are accountability framework

and holding to account. The former‟s elements are based on the principles of

effective accountability. The latter, whereas, is about making sure that the agent

provides adequate reporting and undertake sufficient review of information

reported so that it can make adjustment or change and especially understand the

consequence of its performance.

Figure 2. The Accountability Framework

(Source: AGC & TBS 1998:8)

2.3. A Sustainability Balanced Scorecard (SBSC) Approach to Performance

2.3.1.

What is SBSC?

Public sector reforms have diverted the accountability and performance to focus

more on financial aspects to senior executives of public organizations rather than

PERFORMANCE

To meet expectations usingro er means

Holding to Account

Accountability Framework

Roles and Responsibilities

Expected Performance

Balance Expectation and Capacity

Re ortin Re uirements

PUBLIC SECTOR VALUES AND ETHICS

Review and AdjustmentCredible Reporting of

Performance


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the others, and on outputs and outcomes than on inputs and processes and more on

the customer rather than to the Parliament and the public. To address this, Kaplan

and Norton (1992) propose “Balanced Scorecard (BSC)” to widen accountability

and performance beyond financial dimensions towards an integrated approach that

consists of four perspectives: (1) financial, (2) customer satisfaction, (3) internal

business process, and (4) learning and growth perspectives. BSC is to restructure

the exclusive emphasis of organizations on the financial perspective with the other

perspectives (Nickols 2000). However the effectiveness of BSC may be limited by

judgmental effects. If auditing still prioritizes financial over non-financial

indicators, it may discourage managers to balance the four perspectives.

Another model developed to address accountability for performance is “Triple

Bottom Line (TBL)” (Elkington 1998). This model covers economic, social and

environmental aspects of an organization. Kaplan and Norton (2001) refer it to

environmental, health and safety (EHS) dimensions. Recently the incorporation of

BSC and TBL has become more popular; it is known as “Sustainability Balanced

Scorecard” (SBSC) (Brignall 2002; Dabhilkar & Bengtsson 2002). The concept of

sustainability itself is used to point to the current activities of

humanity/organizations which consider the same opportunity of the future

generations in meeting their needs (WCED 1987). Two aspects or organization

that account for sustainability are social and environment.

2.3.2. SBSC as Organizational Strategy for Performance

Kaplan and Norton (1996) relate BSC to the translation of the organization‟s

vision and strategy into reality. BSC helps managers both in defining significant

indicators of each perspective, establishing necessary action to achieve these


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objectives and in linking leading indicators to lagging indicators. As the focus is

on both financial and non-financial aspects, all managers of an organization are

required to understand, communicate, link and align their strategy with other parts

of organization. BSC promotes inclusiveness, openness, interdependence and

coordination of all parts of the organization. There is also interdependence among

the four perspectives.

Kaplan and Norton (1996) argue that relationships of four perspectives are a

cause-effect one. This one-way linier cause and effect relationship - starting with

innovation, learning and growth perspective and culminating in the financial

results for shareholders - helps the managers in implementing corporate strategy.

The financial and customer dimensions are classified as results, whereas internal

business processes and innovation and learning are the determinant dimensions.

Action in learning and growth, for example, will have impact on internal

processes and lead to better quality of service which, in turn, increases customer

satisfaction and produces a better financial return. However, Norreklit (2000)

refutes this argument, claiming that relationships between perspectives are

interdependent and not only a cause-effect one. He suggested that the quantity of

research for innovation, for example, is influenced by financial results and

likewise research and innovation will produce financial results. As such, there are

iterative cycles of communication and interdependence of relationships which

consequently require a systematic or holistic approach. Furthermore, the time

scale during which an organization experiences change is another thing that may

influence the cause-effect relationship. Change in learning and growth, for

example, may take a while before change in other perspectives happens. During


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this time scale, there may be some other effects due to the change (Norreklit

2000:71).

SBSC also acknowledges the diversity of stakeholders. Three key organizational

stakeholders, according to the SBSC, are shareholders (financial, sustainability),

customers (customers) and employees (organizational innovation, learning and

growth, sustainability). This variety of an organization‟s stakeholders reflects the

various accountability relationships. The focus of accountability in satisfying the

needs of various stakeholders is on how to integrate strategies and response to the

needs and requirements of stakeholders. This model, however, fails to address

other stakeholders whose needs for performance-related information are essential.

In the public sector, stakeholders are unlimited (Deleon 1998; Peters 2001).

Public sectors are having not only accountability relationship customers, but also

with citizens. Citizens are the holders of the rights and legal status which have a

right to hold public sectors accountable. The stakeholders include those who have

concerns over environmental and social matters that need to be taken into account.

2.3.3. The Incorporation of SBSC

The incorporation of social and environmental matters into BSC reflects how

organizations demonstrate accountability for the stakeholders. Whether it is fully

or partly incorporated, it will have a different impact on its effectiveness (Bieker,

Dyllick, Gminder & Hockerts 2001). Some apply SBSC in the some perspectives

of BSC that most expose to sustainability issues (known as partial SBSC). Some

apply it in all four perspectives (transversal SBSC) while others add it as the fifth

perspective (additive SBSC). Commenting on the addition of the fifth perspective,

Epstein and Wisner (2001) argue that it requires top management to recognize the


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strategic value of the new perspective. The recognition will not only give signals

to the whole organization of the value of it and the management‟s concern, but

also will direct the attention of managerial and employees to see it as a main value

of organizations. The addition also makes sustainability as important as other

perspectives, especially for organizations that expose and allocate a large resource

to social and environmental issues.

Table 2. A Sustainability Balanced Scorecard Approach for Performance in LG

(adapted from Ballantine, Brignall & Model 1998; Bieker et al 2001; Fitzgerald et

al 1991; Kaplan & Norton 1992; 1996; Kloot and Martin 2000).

Performance Perspectives The focus of the perspectives

Primary objectives orresults to be achievedFinancial

Community

Secondary objectives ordeterminants of successInternal Business Process

Innovation and Learning

Sustainability (Social andEnvironment)

To succeed how should LG appear to itsstakeholders?

To achieve its vision how should LG appear to itsstakeholders?

To satisfy its stakeholders what business processesmust LG excel at?

To achieve its vision how should LG sustain itsability to change and improve?

To succeed how should LG secure long-termadvantages?

Source: (Ballantine, Brignall & Model 1998; Bieker et al 2001; Fitzgerald et al1991; Kaplan & Norton 1992; 1996; Kloot and Martin 2000).


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Chapter 3

THE ACCOUNTABILITY SYSTEM IN LOCAL GOVERNMENT

IN INDONESIA

The accountability system in LGs in Indonesia consists of few relationships (See

Appendix 3, 4 and Table 3). In practice, however, it is mostly dominated by two

separated independent entities: an executive branch of government and DPRD

(Dewan Perwakilan Rakyat Daerah). The former is the core of LG which consists

of Mayor and Local Departments/Agencies. This section, therefore, will explore

the accountability relationship between the two entities and the role of the Auditor

General (AG - external), which is a nation-wide independent auditing

organization, and Inspectorate General (IG - internal) at LG. In this study, the

terms Legislature, DPRD and Local Parliament are used interchangeably with one

another. Similarly, instead of using Executive branch of government, this study

often refers only to government.

3.1. The Legislature as the Principal of Accountability

In a democratic government, it is the citizens who give mandate to the

government to act on their behalf. The government, in turn, is accountable to the

citizens. However, given the fact that the public is not an organization, there is an

obvious problem here in terms of organizing accountability. DPRD therefore

should act on behalf of the public. But the current model of democracy in LG in

Indonesia does not give power to the public to directly nominate the Mayor. It is

still the DPRD that nominates the Mayor and then holds the Mayor accountable.


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Therefore, DPRD can be seen both as the principal in relationship with the

executive and as the agent in relationship with the public.

As distinct from previous eras, during the reform era, DPRD has assumed a

greater role. According to LG Act 22/1999, DPRD is independent and has equal

power to the government. The law even empowers it to impeach the government

should it fail or abuse its power. Yet many argue that DPRDs are still facing a

very basic problem – insufficient capability (Syahruddin and Taifur 2002).

Another challenge is how does the public ensure that DPRD is itself accountable?

The public can hold DPRD accountable every 5 years, but with the current

electoral system it is quite impossible to vote a member out. The current electoral

system allows only a party to nominate its members. Voters indirectly nominate a

member and the ultimate authority is with the party. As a short-term solution,

pending a direct electoral system, it is better to have an independent institution

that oversees the DPRD on behalf of the voters.

Others have argued for the existence of an effective and active Parliamentary

Audit Commission (PAC) to hold the government accountable (De Martinis &

Clark 2001). PAC plays important roles in assuring the work and accountability of

both internal and external audits (Bowerman & Hawksworth 1999). De Martinis

and Clark (2001) point out some more detail of the roles of PAC in relation to

internal and external audits as follows: approving strategic and annual work plans;

taking an active role in the appointment of the Chief Internal Auditor, overseeing

the internal audit function and its liaison with the external audit and management;

reviewing progress against plan; reviewing internal audit reports and management


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responses; and following up the implementation of internal audit

recommendations.

In spite of its power, it should be ensured that both PAC and Auditors have

mutual trust, confidence and understanding of each other‟s role and functions.

Above all, independence, cooperation and continuos learning environments are

promoted and guaranteed (De Martinis & Clark 2001). As Krafchik (2002:1)

argues:

AGs and PACs have traditionally developed a close relationship thatmight be described as mutual dependence or symbiosis. Parliament‟soversight over the budget is most effective when it can rely oninformation from the AG. In turn, the AG is most effective inimproving budgetary oversight when it can rely on parliament to

promote its recommendations with the executive.

3.2. The Government as the Agent of Accountability

As the agent, executive branch of the government is entitled to discharge

delegated responsibilities and then accountable to the DPRD and citizens.

However, the current indirect electoral system has hindered it. It is the DPRD that

nominates the executives rather than the public. This system only strengthens

accountability relationship between the government and legislature. This seconds

Gray, Owen, and Adams‟ (1996:44) argument that the principal-agent relationship

“can run the other way; so each party can be both an agent and a principal to the

other”. Therefore, instead of being controlling by the public, the government can

control the public. AF (2002) finds out that many LGs see local non-government

organizations (NGO) as a nuisance as the latter often play an opposition role to

the former. Almost similarly, most LGs also do not really take into account the

regional government roles, although it has significant roles.


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Table 3. Accountability relationships in a LG context in Indonesia

Who For What To Whom How To WhatOutcome

Elections

PQs/debates ExplanationLegislation MPs Letters Information

Mayor Policy /Systems

Public(Electorate)

JudicialReview,Enquiries

Acknowledment

Outputs /Functions

DPRD Review

ChiefExecutives/Head ofAgency orDepartment

Administrative processes,Value formoney,Costs

SelectCommittees,Ombudsmen,Audit Office

AnnualReports,

No Contracts

Revision

Individualmembersof public

Public/privateventures

Redress

Sanction

Source: Barberis (1998:467).

It is clear here that there are several aspects of accountability that may occur

within one relationship (Barberis 1998). These aspects of accountability are

specified by Law 22, 25 and 28 of 1999, as will be elaborated next.

3.2.1. Providing Information/Reporting

Providing information or reporting is the essence of answerability; being

accountable means having the obligation to provide information and to answer

questions regarding decisions and/or actions (Stewart 1984). Providing

information is simply to be informed; this might include budget information,

annual report, evaluation of performance, websites, newsletters or bulletins and so

forth. Law 22 of 1999 requires the government to provide information to the

public, the parliament, provincial and central governments (see Appendix 4). It

states that the Mayor must present annual reports to the DPRD and at the end of


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his/her service period (Article 44, 3). In this section later, the first three potential

sources of information are examined further.

In providing information, the government does not only focus on financial

information, but also more on non-financial matters. There should be an

indication of what type of performance measures (inputs, outputs, efficiency and

outcomes) should go into the reports (Neale & Anderson 2000). Complete

information covers all aspects of the organization‟s performance (performance

measures, capability and areas such as risk management) as well as reporting the

dimensions of quality, quantity, timeliness, and location and cost as applicable.

Steward (1984) argues that accountability information should cover all levels of

the accountability ladder (see Table 4). It should also be relevant and

understandable in the sense that it is comparable over time and with other

organizations. Lastly, it should meet standards that are generally accepted by

professional groups, or other similar reporting organizations. Furthermore,

meeting these criteria for providing information is not, in itself, sufficient for

accountability (Stewart 1984). After all, there is no guarantee that the provided

information is accurate (Kluvers 2003). Thurmaier (2003), therefore, argues that

accountability requires greater transparency of processes and documents. This

implies that processes and their documentation, for example, should be open and

accessible to the public and the press.

However, most of the reports by LGs provide financial information only on the

inputs and outputs measures as reflected in the traditional budget (Fachrudy 2001;

Raditya, Hermawan & Rizki 2002). Law 22 of 1999 does not specify in detail the

breadth and content of an accountability report. It does require transparent


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processes and documents, but this is also another issue that has been widely

demanded by NGOs and international organizations (Raditya et al 2002).

Table 4. Ladder of Accountability

Accountability information Concerning

Policy accountability: Goals and objectives

Programme accountability The achievement of goals and objectives

Performance accountability The achievement of required standards

Process accountability Ensuring adequate procedures and efficiency

Accountability for probity andlegality

The avoidance of malfeasance and illegality

Source: Stewart (1984:16-17).

3.2.1.1.

Annual Budget

Budget plays an essential role in enhancing accountability for performance

(Kluvers 2001). Budget is more than a technical tool for resources allocation and

performance measurement (Thurmaier 2003). It reflects the political will of the

government which determines and shapes public life, public organizations and the

relations between the two (Kluvers 1999). As such, transparency and publicity of

the budget processes and documents are deemed essential to accountability as

they enable the citizens to access the information and therefore to hold the

government accountable (Corbett 1996).

Cagatay, Lal, Keklik and Lang (2000) argue that accountability is not only about

assuring that the budget is allocated and spent appropriately, but also about

assuring that resources are targeted for social equitable purposes to meet the needs

of a broad range of citizens especially marginalised groups. This increased

accountability of budgetary processes increases citizen participation and equitable

use of resources. Some countries have shown that a participatory budget which

involves citizens in establishing budget priorities, allocating investments and


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monitoring results has significantly enhanced accountability (Navarro 1998;

Posner 2003).

Accountability in terms of holding the government accountable is exercised in

almost all stages during the budget cycle (see Figure 3) especially when the

budget bills are presented to DPRD for debate and review for the expenditure of

funds raised from general revenues. Difficulties may arise where private sectors

are involved in partnership with public sectors, the scrutiny by DPRD might never

happen as the income raised does not necessarily come from appropriateness, but

it comes from tolls and other charges (Grimsey & Lewis 2002).

Figure 3. LG Budgetary Cycle

(Source: Buku 4 SAKD 2002 cited in Eriantono 2003:33)

3.2.1.2. Annual Report

A public sector annual report is generally prepared to serve two objectives:

accountability and decision-making. It is deemed to be a primary medium of

accountability, although not reporting on the overall accountability (Steccolini

2002). The annual report is the main vehicle for reporting program performance.

4. Reporting(Calculatingof BudgetExecution)

5. Auditing theAccountabilityReport

3. Accounting

& Calculation

Operational &CapitalSpending

Operation

Income

Execution

1. Budget

Preparation

2. Budget

Authorisation


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However, some dispute its ability to discharge accountabilities and question its

value and usefulness, whereas others highlight the use of other communication

means by public organizations (Mack, Ryan & Dunstan 2001; Ryan, Stanley, &

Nelson 2002).

In Indonesia, ICDHRE (2002) argues that lack of demand and requirement for the

publication of the report, limited users, limited information and the inexistence of

a general framework and performance standards are among some basic problems

of annual reports. Some other problems found by the author during his work in

LGs are lack of knowledge and interest from DPRD of the report itself. In

addition, Law 22 of 1999 (article 44, 3) requires the government to report to only

regional and central governments. There is no requirement to publish and

disseminate it.

Steccolini (2002), for example, finds that most annual reports do not seem to

serve the general purpose of the report - satisfying the information needs of the

potential users - but rather to meet the law requirement which is mainly to serve

internal stakeholders. This is related to her findings that citizens are not likely to

be interested in reading annual reports, while internal users are interested in more

specific and frequent monthly or quarterly reports (Steccolini 2002:19). To

overcome these problems, Cárcaba-García, López-Díaz, & Pablos-Rodríguez

(2002:27) suggest the elaboration of “special reports” to meet the specific needs

of different users. While for the detailed content of the annual report, Ryan,

Stanley, & Nelson (2002) present a general framework that has been used in local

governments in Queensland (see Appendix 1).


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What is included in the annual report and how it is published are two central

issues that have also been highlighted (Steccolini 2002). Ryan, Stanley, & Nelson

(2002) argue that the content of the annual report is closely related to the

difficulty and embarrassment it might cause. Similarly Coy and Pratt (1998:541-

2) argue, “the content and presentation of annual reports may have less to do with

what are the best technical approaches, and be more a result of political

compromises between the various interested parties”. Another issue that has

significant impact on the quality of the report is its timeliness and its

comprehensiveness. Any delay in the publication will consequently undermine its

role in the local democratic process (Ryan, Stanley, & Nelson 2002:264).

3.2.1.3. Performance Information

Performance information is critical for performance accountability improvements

and resource allocation particularly in accrual-based accounting (Pallot 1999;

Ryan, Stanley, & Nelson 2002). It is broader than performance indicators, and the

collected evidence (Guthrie & English 1997). Barrett (1996: 97) argues “the

concept covers the setting of objectives, the development of strategies or means to

achieve the objectives, the use of both qualitative and quantitative indicators,

targets, standards (including values and ethics) and benchmarking”. Performance

reports must include information on performance trends and comparisons over

time rather than just a snapshot at a point in time which may be misleading

(Bartos 1995). There has been also increase auditing of performance reporting

(Barrett 1996).

Barrett (1996: 103) identifies some of the principles that have been applied in the

Australian Public Sector:


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performance information should measure all part of the objective set forthe programs or services;

there should be an appropriate balance of indicators to address economy,efficiency and effectiveness;

targets and standards should be developed which motivate appropriate

behaviour and assist the achievement of objectives; where cost effective benchmarking exercises should be undertaken to

test actual performance; and reports, in particular the annual report, should include outcome oriented

performance information which allow the assessment of program performance.

The provision of performance information requires wide involvement of the

public to identify and evaluate their needs and satisfaction (Barrett 1996). This

implies that the performance information goes beyond the one-way obligation of

public sector organization to provide information on the performance of the public

programs. The difficulty in identifying users, aggregating their information needs

equitably and assessing their criteria for judging performance are among some

problems justifying public participation (Brusca Alijarde 1997; Steccolini 2002).

As explained earlier, Law 22 of 1999 does make clear the aforementioned

requirements. Central government has actually provided LAKIP (Public Sector

Reporting of Accountability for Performance). However, Tamin (2002) argues

that this centrally designed framework has been abandoned by many LGs. Some

problems associated with LAKIP are inadequacies of reporting, lack of incentive

to report more than required, inexistence of enforcement mechanism, tension

between parliamentary and managerial accountability, variety of performance

reporting on outputs, imbalance focus among outputs, outcomes and capability,

and incapability of recipients to assess performance information (ICDHRE 2002;

Yudoyono 2001).


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3.2.2.

Providing Explanation/Justification

This type of accountability moves beyond reporting. It asks for explanations and

justifications; that is, why and not what (Brinkerhoff 2001). Law 22 of 1999 states

that the government must present accountability reports to the DPRD for certain

matters on the request of the DPRD (Article 45, 2). The requests by DPRD are

done on either its own initiative or on request from the community, Audit Office

and the Ombudsman. It can take place in various ways, from internal dialogue

between the legislature and particular agency to more public arenas such as

parliamentary questions and hearings, or city hall meetings where local officials

hold dialogue with residents.

AF (2002) finds that there has been increased dialogue held between local

governments and their citizens ever since the implementation of the

decentralisation policy. In fact, dialogue is seen as an effective means to address

accountability concern as participants listen and respond emphatically to one

another, trying to understand what others think and feel equally without coercion

(Roberts, 2002). Most importantly, the public context of the dialogue, especially

when there is a free press reporting on participants‟ every move, can help to make

participants accountable to one another and to build relationships on mutual

listening and learning (Dryzek, 2000). There is nowhere to hide if things go

wrong. It also enables the participants to commit themselves to working together.

However, dialogue is not enough to hold the agents accountable. Accountability

reflects an unequal relationship of authority between principals and agents in

which the latter comply with the former‟s direction including sanction for any

failure (Mulgan 1997; 2000b; Ryan, Dunstan & Brown 2002). As such, dialogue

which reflects equal relationship between involving parties does not enable the


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principal to exercise its sovereign right to some extent. It might involve

information sharing and assessment or verification, but there is no direction or

control and sanctions can be imposed.

3.2.3. Reviewing and Revising

Reviewing of the government‟s reports is aimed at giving assurance of the fairness

of the information (Stewart 1984). Reviewing enables those accountable to

examine performance, system or practices, and if necessary, make changes to meet

the expectations of stakeholders. Whereas for the principal it will help diminish

information asymmetry as a result of its incapacity to monitor and understand in

detail everything that the agent has done or is doing. Information asymmetry also

exists when the agent produces information, in order to satisfy the system but it

may be misleading (Broadbent, Dietrich and Laughlin 1996).

In Indonesia the political culture of “keeping the boss happy” - meaning not to

upset or cause any problems, or even be novel - has a profound impact on the

authenticity of disclosed information (Antlov 2002). The main mechanism for

reviewing is auditing (described later in detail). DPRD also review the

performance of the government by querying it during question period or by

debating its annual estimates. Another forum to hold the executive accountable is

through legislature committees that allow members of the DPRD to explore in

more detail matters that need further justification. However, concerns have also

been raised as legislature committees have a great number of weaknesses, such as

their authority, effectiveness, and the insufficiency of time (Syahruddin & Taifur

2002).


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3.2.4.

Granting Redress or Imposing Sanction

Accountability is not complete after receiving information from the executive.

Feedback as well as reward or sanction should be provided. If there are no

consequences attached to performance information, it will not affect the corporate

culture (Brinkerhoff 2001). For any activity to change the way people act, it must

affect them directly. If good performance is not reported publicly, reviewed,

appreciated and rewarded, those involved will realize that it does not matter if

they do not put in extra effort or have little incentive to learn and improve.

