The Costs of Accountability

The argument just made can be restated to say that robust and efficient management controls are essential because they obviate the need for burdensome internal controls. The situation is more complicated than this statement suggests, however, because New Zealand relies on a potent combination of internal and external controls to maintain accountability. Thus, the external controls on inputs have been lifted, but new external controls on outputs (in the form of performance and purchase agreements, financial reporting and auditing, service performance reporting requirements, and so on) have taken their place. New Zealand is not a country where anything goes in public management.

The heavy reliance on external controls is not accidental; it derives from what is referred to as the "accountability relationship":

a relationship between two parties - where one party (the principal) confers resources and authority on and exercises accountability over another (the agent). . . . The exercise of accountability requires the provision of high-quality information on the discharge of those responsibilities.

Report of the Working Party to the Advisory Group on

Accountability Requirements, October 1994, p. 10.

New Zealand's accountability requirements entail substantial transaction costs. These requirements were catalogued in 1994 by the Working Party (quoted above) which found no "fundamental problems with the underlying elements of the accountability system," but set out six principles to guide the central agencies in operating and refining the accountability system. These were (1) the clear indication of the purpose of, and justification for, the information required; (2) consistency of the purpose with the responsibilities and accountabilities of Ministers, chief executives and the central agencies; (3) use of the most efficient and effective information processes to achieve that purpose; (4) proper consideration of materiality and risk; (5) minimisation of duplication and overlap; and (6) reasonable assurance that benefits exceed costs and that overall costs are minimised. The working party recommended, and the Government agreed, in accordance with SSC guidelines, that chief executives should decide how best to meet public information requirements. This would have permitted departments to dispense with corporate plans. Many continue to publish these plans but some ceased to produce them and now rely instead on DFRs or a combination of strategic directions documents and DFRs.

I am not persuaded by the Working Party's conclusion that the current accountability regime does not overload departments. Not only are the costs quite substantial, they have escalated as additional requirements have been imposed. Chief executives must allocate many more resources to operate the accountability system than was required five years ago. Because New Zealand allocates overhead costs among each department's output classes, it probably would be impossible to calculate the full cost of the system. There is no separate output class for accountability outputs, such as the purchase agreements and DFRs, nor should there be. Nevertheless, one should not be surprised if the transaction costs of the system represented a significant portion of total running costs, especially in small departments.

Arguably, these costs are lower than the costs of operating the old input controls. But even if this were so, the comparison is inapt. The issue is not whether today's transaction costs are higher or lower than the costs of complying with the input controls, but whether these costs are higher than necessary to provide reasonable assurance that managers account for their performance. It would be appropriate for Treasury to study the total financial costs of maintaining the accountability system. Only with data in hand would it be possible to assess compliance costs in the light of departmental resources.

Money is not the only cost borne by departments. The multiplicity of informational requirements and procedures can induce compliance behaviour, the attitude that the most important measure of performance is adherence to preset rules. It should be of little comfort that compliance now is oriented to producing outputs and meeting other contracted obligations. Whether it concerns inputs or outputs, a compliance mentality breeds passivity, reluctance to take risk and initiative, dependence on detailed specification, and an inclination to work by the book. This face of compliance may not be evident yet in New Zealand because the rules are relatively new and there is widespread appreciation of the reforms. But it will not be long before the next generation of managers and civil servants inherits rules and procedures they did not create, and are required to do things a certain way without fully understanding the logic of the New Zealand model.

There is a tendency in organisations for accountability requirements to be added as new situations and problems arise. This already has happened in New Zealand, and I doubt that the process of accretion has run its course. Indeed, some of the issues raised in this report may spawn additional requirements. Care must be taken that the cumulative burden of the accountability system not overwhelm the departments and induce even more compliance behaviour.

Last modified: