PERFORMANCE MEASUREMENT EVOLUTION AND ACCOUNTABILITY IN INDONESIAN REGIONAL GOVERNMENTS A thesis submitted in fulfilment of the requirements for the degree of Master of Business (Accountancy) MUHAMMAD THAHAR SE (Universitas Syiah Kuala) MAcc (The University of Western Australia) School of Accounting College of Business RMIT University May 2016 i Declaration I certify that except where due acknowledgement has been made, the work is that of the author alone; the work has not been submitted previously, in whole or in part, to qualify for any other academic award; the content of the thesis is the result of work which has been carried out since the official commencement date of the approved research program; any editorial work, paid or unpaid, carried out by a third party is acknowledged; and, ethics procedures and guidelines have been followed. Muhammad Thahar 16 May 2016 ii Acknowledgments First of all I would like to thank God, Allah SWT for His blessings throughout my entire life. Then, I would like to express my deepest gratitude to my supervisors Dr Gillian Vesty and Dr Sue Robertson who have patiently assisted me during my research journey and given invaluable guidance along my study. My sincere appreciation goes to Associate Professor Prem Yappa, Professor Lee Parker (both from RMIT University) and Prof Christopher Napier (from Royal Holloway University of London) for their supportive comments during discussions in the candidature stages.
I also acknowledge the assistance of Bradley Smith, of Semiosmith Editing and Consulting Services, for providing professional editing and proofreading of the entire thesis. At this excellent opportunity, I would like to thanks my parents and my siblings who give me endless support in pursuing my goals in life. Finally, I dedicate this achievement to my beloved wife, and my sons, Faris Naufal and Fadel Nadaffa. All of you have been gorgeous by willing to sacrifice your time for me and struggling with a new environment without any complaint.
Without all of you, this research journey would have not been able to be accomplished. iii Table of Contents Declaration. iii Table of Contents. iv List of Figures .vii List of Tables.
ix Thesis Related Publication. xi Chapter 1: Introduction .2 Objective of the study and research questions .3 Contribution of the study .5 Outline of the thesis. 6 Chapter 2: Literature Review .2 Public sector PMS.1 NPM and NPFM as impetuses for change .2 Corporate governance and good governance as more recent public sector reform frameworks .3 PMS adoption and impediments .3 Defining accountability in the public sector .4 Dimensions of accountability in the public sector .3 Corporate and hierarchical accountability .6 Vertical versus horizontal accountability.7 External versus internal accountability .5 Management accounting reform in the Indonesian Government and the practices of neighboring countries. 29 Chapter 3: Theoretical Framework .2 New Institutional Sociology (NIS) as a lens.1 Isomorphic processes under NIS perspective .3 NIS approach on performance measurement research .2 PMS introduction and development overtime .3 Major impediments to PMS development and implementation .4 The extent of accountability.
46 Chapter 4: Research Method .2 The nature of qualitative research and its philosophical assumptions .1 The nature of qualitative research .2 Qualitative research philosophical assumptions .4 Method of data collection and data analysis .1 Sources of evidence .2 Method of data analysis .1 Credibility of research.2 Transferability of research .6 Ethical issues and data storage. 62 Chapter 5: The Research Setting .2 Indonesia in brief .3 The structure of the Indonesian Government .4 The concept of PMS and accountability in the Indonesian Government .2 The evolution of the Indonesian regional government PMS since 1999 .1 The introduction of a PMS for accountability (1999-2003) .2 Revision in performance planning and budgeting and the introduction of key performance indicators (KPIs) (2004-2009) .3 Improvement in PMS regulations (2010- 2014) .3 A picture of the current government PMS .4 Impediments to PMS development and implementation .5 The discharge of accountability through PMS implementation .6 Motivation in adopting the central government PMS framework .2 PMS introduction and development.3 Impediments to the development and implementation process .4 The extent of accountability.5 Evidence of Isomorphism .2 Summary of research approach and key findings .3 Summary of key contributions.4 Limitations and areas for further research. 133 Appendix I: Documents used as source of evidence. 133 Appendix II: An example of performance disclosure.
135 Appendix III: Strategic plan template in performance measurement regulations. 153 Appendix IV: Sample of a working plan and budget. 154 Appendix V: A performance agreement template. 155 Appendix VI: The results of local government SAKIP evaluation from 2009 to 2012 156 Appendix VII: Node summary report.
157 Appendix VIII: A sample of hierarchical structure of coding. 163 Appendix IX: Ethics- Participant Information sheet (invitation letter), Consent Form 167 vi List of Figures Figure 2.1: The public sector accountability and performance continuum .2: Data coding process and its association with category and theme .1: The structure of the Indonesian government .2: A brief picture of PMS in the Indonesian regional governments .2: Performance measurement cycle .3: Performance measurement based on PAA decree number 239/IX/6/2003 .4: The Indonesian regional government planning structure .5: The use of KPIs .6: PMS and its integration with planning system and budgeting system .7: The content of performance reporting .8: A diagram of performance reporting and financial reporting. 102 vii List of Tables Table 2.1: Main literature on public sector performance measurement used in the study… .1: Main literature on NIS used in the study .2: Some application of NIS for public sector performance studies .3: Literature for research question development .4: Research themes and sample of associated interview questions .2: Attempt to increase trustworthiness….1: The comparison between the two performance reporting regimes. 83 viii Acronyms ABC Activity Based Costing CHEANs College Human Ethics Advisory Networks DRG Diagnosis Related Groups FDSA Finance and Development Supervisory Agency GAAP Generally Accepted Accounting Principles GPRA Government Performance and Results Act KPIs Key Performance Indicators MSAE Ministry for State Apparatus Empowerment MSAEBR Ministry for State Apparatus Empowerment and Bureaucracy Reform MoE Ministry of Education MoHA Ministry of Home Affairs MoF Ministry of Finance NIE New Institutional Economics NDPA National Development Planning Agency NIS New Institutional Sociology NIT New Institutional Theory NPFM New Public Financial Management NPM New Public Management PAA Public Administration Agency PBB Performance Based Budgeting PIs Performance Indicators PMS Performance Measurement System ix Thesis Related Publication Thahar, M, Vesty, G & Robertson, S 2015, 'Performance Measurement System Evolution and the Discharge of Accountability: Evidence from Indonesia', paper presented to Asia Pacific Management Accounting Association, Bali, 26-29 October 2015.
x Abstract This thesis explores the development and implementation of a performance measurement system in Indonesian regional governments. A field study approach is employed in which publicly available and internal documents, together with semi-structured interviews, are used as a comprehensive source of evidence. In 1999, the Indonesian Government, like many other countries in the Western world, decentralized their control to autonomous regional government units. Public sector reforms were introduced with significant changes to the way performance was measured and managed in areas such as education, health, government planning and infrastructure, as well as financial management of budgets.
As part of the decentralisation process, the central government put mechanisms in place to ensure their overarching vision and strategies effected transparency in performance and resource allocation. Drawing on the performance measurement literature and taking a New Institutional Sociology (NIS) approach, an analysis of the discharge of accountability, public sector governance and performance measurement system (PMS) change over 15 years (1999-2015) was conducted to provide insights into: a) regional governments’ underlying motivation for adapting to change; b) performance measurement system (PMS) introduction, development and implementation over time; c) whether there were any major impediments to the implementation of the national framework on performance measurement at a regional level; and d) the extent to which accountability has been impacted. Different stages of change were identified, as follows; a) the introduction of PMS for accountability (1998-2003); b) revision in performance planning and budgeting, and the introduction of Key Performance Indicators (2004-2009); and c) improvement in PMS regulations (2010-2015). The findings of this study support NIS research, in that the main motivation of regional governments towards adopting the national framework was for meeting legitimacy needs as well as there being strong evidence of coercive isomorphism that results in compliance.
In particular, a number of impediments were noted during these evolutionary stages. These include: low levels of top management commitment; passive attitude/apathetic behavior towards PMS among staff in accountability units; low institutional capacity; lack of coordination among policy setters in the central government; communication problems between policy setters in the central government and implementers at regional governments; conflicts of interest among stakeholders at regional level; and a high level of informality (in xi relation to PMS and administrative control), which influence decision making processes at both higher and lower levels management. Each of these has provided obstacles to the development and implementation of PMS. Furthermore, in response to the discharge of accountability, PMS has been largely implemented and used for accountability purposes; in particular, towards the central government, the major regional governments’ stakeholder.
Regional governments’ response in meeting the need to fulfil accountability requirements to other stakeholders remains limited. The research contributes to the literature in several ways. While reforms in industrial countries have been comprehensively studied, there has been less attention paid to public sector performance measurement reforms in developing countries such as Indonesia. The present research is intended to fill this gap by providing evidence of the evolution of performance measurement and the discharge of accountability in the Indonesian public sector.
In addition, the present research contributes not only to management accounting literature by providing evidence from a developing country perspective, but also provides valuable insights into practical applications for policy makers and public sector accountants, for future policies and further designs and application of reliable PMS. It also offers an opportunity for other countries with similar socio-economic conditions to those of Indonesia to learn from the practices identified. Keywords: Performance Measurement System, New Institutional Sociology, Legitimacy, Isomorphism, Indonesian regional governments xii Chapter 1: Introduction 1.1 Background Research in the area of public sector performance measurement has recently became popular in both accounting (Abernethy et al. 2005; Brignall & Modell 2000; Cavalluzzo & Ittner 2004; Speklé & Verbeeten 2014) and non-accounting literature (Anderson 2001; Bernstein 2001; Heinrich 2002; Propper & Wilson 2003).
The emergence of New Public Management (NPM), and subsequently New Public Financial Management (NPFM), have triggered the change in public sector management practice from a traditional model to a business-like mechanism. This follows a belief that the business model may deliver better performance and accountability (Guthrie, Olson & Humphrey 1999; Hood 1991, 1995). Another mechanism that has been introduced into the public sector is the principle of good governance in which transparency and accountability, effectiveness and efficiency of public services are taken into consideration (UNESCAP 2009). In addition, the philosophy of corporate governance, initially used in the private sector, has now been applied in public sector management reform (Ryan & Ng 2000).
Since the emergence of these approaches to improving public sector management performance, the issue of public sector performance measurement and accountability has arisen as the community expectation of better public services is increasing. Constituents or stakeholders have become more aware of public sector expenditure. They increasingly scrutinise and question how public money is being utilized (Allmendinger, Tewdwr-Jones & Morphet 2003). In order to be accountable, the public sector has to be able to produce reliable measures for their performance and accurate data to be measured.
Thus, there is a very strong relationship between performance measurement and accountability. For the purpose of the present research, particular focus is put on the discharge of such responsibilities between regional and central government, and how the relationship with other constituents is managed.