Acc 4291 Case Study
KULLIYYAH OF ECONOMICS AND MANAGEMENT SCIENCES
(CITY OF YORBA LINDA, CALIFORNIA)
ACC 4291
INTEGRATED CASE STUDY
TERM CASE ANALYSIS REPORT
(SECTION 1)
SEMESTER 1, 2014/2015 SESSION
MATRIC NO
1022133
NAME
MUHAMMAD FIKRI BIN AHMAD
PREPARED FOR:
PROF DR NIK NAZLI NIK AHMAD
DEAN, KENMS IIUM
1
CONTENT
BIL
1.
2.
3.
TITLE
EXECUTIVE SUMMARY
PROBLEM STATEMENT
SITUATION ANALYSIS
- PESTEL
- ISHIKAWA
PAGE
3
3
4-8
4.
5.
6.
ALTERNATIVES
DECISION CRITERIA
EVALUATION OF
ALTERNATIVES
RECOMMENDATION
REFERENCES
ANSWERS FOR
QUESTIONS
8
8
9 - 10
7.
8.
9.
10
11
12-19
2
EXECUTIVE SUMMARY
The case study mainly discussed on the City of Yorba Linda, California. The case overview would be the budgeting process made by the elected member of city council …show more content…
for the year 1991 until year 1993 since the budget cycle is every two years. A bit of background of Yorba Linda would be city located in northern Orange County in California, was incorporated in 1967 as a general law city. Yorba Linda is known to be the birthplace for Richard Nixon the 37th president of the United States, and is the home of the Nixon Presidential Library.
Since 1980 Yorba Linda had been growing at a rate of about 3,000 people per year. In
1991 the city had 53,000 residents living in approximately 18.5 square miles. Yorba Linda also used a city manager form of government. Mr. Simonian, the city manager, was a full-time employee appointed by the City Council to manage all city departments except Legal Services.
The city’s budget included 68 full-time employee positions for general city operations and 17 for library operations.
The crisis begin when for only the second time in city history, the budget table by the city manager was not unanimously approved. The final vote was four in favour and one abstention.
The abstaining council member raised several issues and the most important and highlighted one would be increment of 24.9% in police service costs which the city outsource from the neighboring
City of Brea. The reason for disagreement would be the concern made over overpaid police personnel and City of Brea is taking advantage over Yorba Linda.
PROBLEM STATEMENT
Mr. Simonian is in dilemma when one of the City Council constantly opposed to his committee members budgets proposal to run Yorba Linda. The dilemma arise when the fact that this disagreement happened to be the second time since Yorba Linda existed in 1967. Though he had explained and argued well with the disagreed City Council Member, the budget is approved with four in favour and one abstention. He had try his best by justifying the reason to the council members. It seems the program budget to replace line-item budget is not convincing enough. The disagreed member of City Council still questioning over the impact of cost increase over benefits of Yorba Linda’s citizens.
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SITUATION ANALYSIS
PESTEL Analysis:
Through PESTEL analysis we are going to evaluate the external factors that have impact on the
City of Yorba Linda both in long and short terms. These factors include Political, Economic,
Social, Technology, Environment and Legal aspects that are evaluated further in the following paragraphs. Political factors:
1
The signatory of Strategic Arms Reduction Treaty (START) between United States of
America and Soviet Union.
The treaty was signed on 31 July of 1991 between this two blocks which has just ended their
Cold War. The treaty is signed to bar the signatory from deploying any nuclear warheads to both countries hence preventing from any further world war to happen. It also gives impact to Yorba
Linda in the sense that the focus of the nation is no longer in combatting war but to develop their own nation. It also gives more confident to the investor to chip in money as peace is to be resumed by having above agreement. The dissolution of Soviet Union marks the winning of America over
Cold War in 1991. America can capitalize their political power as the then no 1 country in the world in terms of power.
Mr Simonian can capitalize the situation by lobbying into other states or country to invest into Yorba Linda as it would be more safer environment and secured than before.
Economic:
1- Hike in United States Debt due to Involvement in Middle East War
“The net effect on GDP is a combination of several countervailing influences. Current and projected war spending pushes GDP higher because it increases aggregate demand. But deficit spending crowds out capital investment spending, which ultimately lowers the nation’s stock of productive capital and also reduces GDP. War-related deaths and injuries also reduce the nation’s supply of human capital, which reduces GDP. Estimates suggest
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that in total, war spending has probably raised GDP by 0.5% .but the net effect will fall to zero by 2020 and turn negative as the full effects of the reduced capital stock emerge.”
As Yorba Linda is part of United States of America, the city would somehow would be affected by the increment of aggregate demand can enjoy better economic benefits. But in long term, the city would have to bear higher inflation rate due to debt incurred by the federal government.
Impactful program needs to be executed to balance the inflation. Involvement in Middle East War also gives bad impression to the public morale hence reduced investment made by investor all over the world. Mr. Simonian would face tough time in convincing City Council to spend more due to hike in national debt.
Social factors:
1 Crown Heights riot
The racial tension in United States of America is still prevailing in those years and proven through cases such Crown Height race riots. It was a three days of race riots among black people against orthodox Jewish and causing harm to the society. The case happened in New York City. Many were badly injured while some were killed due to that incident. The case took place on 19th to 21st of August 1991. Hence, it create challenge to Yorba Linda regulators to ensure there shall be no policy which is race biased.
Technology:
1
The Introduction of Internet & world wide website in 1991
In 1991, Bruners’ Lee has managed to introduce internet the way we see today. Anyone on earth can simply retrieved any information in any website they prefer. This would enhance communication among people. It impact a lot the ways government used to function. Before it takes days for people to notice the death of Abraham Lincoln, the former President of United States of America, now with internet the whole world can retrieve the information in real time. It gives more pressures for Yorba Linda to perform better and updates their day to day operation to public via www or internet.
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Environmental:
1
•
Growing concerns towards the environmental issues:
Richard et al. (1998) mentioned that 1988 marks the key year of the public awareness over global warming especially in United States of America.
•
Kasperson et al. (1990) reported that studies conducted in 12 European countries in 1982 and
1986 on ‘public concern over global environmental change’ included 3 dimensions of change: plant and animal species extinctions, depletion of world forest resources, and possible climate change from CO2 emissions (reported in On average, 34% of these respondents indicated concern or worry over CO2 emissions in 1982 and 38% concurred in 1986. By 1992, citizen majorities in 13 of 24 countries
•
By 1992, citizen majorities in 13 of 24 countries picked ‘very serious’ as the option to describe the threat of global warming (Dunlap 1994).
•
According to Richard et al. (1998) global warming received the fewest ‘very serious’ votes among a list of 7 environmental problems. The other problems and the number of countries expressing majority concern are: air pollution (20), water pollution (19), loss of rain forest
(20), loss of ozone (19), loss of species (15), and contaminated soil (15). In these international surveys, the United States did not muster a majority expressing concern for global warming.
Hence, based on the research done above environmental is an issue that need to be address within state budget which give impact and address concerns of the public. Mr. Simonian need to address issue pertaining to environmental caution be it in terms of prevention measures or damage control measures. 6
Legal:
1
The increment in crime rate from 1984 until 1991
Figure 1 shows that the Crime Index Rate Total crime rate generally increased from 1960 to 1980, with slight dips occurring around 1972 and 1977. After the 1980 peak, the crime rate decreased until 1984, then rose until 1991, when it began decreasing. Recent data show these decreases continuing in 1999. The violent crime rate trended like the Crime Index Rate Total. Based on this statistics we can deduced that there shall be a valid concern made by the authority over the safety of Yorba Linda’s citizens due to many violation of law happening within the nation in general.
Ishikawa Analysis:
Problem : Fails to have good measures of budgeting system which can benefits the society most.
Symptoms:
1) The Head Department :
-
Though Mr. Simonian as the city manager has introduced a transformation program to progress from line-item budgeting system to program based budgeting system, the head of department still fails to address priority and tends to budget on line-item based budgeting.
The failure to understand program based budgeting is simply due to failure to prioritize among program available according to objective.
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2) Council members John Gullixson:
-
He consistently disagreed with the hike of 24.9% increase in police service though an explanation was given by the city manager pertaining to the comparison of service cost from other service provider and the needs to maintain good relationship with them. Not to forget more costs is needed to bear police costs if they want to have it on their own. If John may consider the fact that crime rate is increased year by year from 1984 until 1990 he might be fine with arrangement provided clear impact on citizen safety.
3) Low turnover during budget hearing
-
The citizens are customarily not interested to join budget hearing is primarily due to the fact they cannot really relate it to themselves. People would usually like to hear what is from the budget that they can enjoyed. Line-item based budgeting and program based budgeting might not address this concern well as it focus more on the establish criteria without concerning on the number of people affected or whether the changes made are sustainable.
ALTERNATIVES
1) To replace program based budgeting to Impact based budgeting which address the citizen concern 2) Do Nothing
DECISION CRITERIA
As a guardian to a city, there shall be main criteria that need to be address well in ensuring the best budget is being made for the benefits of all citizens:
1) The degree of the impact
- When the government of a city is being granted with a responsibility to craft the city budget, they shall consider the highest impact to the citizen as main criteria in tabling budget. There shall be no longer over concern on the numbers of project implemented but rather to look on how many affected and whether the changes bring forward is sustainable or short sighted.
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EVALUATION OF ALTERNATIVES
1) To replace program based budgeting to Impact based budgeting which address citizens concern
From PESTEL perspective, as far as all components are concerned by having impact based budgeting Mr Simonian can prioritize better program for the benefit of more people in Yorba
Linda. The winning of USA against Soviet Union gives them a better chance for any diplomatic ties. Since the nation generally indebted due to decision to engage in Middle East War, Mr.
Simonian may wanted to reduce any high revenue projection and reduce capital spending to balance the budget. He needs to explain the fact that many programs would not promised a good governance of the country but few effective and impactful program is.
Crown Height case sparks the racial tension again. Mr. Simonian needs to ensure that in the due process of producing budget and also process of awarding contract should properly follow unbiased procedure to avoid any racial tension to also spark in Yorba Linda. Again, the understanding of impactful program to the citizen in general may hinder any necessary tension.
From technology point of view, the introduction of internet would ease the spread of information.
The city manager should in explaining the impact of the program through internet in order to achieve the second goal of city’s budgeting process. It would be easier to be understood by the public by explaining on how the program can affect them. In fact, when the KPI of all head department is on impact, they would be more prudent in spending and no longer line-item budgeting practiced among them. As for the environmental factor, the City Manager should propose on many incentives related to environmental health. He may instruct the head department to implement high impact program which is environmental friendly.
Last but not least would be the legal case. As we can see the number of citizen violated laws in USA generally is increasing since the year 1984 until 1991. The city manager has the right to put more concern on citizen safety. Mere program with only objective to address this concern is not enough and not convincing enough for the one of the City Council Member, Hence the explanation needs to go further on the how the program conducted by the City can gives impact to the crime reduction within Yorba Linda.
9
From Ishikawa perspective all the symptoms arises from the missing link between the program done by the Council and impact on the citizen. By formulating Impact Based Budgeting the missing link can be restored. The Head department can now relate directly with their spending and the needs of many people, Mr. John Gullixson can now understand how severe our crime rate is and would tolerate for any cost for a safer environment and more citizen would be interested in joining budget hearing to contribute what they think would be the most impactful program to the society rather than just simply fill up the KPI set by city manager.
2) Do Nothing
The city can operate as usual and accept the fact that some of the City Council Member to go against the majority. Yorba Linda would end up having more programs to achieve its objective in maintaining the basic necessity of the people. What lacking is the head of department would continue to produce line item budgeting which would not promote the better well-being of the society. Worst case scenario, the city may only spend citizens money for the elite and gap between the rich and poor would not be well addressed.
RECOMMENDATION
Based on the analysis done couple with the decision criteria, I would like to recommend to the
City Manager, Mr Simonian to go for first alternatives which is to replace program based budgeting with
impact
based
budgeting
due
to
the
following
reasons:
1) Impact Based Budgeting would give a clear picture to the Head Department to craft their budget and assisting them in budget planning process
2) The city council can have a clear ground of argument on the variance of budget tabled. It would be based on the data of how many citizens would be affected and no longer depending on the number of program which may not be the best budgeting process to tackle more people and more sustainable. It would also answered questioned of price hike as cost vs benefit analysis would be done to ensure proper allocation of resources are being put to impact based program.
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REFERENCES
Tyler Lacoma, “Differences in Modified Vs Accrual Accounting.” Demand Media Inc. http://www.ehow.com/info_8636408_differences-modified-vs-accrual-accounting.html, (accessed on November 27, 2014)
Stuart Wilks, (1995),"Reform of the national budget process in Sweden", International
Journal of Public Sector Management, Vol. 8 Iss 2 pp. 33 – 43
Gramling, A.A., Rittenberg, L.E., and Johnstone, K.M., (2012). Auditing. 8th Edition.
Canada : South-Western CENGAGE Learning.
“Macroeconomic
Impact
on
Military
Spending.”
Watson
institute.
http://costsofwar.org/article/macroeconomic-impact-military-spending, (accessed on November
26, 2014)
Bord, J. R., Fisher, A., & O’Connor, E., R. (1998), Public perceptions of global warming:
United States and international perspectives; Dec. 1998; The Journal of Climate Research; Vol.
11, No. 75-84
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QUESTION FROM STUDY CASE
1. A) Does the city of Yorba Lina’s current budgeting process meet the goals set of it?
In my humble opinion, it does meet the first goal but not the second and third goals .The first goal is intended to be easy for the city council to understand. This is due to the fact that the city council members had little or no formal training in public administration or policy. The city council has no problem with the current budgeting process which evolves from line item to program budgeting and their only concerns as mentioned by the case would only raise by one of the council member was on the increment of 24.9% to the police service cost. Nothing mentioned on their difficulties to understand the process. The introduction of program budgeting to replace line-item budgeting helps the city council members to understand the budget better. The prove is, the city council disagree with the increment of 24.9% with some reasonable argument not simply arguing as the case during line-item budgeting before.
Second goal that is to ensure the budget is easy to be understand by the community members is hardly seen to be accepted by the community. In the current budgeting process there is no input from the company which can helps them to understand the priorities and budget better.
Small number turnout during budget hearing signify that the community has less interest on the budget. The situation getting worse when the access to budget would only available during budget hearing and not in terms of publication. Not just the community cannot understand because of the issue raised in the budget but more often due to the limited access to the publication which hinder them to understand the budget better. Inputs from community on budget can also signify their understandability towards the budget, in which none of it would signify otherwise.
As per the third goal, the city manager would like to encourage the city department directors to analyze current and projected activities & their available resources so that priorities could be evaluated. The fact that Mr. Simonian realized that department directors tended to budget on a line-item basis showed that they failed to meet the goals set for them. The department shall come with a solid justification on next year budget and would not hesitate to reduce budget on certain program shall the objectives has been achieved previously. It would be too bad when the
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manager asked, the directors simply tabled their budget by including the inflation and just following the previous year spending instead of based on needs of the society.
b) Are those goals the right ones?
In my point of view, those goals are not the right ones. It would circulated around input based budgeting rather than outcome based budgeting. The city council should focus more on the impact of the program done to the society rather than simply managing resources available to streamline priorities. (Wilks, 1995) mentioned that the goal should be to encourage and enable long-term planning by moving away from incrementalist techniques and by replacing rule-based input-control systems with an emphasis on results and outcomes.
First, an overarching goal of assuring good internal communication surrounds this process.
Every component of Yorba Linda community shall have the opportunity to understand this process, provide input and realize their personal involvement in the continued success of the city.
The budget shall have few focus areas which are beneficial and the most concern area by the inputs from every component in the community. For example to focus on reduction in crime, unemployment rate, improving access to education and healthcare for the community would be more helpful. The department manager would be clearer for what kind of project that need to be done to achieve those projected target set up by the city council. In addition, the city council need not to understand the mechanism or the technical part of coming into budget, but they should be able to decide on the best impact to the society.
Second, the city council should also be clearly specified on the required results after setting focus area. For example, there shall be 10% reduction in crime cases involving Yorba Linda community with gradual decrease by every quarter through more surveillances in the city. Hence, the department manager would pick up this expectation and struggle for the types surveillances that they can offer to the city council for approval in achieving those objective.
Third, analyzing and evaluating the result achieved for future benefits. By analyzing past performance the city council can analyze better as the resources available are always limited.
Hence, proper planning from now is crucial. It is more or less the same practice done by the
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deparment manager except the fact that the propose system would have a clear direction from the city council.
c) Does the city council’s failure to approve the budget unanimously reflect badly on the city manager and
his
staff
and/or the budgeting process?
Why and
why not?
No, because the majority of city council members agrees with the budget proposed by the city manager. In addition, the basis of disagreement of the disagreed city council members is only on the assumption that the neighboring city of Brea is making money from the police service that they offered. As explained by the city manager the cost of hiring others police force from other cities in Orange County would be higher than offered by Brea. Besides, the city of Yorba Linda need to only cover cost per hour than to have their own force which also lead to additional cost of overhead. If the basis of disagreement is on the outcome of budgeting then the whole budgeting process would be in stake.
2. The city of Yorba Linda uses fund accounting
a) What is fund accounting?
Fund accounting is commonly used for non-profit organization including state and local government funds. It focus more on accountability than profitability and usually separate accounts are used for specific purposes according to laws and rules and regulations. The basis of accounting rely on modified accrual accounting where the revenue would only be recognized when it is available and measurable not when it is earned. The same goes to expenses, it would only
be recognized when the related liabilities is incurred.
b) What are its strengths and weaknesses as compared to standard accrual accounting for use in municipality such as Yorba Linda?
In your responses, consider the following question : Did the City of Yorba Linda expect to have a good year in fiscal year 1991-1992? How do you judge?
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Standard accrual accounting (SAA) and modified accrual accounting (MAA), has the same treatment to revenue recognition but slightly different on the expenditure treatment. SAA does not pay attention to the cash flow but to focus more on the transaction. The strength of it would be easier for recording purposes and to align business record on the property date associated with earning income or incurring expenses. Besides, it would help the company to tighter control over its cash flow since the method is quite timely. The weaknesses of this method would be, it does not take into account the differences between the real value and the book value especially when delay cases happened be it for the income or expenditure cases. It may underestimate or overestimate the net income of the institution.
As to compare to MAA, it focus more on the cash flow as far as expenditure is concerned.
The differences is the net income would only be reduced when the check is issued or cash is disbursed not the date when the order is made. The good side of it would be giving some flexibility to the management to adjust their expenditure as per budget to the directors especially in facing crisis. The bad side of it would be the director may lost track on which project that have been approved and which one in the process of payment. Consequently, leading to difficulties in recording and extra job needed to track record on which project that have been paid.
The Yorba Linda does not expect to have a good fiscal year since they have projected as per exhibit 5, reduced total city revenue from the last year budget with the highest expenditure as to compared with year 1990-1991 and 1992- 1993. This is due to the expectation by the Mr Vessey, the finance director on the declining capital revenues because of sharp reduction in developer fees.
Besides, the increment of expenditure is highly likely due to the increment of budget for police services by 24.9%.
3. a) Evaluation the overall financial control system used by the city of Yorba Linda
Financial control system is usually being associated with the internal control done within the organization. By control we define as any policy and procedure established to assist organizations in accomplishing objectives and mitigating risks. Most organization would employ the generic control which are segregation of duties, independent reconciliations and management
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review. However, the fraud which arises from lack of financial control may also arises from lack of documented support for all entries, lack of references to underlying supporting data with a well developed audit trail, no review from CFO or controller and no independent review from internal auditor. In addition speaking from the financial control system perspective, there are basically two types of it which are preventive and detective controls. Preventive control is the most cost-efficient control when designing process. For example, limitation of access for the unauthorized entry of transaction would save from any manipulation done by the irresponsible employee. Next would be detective control. This control would capture loophole which cannot be covered by the preventive control. For example, random cycle of reconciliations and continuous monitoring functions done by the higher authority.
For the sake of answering question I would divide the evaluation of Yorba Linda financial control system into four measures. Among them are segregation of duties, authorization procedures, adequate documentation and reconciliation.
The first measure to evaluate Yorba Linda financial control system would be the segregation of duties. The underlying concept of this control is that individuals should not be put in situations which they can just cover up fraudulent activities by manipulating records. Usually the duty should be differentiate between the ability to process transaction and the custodian to the data. As per Yorba Linda case, the segregation of duties is well arranged except for few issues.
First, when the head of department determine the cost of personnel under his supervision, there is a tendency of the supervisor or head of department to influence his subordinate to do according to his interest. This shows bad sample of control within a department. Second issue would be, every department is expected to produce their own budget without anyone from financial background.
Though guide lines were given, the fact that the head of department still producing line-item based budgeting showed how they are not up to the level to produce on their own.
The second measures to look for would be on the authorization procedure. Controls should be established in the sense that only wanted person would go through the system and make changes
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out of it. The unwanted employee would be stop from accessing the system to ensure safety. The level of commitment to the company should be taken into consideration for the highest authority given. For example the board of directors which would be held responsible for any issue within the company.
As far as Yorba Linda is concerned, the budgeting procedure follows proper authorization channel to ensure better financial control of Yorba Linda resources. The departmental manager would submit their budgets, then the city manager would screen it out for better budget planning on a bird overview. Then, the city manager would presented it to the city councils elected by the people to give final say on the budget suggested by the city manager. In fact the city council would have the power to establish final priorities for the city benefits.
Third measures to ensure proper financial control has been done would be an adequate documentations. The necessity arises as a solid evidence for the journal entries, existence of transaction and financial commitment made by the organization. Among guideline to implement this type of control would be pre numbered paper or computer-generated facilities which is crucial for completeness assertion. Next would be timely preparation of document including electronic trail which would decrease the rate of errors on all documents kept. Lastly, authorization documents should be safely keep be in digital or hardcopy.
Looking into Yorba Linda case, there is no specific issue pertaining to this type of control.
The information covered would be past document which is the submission of budget but silent on the documents or past records kept by the managers. The closest that I can comment is the fact that they have to prepare two years cycle of budget in one time, yet they still producing line item budgeting showed that they kept documents properly as comparison. Plus, there is no issue between Yorba Linda and the City of Brea in their transaction proof either they have high level of trust or proper documentation to support their agreement in outsourcing police protection for
Yorba Linda.
Last but not least would be reconciliation. Reconciliation means control operate to look into deliverability of party involve in agreement and to walk through the process again. It is vital that the reconciliation is done not by the same person originally recorded the transaction, the individual with custody to the transaction and individual which authorize the transaction. As far
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as Yorba Linda is concerned nothing mentioned in case pertaining to the effort made by the manager to reconcile between budget pitch for and budget spend. It is even worse when the comparisons of actual program performance as compared to budget were not considered in department performance evaluations. This would result in lesser attention given for reconciliation purposes for financial control purposes.
b) What suggestions, if any, would you make to Mr. Simonian to improve it?
In my humble point of view, there are few point which can be taken into consideration for
Mr. Simonian to improve their financial control system. First is pertaining to the segregation of duties issue among his subordinate. He should not let the head of department to decide on the wages of their employees. This might prevent any whistleblower action from the lower level employees in curbing any issue made by the head department. Hence, Mr Simonian may established human resource department which would oversee employee development in terms of human capital and wages or he may delegates it to the financial department.
Next to address the issue of lack of competent for the head of department to table next cycle of budget can be rectify by assigning people with financial planning education background to each department. Mr simonian can outsource the person from finance department or from open market. This person would involve directly in budget making to avoid line item budgeting as what have been repeatedly done by head of department although guideline has been given by finance department. Another
way
of
doing
it
by
engaging
with
consulting
firm
like
Pricewaterhousecoopers, Delloitte, KPMG etc in coming with state budget.
Third is to improve on the authorization procedure. Somehow the case did mentioned few procedures in coming to the budget approval but somehow silent in the course of executing the project and post project phase. A better control would be to implement monetary limit of authorization according to level of authority. This to ensure that proper monitoring can be done in the course of the project and involving more authoritative employees as the amount of money involved goes higher. For example, approval for RM 1000 may only involve 1 manager but approval for RM 1,000,000 may involve four manager or even Mr Simonian himself. Next, as for
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the post project phase the report must be submitted and supervise by both head department and city manager to ensure the objective of the project is well achieved.
Fourth is to address on the need to keep complete documentation for cross referencing purpose in the future. Since, the case silent on method they kept their documents, I would like to highly recommend for Yorba Linda to at least keep it in the form of digital and hardcopy which cover seven years of records in case of tax inquiries.
Last but not least would be, to reconcile transaction between approved and executed project. This is to ensure that what has been planned can be executed well and run according to plan. It serves a good compliment for the internal auditor to keep track records for future benefits.