Law 22 of 1999 clearly states about imposing sanctions on the Mayor whose

report has been rejected twice (Article 46). The Mayor must submit annual

progress reports to the DPRD, and if these reports prove insufficient and cannot

satisfy the DPRD twice, they could dismiss the Mayor. In some regions, Mayors

have been impeached by DPRD for failing to discharge their responsibility

(Syahruddin & Taifur 2002). Given this fact, it is important that the

accountability requirements for impeachment should be clearly specified. They

should be transparent, clear, realistic, and not burdensome so that they will not be

used as political tools for threatening the mayor with dismissals. Stakeholders also

need to liken the accountability requirements. Sometimes, the Auditor General,

for example, promotes efficiency, whereas the Information Commissioner favours

access to information.

Care must be exercised with regard to sanctions. It must take into account both the

agent‟s performance and the likely responsiveness of the agent to the sanction.

After all, the goal of accountability is to ensure the improvement of performance

not to shackle the agent. The focus that is pursued is on how to change the


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organizational culture from merely complying with legislation to one that favours

flexibility for continuous learning and improvement. Furthermore, there are other

factors that might contribute to the failure of the agent, such as inadequate

instruction, powers and resources (e.g., outdated legislation, failure to provide

policy direction), and appointments of incompetent members (Standbury & Priest

1998:19; Syahruddin & Taifur 2002).

3.3. Auditing and Accountability

Auditing is a significant component of accountability. It legitimises the

information and assures the trust on which accountability, control and power rest

(Gendron et al 2001; Lee 1998). “Politics is replaced by management, which in

turn, is replaced by audit” (Walsh 1995:250). For public servants an audit helps

them to understand the dimension of programs and processes, to harness the

provided information for decision-making and to asses the cost-benefit of the

collected information (Baker & Wallage 2000; Barrett 1996). For the principals,

an audit helps them in holding the agents accountable, and influences the ability

of the former in controlling the latter. As such, the ability of the principal to

control the agent depends heavily upon auditor, whose role is to ensure that the

principal is informed of the agent‟s activities (Gendron et al 2001).

This essential role has drawn public attention to its credibility and integrity which

are often attributed to its independence (Gendron et al 2001), competence (Lee

1998) accountability (Hollingworth, White, & Harden 1998), funding and a

comprehensive mandate (English & Guthrie 2000; Funnell & Cooper 1998) which

are intertwined but dilemmatic in their characteristic. Furthermore, auditing

institutions do not work secludedly. Mulgan‟s (1997) model of accountability (see


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Appendix 5) describes several complementary agencies, processes, and channels

of accountability which are interdependently inevitable and together will deliver

better outcomes (Barberis 1998; Brinkerhoff 2001; Wilkins 2002). The focus,

then, is on how to provoke other channels of accountability to respond

appropriately on the auditing activities (Mulgan 1997).

3.3.1.

The New Focus of Auditing

Another challenge facing auditors in the NPM era is the shift of the focus of the

auditing. Initially the focus was on the financial control and compliance with

rules and regulations (Gendron et al 2001). Now the focus is on results and

includes areas of scrutiny beyond financial assurance such as performance,

probity, accountability, authority and value for money (Buchanan 2001; Gendron

et al 2001; Glynn 1985).

Performance audit is used to describe a wide range of activities and aims to

evaluate the performance of governments (Pallot 1999). It covers efficiency,

effectiveness and management capacity audits (Barzelay 1996; See Appendix 10).

Others point to the “Value for Money (VFM)” which includes economy,

efficiency and effectiveness audits (Gendron et al 2001; Glynn 1985; Guthrie

1990a; Parker 1986; 1990; Power 1999; Rouse 1999). Economy refers to the

“resource acquisition”, efficiency refers to the “resources usage” and effectiveness

refers to the “ends-oriented rather than means-oriented concept” (Parker 1986:13).

There are, however, some critics of VFM audit across western countries. It is

linked to the short-term foci on the quantitative data and performance

measurements which do not take into account the environmental influences,


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interdependence between organisational processes, and long-term impacts (Parker

1990). Pallot (1999) links it to the unintended impacts on the managers‟

motivation, innovation and reliability on the performance measures - evidence

such as the number of letters to the minister - which overshadows its usefulness.

Pallot (1999:45) therefore, argues that auditors need to examine further the

relevance, completeness, understandability and reliability of information. The

emphasis on the quantified phenomena might overshadow unquantified aspects of

performance (Smith 1995). The challenges auditors face are to develop and

implement performance measurement schemes that do not run the risks and to

identify inadequate performance measures. Smith (1995:304), therefore, suggests

involving “staff at all levels in the development and implementation of

performance measurement scheme” to encourage creative thinking and dialogue

between auditors and auditees on the performance criteria and other unintended

consequences.

Auditors also need to examine whether the established performance goals are

reasonable, as illustrated in Figure 2. This is essential to avoid unintended

consequences of the publication of poor performers. Auditors are expected to be

able to assist management in understanding its programs and problems; thereby

auditors focus on continuous improvement to achieve higher goals and objectives.

However, auditors have to be careful not to overburden management with

additional requirements and not to overstep the authority and domain of the

management (Barzelay 1996). Kluvers (2001) finds in Victorian LG that

management tends to reject performance audits and the gathered information due

to these problems.


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Additionally, Parker (1986) points to the powerlessness of AG to do effectiveness

audits which require essential political judgement in which they should not be

involved. It is hard to distinguish between the effectiveness of achieving the goals

of a policy and the question of the worthwhileness of the policy (Gendron et al

2001). It is debatable whether auditing should focus on the implementation of

policy and stay away from the formulation of the policy (Glyn & Murphy 1996).

This is an old issue in politics – deciding the boundaries between administration

and policy-making. The difficulty facing AG as an officer of the Parliament may

reduce as the Parliament has gradually shifted its role from lawmaker to

supervisory body (Guthrie 1990b). Furthermore, effectiveness auditing requires

particular expertise which may cause difficulty and the wrong conclusion if it is

done by non-expert auditors (Glynn, Gray, & Jenkins (1992). Cost-benefit

analysis, for example, is deemed appropriate to be done by experts. Given these

difficulties, some public sectors tend to focus on more economy and efficiency -

something easily measurable - rather than effectiveness (Palmer 1993). Glynn

(1987) and Butt and Palmer (1985) provide a framework for efficiency and

effectiveness auditing (see Appendix 11, 12).

3.3.2. Auditing in Local Government in Indonesia

There are two auditing institutions at LG: IG and AG. As mentioned earlier, the

independence of auditing is essential to maintain credibility and legitimacy. The

extent to which they can adequately scrutinise and audit very much depends on

their accountability relationships with both DPRD and the government (see

Appendix 5). The IG operates separately from those organizations that are

responsible for the activities under review. Therefore, it must be independent from

both DPRD and the executive branch of government. However, this is not the case


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in relation to the government in LG in Indonesia. The IG has been viewed and

positioned as partial auditor to LG (World Bank 2000). As it finds that “… there

is currently a lack of clarity in the mandate, scope, independence and roles of …

and Inspectorate Generals…” (World Bank 2000: 21). Appendix 5 illustrates that

IG has no accountability relationship with Legislature. Similarly, according to

Law 22 of 1999, DPRD does have power to ask for auditing and have all audit

reports tabled in the DPRD. It is only the Executive branch of LG that can hold

the IG accountable.

DPRD can rely on the AG which can provide independent review and objective

information on the activities of the executive. Its independence originates from

three issues: the mandate to perform audits, independence from direction by the

executive, and funding (Buchanan 2001; English and Guthrie 2000). The "1945

Constitution" clearly specifies these issues, that is, AG is established to examine

state finances, its funding from the state annual budget, unless for special audits,

its unrestricted access to information of the audit function together with the right

to report any findings to DPRD, and its independence from both DPRD and the

executive branch of government. This independence has enabled the AG to

criticise the government, detect and prevent several cases of corruption of public

money both at central and LG levels (Masassya 2000; Sherlock 2002).

In addition to these auditors, there are various kinds of independent review

mechanism such as ombudsman, commissioners concerned with specific matters

of accountability such as access to information, human rights, respect for privacy,

and so on. However, the appearance of these multiple players does not necessarily

simplify accountability. In fact, just the opposite, as multiple players imply


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multiple views, multiple criteria and multiple standards (Aaltonen 1996). Their

independence has also been criticized (Hollingsworth, White & Harden 1998;

World Bank 2000). Issues such as the scope of their auditing, accountability

relationships and authority/responsibility can pose difficulties if not well

addressed (Clark & De Martinis 2003; English & Guthrie 2000).


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Chapter 4

RESEARCH METHODOLOGY

In this study the emphasis in the elements of the SBSC are changed to

acknowledge how local governments are different from private sectors. First,

public sectors have stakeholders - not only shareholders -with different interests

and conflicting relationships (Mayston 1993), for example the central and

provincial governments, parliament, ratepayers, local community, and consumers

including employees, and other private partners. A second change is to replace

customer with community as local governments‟ decisions affect the whole

community, not only its specific service users.

