Part 3: Observations from the public and private sectors

Reviewing financial management in central government.

3.1
In this Part, we provide some comparisons with other public sectors (Singapore, Denmark, the United Kingdom, and Australia) and set out some lessons from financial management practices in large private sector organisations.

Observations of other countries' public sectors

3.2
The global financial crisis has led to more emphasis on financial management in the public sector. Overall, New Zealand compares well with other countries. Our main observations included:

  • The frameworks for financial management in New Zealand are more robust and relevant than many of the other countries. The financial frameworks in other countries are not well designed for dealing with delivery chains that span departments and agencies. Early work is under way, particularly in the United Kingdom, to attempt to address this.
  • In 2006, Singapore's government established mandatory VFM-based audits for all central government and statutory boards of government. The VFM framework is overseen by Singapore's Accountant-General in partnership with the country's Ministry of Finance. The United Kingdom's National Audit Office performs similar, independent VFM reviews.
  • Although many countries want more sophisticated, strategic financial management, they find it difficult to move from what is seen as a compliance and control function towards a value management and performance framework.
  • Many governments face significant challenges understanding (and, therefore, managing) the costs of service and successfully integrating financial and performance information with reporting.
  • Most governments' capability levels are similar to New Zealand's. Countries find it difficult to recruit and retain staff with the required skills to deliver strong financial management, within and outside finance teams.
  • The role of the chief financial officer (CFO) is largely similar. However, in Singapore "Finance Directors" (the CFO role) sit with the chief executive on the senior leadership team and are seen as third in line after the Director of Policy and Strategy.

Lessons from private sector practices

3.3
Overall, financial management practice in the public sector and in the private sector differ significantly. The private sector has an advantage in having clearer performance drivers (for example, the profit motive) and a much better understanding of the practice of performance management.

3.4
CFOs consider themselves as "Chief Performance Officers", leading a team of skilled finance, planning, and performance improvement specialists, with a wide mandate to work with the business to improve value.

3.5
A summary of the private sector's financial management attributes include:

  • Financial management acumen is culturally valued and seen throughout most parts of the organisation as a significant set of skills to advance. Chief executives and CFOs set the tone on the organisation's financial management culture and attitude to the customer, cost consciousness and value creation.
  • The premium placed on financial management acumen and skills in senior management is reinforced through having clear personal and unit-level key performance indicators linked to budget management, cost containment, revenue growth, and profitability measures.
  • CFOs are part of the senior executive team, and the finance team's main role is to scrutinise and challenge the business not just to report on the numbers. They are seen and act as a catalyst for change.
  • There is a single point of accountability for strategy, planning, budgeting, and business improvement.
  • The budget is regarded in almost contractual terms – that is, achieving the financial performance metrics is essential to externally measuring organisational performance, especially for organisations listed on the capital markets. This creates an environment in which budgets and forecasts are strongly in line with the communicated organisational strategy and the sense of ownership of budgets and forecasts is strong.
  • There are robust internal accountability and governance provisions for major capital allocation and reprioritisation processes. Appropriate and rigorous risk management structures are critical in making effective decisions at the governance level.
  • The calibre of financial literacy in large corporate boards is high, and management teams are motivated to ensure that financial information provided to the governing body is comprehensive, relevant, and timely.
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