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(CITY OF YORBA LINDA, CALIFORNIA)
ACC 4291
INTEGRATED CASE STUDY
TERM CASE ANALYSIS REPORT
(SECTION 1)
SEMESTER 1, 2014/2015 SESSION
MATRIC NO
1022133
NAME
MUHAMMAD FIKRI BIN AHMAD
PREPARED FOR:
PROF DR NIK NAZLI NIK AHMAD
DEAN, KENMS IIUM
1
CONTENT
BIL
1.
2.
3.
TITLE
EXECUTIVE SUMMARY
PROBLEM STATEMENT
SITUATION ANALYSIS
- PESTEL
- ISHIKAWA
PAGE
3
3
4-8
4.
5.
6.
ALTERNATIVES
DECISION CRITERIA
EVALUATION OF
ALTERNATIVES
RECOMMENDATION
REFERENCES
ANSWERS FOR
QUESTIONS
8
8
9 - 10
7.
8.
9.
10
11
12-19
2
EXECUTIVE SUMMARY
The case study mainly discussed on the City of Yorba Linda, California. The case overview would be the budgeting process made by the elected member of city council …show more content…
for the year 1991 until year 1993 since the budget cycle is every two years. A bit of background of Yorba Linda would be city located in northern Orange County in California, was incorporated in 1967 as a general law city. Yorba Linda is known to be the birthplace for Richard Nixon the 37th president of the United States, and is the home of the Nixon Presidential Library.
Since 1980 Yorba Linda had been growing at a rate of about 3,000 people per year. In
1991 the city had 53,000 residents living in approximately 18.5 square miles. Yorba Linda also used a city manager form of government. Mr. Simonian, the city manager, was a full-time employee appointed by the City Council to manage all city departments except Legal Services.
The city’s budget included 68 full-time employee positions for general city operations and 17 for library operations.
The crisis begin when for only the second time in city history, the budget table by the city manager was not unanimously approved. The final vote was four in favour and one abstention.
The abstaining council member raised several issues and the most important and highlighted one would be increment of 24.9% in police service costs which the city outsource from the neighboring
City of Brea. The reason for disagreement would be the concern made over overpaid police personnel and City of Brea is taking advantage over Yorba Linda.
PROBLEM STATEMENT
Mr. Simonian is in dilemma when one of the City Council constantly opposed to his committee members budgets proposal to run Yorba Linda. The dilemma arise when the fact that this disagreement happened to be the second time since Yorba Linda existed in 1967. Though he had explained and argued well with the disagreed City Council Member, the budget is approved with four in favour and one abstention. He had try his best by justifying the reason to the council members. It seems the program budget to replace line-item budget is not convincing enough. The disagreed member of City Council still questioning over the impact of cost increase over benefits of Yorba Linda’s citizens.
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SITUATION ANALYSIS
PESTEL Analysis:
Through PESTEL analysis we are going to evaluate the external factors that have impact on the
City of Yorba Linda both in long and short terms. These factors include Political, Economic,
Social, Technology, Environment and Legal aspects that are evaluated further in the following paragraphs. Political factors:
1
The signatory of Strategic Arms Reduction Treaty (START) between United States of
America and Soviet Union.
The treaty was signed on 31 July of 1991 between this two blocks which has just ended their
Cold War. The treaty is signed to bar the signatory from deploying any nuclear warheads to both countries hence preventing from any further world war to happen. It also gives impact to Yorba
Linda in the sense that the focus of the nation is no longer in combatting war but to develop their own nation. It also gives more confident to the investor to chip in money as peace is to be resumed by having above agreement. The dissolution of Soviet Union marks the winning of America over
Cold War in 1991. America can capitalize their political power as the then no 1 country in the world in terms of power.
Mr Simonian can capitalize the situation by lobbying into other states or country to invest into Yorba Linda as it would be more safer environment and secured than before.
Economic:
1- Hike in United States Debt due to Involvement in Middle East War
“The net effect on GDP is a combination of several countervailing influences. Current and projected war spending pushes GDP higher because it increases aggregate demand. But deficit spending crowds out capital investment spending, which ultimately lowers the nation’s stock of productive capital and also reduces GDP. War-related deaths and injuries also reduce the nation’s supply of human capital, which reduces GDP. Estimates suggest
4
that in total, war spending has probably raised GDP by 0.5% .but the net effect will fall to zero by 2020 and turn negative as the full effects of the reduced capital stock emerge.”
As Yorba Linda is part of United States of America, the city would somehow would be affected by the increment of aggregate demand can enjoy better economic benefits. But in long term, the city would have to bear higher inflation rate due to debt incurred by the federal government.
Impactful program needs to be executed to balance the inflation. Involvement in Middle East War also gives bad impression to the public morale hence reduced investment made by investor all over the world. Mr. Simonian would face tough time in convincing City Council to spend more due to hike in national debt.
Social factors:
1 Crown Heights riot
The racial tension in United States of America is still prevailing in those years and proven through cases such Crown Height race riots. It was a three days of race riots among black people against orthodox Jewish and causing harm to the society. The case happened in New York City. Many were badly injured while some were killed due to that incident. The case took place on 19th to 21st of August 1991. Hence, it create challenge to Yorba Linda regulators to ensure there shall be no policy which is race biased.
Technology:
1
The Introduction of Internet & world wide website in 1991
In 1991, Bruners’ Lee has managed to introduce internet the way we see today. Anyone on earth can simply retrieved any information in any website they prefer. This would enhance communication among people. It impact a lot the ways government used to function. Before it takes days for people to notice the death of Abraham Lincoln, the former President of United States of America, now with internet the whole world can retrieve the information in real time. It gives more pressures for Yorba Linda to perform better and updates their day to day operation to public via www or internet.
5
Environmental:
1
•
Growing concerns towards the environmental issues:
Richard et al. (1998) mentioned that 1988 marks the key year of the public awareness over global warming especially in United States of America.
•
Kasperson et al. (1990) reported that studies conducted in 12 European countries in 1982 and
1986 on ‘public concern over global environmental change’ included 3 dimensions of change: plant and animal species extinctions, depletion of world forest resources, and possible climate change from CO2 emissions (reported in On average, 34% of these respondents indicated concern or worry over CO2 emissions in 1982 and 38% concurred in 1986. By 1992, citizen majorities in 13 of 24 countries
•
By 1992, citizen majorities in 13 of 24 countries picked ‘very serious’ as the option to describe the threat of global warming (Dunlap 1994).
•
According to Richard et al. (1998) global warming received the fewest ‘very serious’ votes among a list of 7 environmental problems. The other problems and the number of countries expressing majority concern are: air pollution (20), water pollution (19), loss of rain forest
(20), loss of ozone (19), loss of species (15), and contaminated soil (15). In these international surveys, the United States did not muster a majority expressing concern for global warming.
Hence, based on the research done above environmental is an issue that need to be address within state budget which give impact and address concerns of the public. Mr. Simonian need to address issue pertaining to environmental caution be it in terms of prevention measures or damage control measures. 6
Legal:
1
The increment in crime rate from 1984 until 1991
Figure 1 shows that the Crime Index Rate Total crime rate generally increased from 1960 to 1980, with slight dips occurring around 1972 and 1977. After the 1980 peak, the crime rate decreased until 1984, then rose until 1991, when it began decreasing. Recent data show these decreases continuing in 1999. The violent crime rate trended like the Crime Index Rate Total. Based on this statistics we can deduced that there shall be a valid concern made by the authority over the safety of Yorba Linda’s citizens due to many violation of law happening within the nation in general.
Ishikawa Analysis:
Problem : Fails to have good measures of budgeting system which can benefits the society most.
Symptoms:
1) The Head Department :
-
Though Mr. Simonian as the city manager has introduced a transformation program to progress from line-item budgeting system to program based budgeting system, the head of department still fails to address priority and tends to budget on line-item based budgeting.
The failure to understand program based budgeting is simply due to failure to prioritize among program available according to objective.
7
2) Council members John Gullixson:
-
He consistently disagreed with the hike of 24.9% increase in police service though an explanation was given by the city manager pertaining to the comparison of service cost from other service provider and the needs to maintain good relationship with them. Not to forget more costs is needed to bear police costs if they want to have it on their own. If John may consider the fact that crime rate is increased year by year from 1984 until 1990 he might be fine with arrangement provided clear impact on citizen safety.
3) Low turnover during budget hearing
-
The citizens are customarily not interested to join budget hearing is primarily due to the fact they cannot really relate it to themselves. People would usually like to hear what is from the budget that they can enjoyed. Line-item based budgeting and program based budgeting might not address this concern well as it focus more on the establish criteria without concerning on the number of people affected or whether the changes made are sustainable.
ALTERNATIVES
1) To replace program based budgeting to Impact based budgeting which address the citizen concern 2) Do Nothing
DECISION CRITERIA
As a guardian to a city, there shall be main criteria that need to be address well in ensuring the best budget is being made for the benefits of all citizens:
1) The degree of the impact
- When the government of a city is being granted with a responsibility to craft the city budget, they shall consider the highest impact to the citizen as main criteria in tabling budget. There shall be no longer over concern on the numbers of project implemented but rather to look on how many affected and whether the changes bring forward is sustainable or short sighted.
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EVALUATION OF ALTERNATIVES
1) To replace program based budgeting to Impact based budgeting which address citizens concern
From PESTEL perspective, as far as all components are concerned by having impact based budgeting Mr Simonian can prioritize better program for the benefit of more people in Yorba
Linda. The winning of USA against Soviet Union gives them a better chance for any diplomatic ties. Since the nation generally indebted due to decision to engage in Middle East War, Mr.
Simonian may wanted to reduce any high revenue projection and reduce capital spending to balance the budget. He needs to explain the fact that many programs would not promised a good governance of the country but few effective and impactful program is.
Crown Height case sparks the racial tension again. Mr. Simonian needs to ensure that in the due process of producing budget and also process of awarding contract should properly follow unbiased procedure to avoid any racial tension to also spark in Yorba Linda. Again, the understanding of impactful program to the citizen in general may hinder any necessary tension.
From technology point of view, the introduction of internet would ease the spread of information.
The city manager should in explaining the impact of the program through internet in order to achieve the second goal of city’s budgeting process. It would be easier to be understood by the public by explaining on how the program can affect them. In fact, when the KPI of all head department is on impact, they would be more prudent in spending and no longer line-item budgeting practiced among them. As for the environmental factor, the City Manager should propose on many incentives related to environmental health. He may instruct the head department to implement high impact program which is environmental friendly.
Last but not least would be the legal case. As we can see the number of citizen violated laws in USA generally is increasing since the year 1984 until 1991. The city manager has the right to put more concern on citizen safety. Mere program with only objective to address this concern is not enough and not convincing enough for the one of the City Council Member, Hence the explanation needs to go further on the how the program conducted by the City can gives impact to the crime reduction within Yorba Linda.
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From Ishikawa perspective all the symptoms arises from the missing link between the program done by the Council and impact on the citizen. By formulating Impact Based Budgeting the missing link can be restored. The Head department can now relate directly with their spending and the needs of many people, Mr. John Gullixson can now understand how severe our crime rate is and would tolerate for any cost for a safer environment and more citizen would be interested in joining budget hearing to contribute what they think would be the most impactful program to the society rather than just simply fill up the KPI set by city manager.
2) Do Nothing
The city can operate as usual and accept the fact that some of the City Council Member to go against the majority. Yorba Linda would end up having more programs to achieve its objective in maintaining the basic necessity of the people. What lacking is the head of department would continue to produce line item budgeting which would not promote the better well-being of the society. Worst case scenario, the city may only spend citizens money for the elite and gap between the rich and poor would not be well addressed.
RECOMMENDATION
Based on the analysis done couple with the decision criteria, I would like to recommend to the
City Manager, Mr Simonian to go for first alternatives which is to replace program based budgeting with
impact
based
budgeting
due
to
the
following
reasons:
1) Impact Based Budgeting would give a clear picture to the Head Department to craft their budget and assisting them in budget planning process
2) The city council can have a clear ground of argument on the variance of budget tabled. It would be based on the data of how many citizens would be affected and no longer depending on the number of program which may not be the best budgeting process to tackle more people and more sustainable. It would also answered questioned of price hike as cost vs benefit analysis would be done to ensure proper allocation of resources are being put to impact based program.
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REFERENCES
Tyler Lacoma, “Differences in Modified Vs Accrual Accounting.” Demand Media Inc. http://www.ehow.com/info_8636408_differences-modified-vs-accrual-accounting.html, (accessed on November 27, 2014)
Stuart Wilks, (1995),"Reform of the national budget process in Sweden", International
Journal of Public Sector Management, Vol. 8 Iss 2 pp. 33 – 43
Gramling, A.A., Rittenberg, L.E., and Johnstone, K.M., (2012). Auditing. 8th Edition.
Canada : South-Western CENGAGE Learning.
“Macroeconomic
Impact
on
Military
Spending.”
Watson
institute.
http://costsofwar.org/article/macroeconomic-impact-military-spending, (accessed on November
26, 2014)
Bord, J. R., Fisher, A., & O’Connor, E., R. (1998), Public perceptions of global warming:
United States and international perspectives; Dec. 1998; The Journal of Climate Research; Vol.
11, No. 75-84
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QUESTION FROM STUDY CASE
1. A) Does the city of Yorba Lina’s current budgeting process meet the goals set of it?
In my humble opinion, it does meet the first goal but not the second and third goals .The first goal is intended to be easy for the city council to understand. This is due to the fact that the city council members had little or no formal training in public administration or policy. The city council has no problem with the current budgeting process which evolves from line item to program budgeting and their only concerns as mentioned by the case would only raise by one of the council member was on the increment of 24.9% to the police service cost. Nothing mentioned on their difficulties to understand the process. The introduction of program budgeting to replace line-item budgeting helps the city council members to understand the budget better. The prove is, the city council disagree with the increment of 24.9% with some reasonable argument not simply arguing as the case during line-item budgeting before.
Second goal that is to ensure the budget is easy to be understand by the community members is hardly seen to be accepted by the community. In the current budgeting process there is no input from the company which can helps them to understand the priorities and budget better.
Small number turnout during budget hearing signify that the community has less interest on the budget. The situation getting worse when the access to budget would only available during budget hearing and not in terms of publication. Not just the community cannot understand because of the issue raised in the budget but more often due to the limited access to the publication which hinder them to understand the budget better. Inputs from community on budget can also signify their understandability towards the budget, in which none of it would signify otherwise.
As per the third goal, the city manager would like to encourage the city department directors to analyze current and projected activities & their available resources so that priorities could be evaluated. The fact that Mr. Simonian realized that department directors tended to budget on a line-item basis showed that they failed to meet the goals set for them. The department shall come with a solid justification on next year budget and would not hesitate to reduce budget on certain program shall the objectives has been achieved previously. It would be too bad when the
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manager asked, the directors simply tabled their budget by including the inflation and just following the previous year spending instead of based on needs of the society.
b) Are those goals the right ones?
In my point of view, those goals are not the right ones. It would circulated around input based budgeting rather than outcome based budgeting. The city council should focus more on the impact of the program done to the society rather than simply managing resources available to streamline priorities. (Wilks, 1995) mentioned that the goal should be to encourage and enable long-term planning by moving away from incrementalist techniques and by replacing rule-based input-control systems with an emphasis on results and outcomes.
First, an overarching goal of assuring good internal communication surrounds this process.
Every component of Yorba Linda community shall have the opportunity to understand this process, provide input and realize their personal involvement in the continued success of the city.
The budget shall have few focus areas which are beneficial and the most concern area by the inputs from every component in the community. For example to focus on reduction in crime, unemployment rate, improving access to education and healthcare for the community would be more helpful. The department manager would be clearer for what kind of project that need to be done to achieve those projected target set up by the city council. In addition, the city council need not to understand the mechanism or the technical part of coming into budget, but they should be able to decide on the best impact to the society.
Second, the city council should also be clearly specified on the required results after setting focus area. For example, there shall be 10% reduction in crime cases involving Yorba Linda community with gradual decrease by every quarter through more surveillances in the city. Hence, the department manager would pick up this expectation and struggle for the types surveillances that they can offer to the city council for approval in achieving those objective.
Third, analyzing and evaluating the result achieved for future benefits. By analyzing past performance the city council can analyze better as the resources available are always limited.
Hence, proper planning from now is crucial. It is more or less the same practice done by the
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deparment manager except the fact that the propose system would have a clear direction from the city council.
c) Does the city council’s failure to approve the budget unanimously reflect badly on the city manager and
his
staff
and/or the budgeting process?
Why and
why not?
No, because the majority of city council members agrees with the budget proposed by the city manager. In addition, the basis of disagreement of the disagreed city council members is only on the assumption that the neighboring city of Brea is making money from the police service that they offered. As explained by the city manager the cost of hiring others police force from other cities in Orange County would be higher than offered by Brea. Besides, the city of Yorba Linda need to only cover cost per hour than to have their own force which also lead to additional cost of overhead. If the basis of disagreement is on the outcome of budgeting then the whole budgeting process would be in stake.
2. The city of Yorba Linda uses fund accounting
a) What is fund accounting?
Fund accounting is commonly used for non-profit organization including state and local government funds. It focus more on accountability than profitability and usually separate accounts are used for specific purposes according to laws and rules and regulations. The basis of accounting rely on modified accrual accounting where the revenue would only be recognized when it is available and measurable not when it is earned. The same goes to expenses, it would only
be recognized when the related liabilities is incurred.
b) What are its strengths and weaknesses as compared to standard accrual accounting for use in municipality such as Yorba Linda?
In your responses, consider the following question : Did the City of Yorba Linda expect to have a good year in fiscal year 1991-1992? How do you judge?
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Standard accrual accounting (SAA) and modified accrual accounting (MAA), has the same treatment to revenue recognition but slightly different on the expenditure treatment. SAA does not pay attention to the cash flow but to focus more on the transaction. The strength of it would be easier for recording purposes and to align business record on the property date associated with earning income or incurring expenses. Besides, it would help the company to tighter control over its cash flow since the method is quite timely. The weaknesses of this method would be, it does not take into account the differences between the real value and the book value especially when delay cases happened be it for the income or expenditure cases. It may underestimate or overestimate the net income of the institution.
As to compare to MAA, it focus more on the cash flow as far as expenditure is concerned.
The differences is the net income would only be reduced when the check is issued or cash is disbursed not the date when the order is made. The good side of it would be giving some flexibility to the management to adjust their expenditure as per budget to the directors especially in facing crisis. The bad side of it would be the director may lost track on which project that have been approved and which one in the process of payment. Consequently, leading to difficulties in recording and extra job needed to track record on which project that have been paid.
The Yorba Linda does not expect to have a good fiscal year since they have projected as per exhibit 5, reduced total city revenue from the last year budget with the highest expenditure as to compared with year 1990-1991 and 1992- 1993. This is due to the expectation by the Mr Vessey, the finance director on the declining capital revenues because of sharp reduction in developer fees.
Besides, the increment of expenditure is highly likely due to the increment of budget for police services by 24.9%.
3. a) Evaluation the overall financial control system used by the city of Yorba Linda
Financial control system is usually being associated with the internal control done within the organization. By control we define as any policy and procedure established to assist organizations in accomplishing objectives and mitigating risks. Most organization would employ the generic control which are segregation of duties, independent reconciliations and management
15
review. However, the fraud which arises from lack of financial control may also arises from lack of documented support for all entries, lack of references to underlying supporting data with a well developed audit trail, no review from CFO or controller and no independent review from internal auditor. In addition speaking from the financial control system perspective, there are basically two types of it which are preventive and detective controls. Preventive control is the most cost-efficient control when designing process. For example, limitation of access for the unauthorized entry of transaction would save from any manipulation done by the irresponsible employee. Next would be detective control. This control would capture loophole which cannot be covered by the preventive control. For example, random cycle of reconciliations and continuous monitoring functions done by the higher authority.
For the sake of answering question I would divide the evaluation of Yorba Linda financial control system into four measures. Among them are segregation of duties, authorization procedures, adequate documentation and reconciliation.
The first measure to evaluate Yorba Linda financial control system would be the segregation of duties. The underlying concept of this control is that individuals should not be put in situations which they can just cover up fraudulent activities by manipulating records. Usually the duty should be differentiate between the ability to process transaction and the custodian to the data. As per Yorba Linda case, the segregation of duties is well arranged except for few issues.
First, when the head of department determine the cost of personnel under his supervision, there is a tendency of the supervisor or head of department to influence his subordinate to do according to his interest. This shows bad sample of control within a department. Second issue would be, every department is expected to produce their own budget without anyone from financial background.
Though guide lines were given, the fact that the head of department still producing line-item based budgeting showed how they are not up to the level to produce on their own.
The second measures to look for would be on the authorization procedure. Controls should be established in the sense that only wanted person would go through the system and make changes
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out of it. The unwanted employee would be stop from accessing the system to ensure safety. The level of commitment to the company should be taken into consideration for the highest authority given. For example the board of directors which would be held responsible for any issue within the company.
As far as Yorba Linda is concerned, the budgeting procedure follows proper authorization channel to ensure better financial control of Yorba Linda resources. The departmental manager would submit their budgets, then the city manager would screen it out for better budget planning on a bird overview. Then, the city manager would presented it to the city councils elected by the people to give final say on the budget suggested by the city manager. In fact the city council would have the power to establish final priorities for the city benefits.
Third measures to ensure proper financial control has been done would be an adequate documentations. The necessity arises as a solid evidence for the journal entries, existence of transaction and financial commitment made by the organization. Among guideline to implement this type of control would be pre numbered paper or computer-generated facilities which is crucial for completeness assertion. Next would be timely preparation of document including electronic trail which would decrease the rate of errors on all documents kept. Lastly, authorization documents should be safely keep be in digital or hardcopy.
Looking into Yorba Linda case, there is no specific issue pertaining to this type of control.
The information covered would be past document which is the submission of budget but silent on the documents or past records kept by the managers. The closest that I can comment is the fact that they have to prepare two years cycle of budget in one time, yet they still producing line item budgeting showed that they kept documents properly as comparison. Plus, there is no issue between Yorba Linda and the City of Brea in their transaction proof either they have high level of trust or proper documentation to support their agreement in outsourcing police protection for
Yorba Linda.
Last but not least would be reconciliation. Reconciliation means control operate to look into deliverability of party involve in agreement and to walk through the process again. It is vital that the reconciliation is done not by the same person originally recorded the transaction, the individual with custody to the transaction and individual which authorize the transaction. As far
17
as Yorba Linda is concerned nothing mentioned in case pertaining to the effort made by the manager to reconcile between budget pitch for and budget spend. It is even worse when the comparisons of actual program performance as compared to budget were not considered in department performance evaluations. This would result in lesser attention given for reconciliation purposes for financial control purposes.
b) What suggestions, if any, would you make to Mr. Simonian to improve it?
In my humble point of view, there are few point which can be taken into consideration for
Mr. Simonian to improve their financial control system. First is pertaining to the segregation of duties issue among his subordinate. He should not let the head of department to decide on the wages of their employees. This might prevent any whistleblower action from the lower level employees in curbing any issue made by the head department. Hence, Mr Simonian may established human resource department which would oversee employee development in terms of human capital and wages or he may delegates it to the financial department.
Next to address the issue of lack of competent for the head of department to table next cycle of budget can be rectify by assigning people with financial planning education background to each department. Mr simonian can outsource the person from finance department or from open market. This person would involve directly in budget making to avoid line item budgeting as what have been repeatedly done by head of department although guideline has been given by finance department. Another
way
of
doing
it
by
engaging
with
consulting
firm
like
Pricewaterhousecoopers, Delloitte, KPMG etc in coming with state budget.
Third is to improve on the authorization procedure. Somehow the case did mentioned few procedures in coming to the budget approval but somehow silent in the course of executing the project and post project phase. A better control would be to implement monetary limit of authorization according to level of authority. This to ensure that proper monitoring can be done in the course of the project and involving more authoritative employees as the amount of money involved goes higher. For example, approval for RM 1000 may only involve 1 manager but approval for RM 1,000,000 may involve four manager or even Mr Simonian himself. Next, as for
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the post project phase the report must be submitted and supervise by both head department and city manager to ensure the objective of the project is well achieved.
Fourth is to address on the need to keep complete documentation for cross referencing purpose in the future. Since, the case silent on method they kept their documents, I would like to highly recommend for Yorba Linda to at least keep it in the form of digital and hardcopy which cover seven years of records in case of tax inquiries.
Last but not least would be, to reconcile transaction between approved and executed project. This is to ensure that what has been planned can be executed well and run according to plan. It serves a good compliment for the internal auditor to keep track records for future benefits.
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