This study relies only on secondary sources, both theoretical and practical, such as

academic journals, research reports, books, electronic databases, and Internet

documents. Various methods of analysis such as description, comparison,

prescription, exploration and synthesis were employed to portrait, expose, explain

and support the findings. However, as it did not involve field research, it is

acknowledged that this study may not provide general situations and results.

This study will explore how accountability should be addressed in local

governments that can deliver performance, using a framework developed in Table

2. In addition to the developed questions in the Table 2, there are three other

questions to guide this project. Firstly, what approaches have been used to deliver

the focus of each perspective of SBSC? Secondly, to what extent LGs in

Indonesia keep up with international practices? Finally, how applicable are the

international practices to Indonesian local governments‟ context?


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Chapter 5

A SUSTAINABILITY BALANCED SCORECARD (SBSC) APPROACH TO

PERFORMANCE IN LOCAL GOVERNMENT

5.1. Introduction

As many authors have argued, accountability for performance should not only

focus on financial aspects to internal stakeholders, especially the management, but

also on other aspects such as community, internal process, employee‟s learning

and innovation, social and environment (Elkington 1998; Kaplan & Norton 1992).

This section, therefore, will explore how each aspect of the SBSC, both in

theoretical perspectives and especially practical, have been addressed in local

governments both in other countries and in Indonesia.

5.2. Community-Oriented Management

The focus of this perspective is on providing satisfying public goods and services,

improving overall customer service and managing relationships with the whole

community (Hafner 1998; Kaplan & Norton 1992; O‟Faircheallaigh et al 1999).

In the public sector, managing community and consumers are equally important.

Consumers do not represent the total stakeholders; therefore satisfying the needs

of the consumers does not necessarily satisfy those of the community. In other

words “consumers‟ responsiveness is no substitute for public accountability”

(Stewart 1995:290).

5.2.1. Satisfying Costumers and Communities Needs

Most of LGs‟ responsibilities are directly associated with satisfying the needs of

the community (Ballantine et al., 1998). It is important to assure that community


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management is directed to the question of how to satisfy community needs.

However, as stakeholders in public sectors are numerous with different and

conflicting interests, there is no “one-size-fits all” approach to satisfy their needs.

Satisfying some stakeholder‟s needs might happen at the expense of the others.

Therefore, satisfying stakeholders‟ needs is a matter of trade-off, negotiation and

balancing (Rouse 1999).

There are various measures with different advantages and disadvantages that can

be employed to increase and sustain the satisfaction of the community. Laking

(1995) suggests some measures such as regular meetings between senior

management and local customer groups, a customer service council, a published

customer charter with precise service standards, publicly available complaints

escalation procedures and customer participation in departmental output

evaluation and in output design. Navaratnam and Harris (1994) put forward some

key strategies for customer service, such as setting performance targets;

conducting customer surveys; conducting staff surveys; benchmarking; sustaining

customer satisfaction; and providing customer advice.

From the various measures, market research, for example, has been widely used to

measure the satisfaction of the community. Local governments in Indonesia have

involved a third party on a regular long-term basis to conduct survey and focus

groups (BIGG 2001b; Soenarto 2001). Some aspects of public services that have

been focused on are tangibility, reliability, responsiveness, assurance and empathy

(Rahayu 1997:11). Stevenson and Gibson (2002), however, warn that in

measuring the satisfaction of the community, it should be remembered that the


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community responses to the very general satisfaction items in community surveys

often do not correlate with more direct, objective measures of service delivery.

Table 5 shows some other detailed measures that influence the quality of public

services.

Table 5. Service Quality Determinants

Determinants Examples

Access “One-stop-shop” Handicapped facilities

Safe location with easy-to-spot logosStaggered office hours

Communication Provision of interpretersTelephone equipment for the hearing impaired

Newsletters, leaflets, educational programmes and seminarsConsumer hotlinesInformation centres

Courtesy Design and display customer service standardsConflict management training

Responsiveness Customer service trainingReferral servicesRespond to all telephone inquires within 24 hours and towritten correspondence within ten working daysAnswer all calls by first ring

Security Protection from discriminationPrivacy actElectronic benefits transfer

Source: Lin and Ogunyemi (1996:7).

The use of Compulsory Competitive Tendering and Contracting (CCTC) has also

increased in LGs in Indonesia (World Bank 2001). CCTC has various benefits

which lead to improved satisfaction. Some of the benefits are: (1) improved

management of public service and organisations (clearer objectives, better

standards and targets setting, better monitoring, reorganisation of work to improve

productivity, etc); and (2) increased capacity of the government to enforce

conformance and performance, achieved in response to the incentive of


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Accountability for Performance in Local Government in Indonesia

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