The role of accounting information in the steering & controlling function of Dutch councilors: A case study in two municipalities

The role of accounting information in the steering & controlling

function of Dutch councilors: A case study in two municipalities

Student number: S2156113

Master thesis: MSc BA Organizational & Management Control Faculty of Economics and Business

University of Groningen

Supervisor: H.J. ter Bogt Second-Assessor: K. LInke

E-mail: D.hermans@student.rug.nl Word count: 17650 words

Date: 14-05-2017

Abstract

Since the 1980’s NPM (New Public Management) initiatives promote the use of performance information (i.e. output and outcome information) in public organizations. However, recent literature doubts the ‘rational’ use of output control in the steering and controlling role of politicians. To provide more insights into the use of accounting, and specifically

performance, information by councilors, this thesis conducts a case study on two Dutch municipalities. Moreover, this thesis sketches the, relatively unexplored, facilitating role of suppliers of information in the planning & control cycle. Results show that councilors do only to a very limited extent use output and outcome information that really measures municipal performance. Moreover, it seems that accounting information is used on a situational base instead of the by NPM proposed routine based use. Therefore, this thesis suggests that the NPM-initiatives on the use of output controls, such as the recent changes in BBV (Besluit Begroting en Verantwoording), are only (very) partially in line with the use of performance information by councilors in Dutch municipalities with respect to performing their steering and controlling tasks. Limitations of this study and suggestions for future research are discussed in the conclusion.

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1. Introduction

Since the 1980s, governments in the so-called First World have been increasingly involved in the adoption of more private sector methods for governmental decision making. This

governmental trend implied the “accountingization” of the public sector, which led to an increased emphasis on output-related numbers and standards expressed in accounting information. The introduction of these business-like styles was named NPM (New Public Management) (Van Helden & Jansen, 2003, p. 68; Hood, 1991). Different researchers found that NPM is a rather “loose term” that cannot be generalized across regions and time (Hood, 2010,, p. 96; 1995, p. 106; Ter Bogt et al., p. 241).The philosophy of NPM garnered

particular attention in the Netherlands with the implementation of PMI (Dutch: BBI, beleids- en beheerinstrumentarium). PMI stimulated the use of output-based measurement by local governments (Van Helden & Jansen, 2003, p. 71). As in many countries, these local

governments were willing to introduce this new way of performance measurement as it aimed to strengthen the council’s position and provide new options in the controlling process (Groot & Budding, 2004; Ter Bogt, 2004; Van Helden, 1998). PMI led to the

development of several new output-, and later outcome-, based documents on parts of the planning and control cycle in the Netherlands, such as interim reports, product budget, and product-based annual reports. PMI was followed by other NPM-based regulations in the BBV (Besluit begroting en verantwoording), which presents accounting rules for local

governments. Examples are the obligation of a separate product and program budget in 2004 and the most recent implementation of “task fields” to compare municipalities’

performances (Ter Bogt, 2004, pp. 71-72; Ter Bogt, 2007, p. 4) (Ministerie van Binnenlandse Zaken/Koningsrelaties, Hoofdlijn vernieuwing: Besluit Begroting en Verantwoording (BBV), 2015).

The increased interest in performance measurement led to an increased production of performance and, more formally, accounting information. This information is largely provided by civil servants, council clerks, and sometimes members of the executive committee and presented in planning and control documents. Accounting information is thought to be useful in assigning accountability and in defining the productivity of specific projects and activities (Groot & Budding, 2004; Hood, 1995). According to NPM, the use of routine accounting information is believed to lead to a more efficient decision-making processes because policy makers receive more information about the transformation process of inputs to outputs and, more in general, information about efficiency and effectiveness in the public sector. Furthermore, citizens are supposed to judge the

performance of governments because of the transparency created by information (Askim J. , 2009, pp. 25-26) However, the effectiveness of organizational changes in line with NPM did not remain without criticism.

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Bogt (2004) argued politicians find accounting information not useful in their activities, as they can also receive, often verbal, informal information that offers them more value and consider the formal information to be of insufficient quality (Ter Bogt, 2004). Taylor (2009, pp. 862-864) found political reasons for elected politicans to not use peformance

information:, Negative outcomes might weaken their popularity. More recent research acknowledges politicians’ limited and irrational use of performance information but states politicians are interested in that information. This research provides probable, but

unverified explanations regarding the opinions of councilors about performance information, such as overly complex information; lack of time; or interesting, but less relevant than other, information (Ter Bogt, Van Helden, & Van der Kolk, 2015a).

A more positive story with respect to the use of performance information is found in Askim’s work. Askim (2009) conducted a survey among Norwegian local councilors and particularly focused on individual and environmental factors that influenced councilors’ use of

performance information. Askim (2009) did, hesitantly, contradict the lack of use in this Norway setting as he found high interest for performance information among members of the appointed executive committee. Remarkably, interest among elected councilors was lower. Also, experienced and well-educated politicians were inversely related to an intensive use of performance information.

In conclusion, historical research shows a greater emphasis on performance measurement in Organization for Economic Co-operation and Development (OECD) governments that

generates more and more performance information; however, the use of this information seems to lag behind. Possible explanations for this phenomenon have been given, but a clear consensus is still far away. Some of this might be explained by the view that considers NPM as a “loose container” term that says applications of accounting information might differ among place and time. As current literature is mainly based on groups other than municipal councilors (Pollitt, 2006), focused on non- elected politicians (Ter Bogt, 2004), or executed in a different region (Askim J. , 2009), an unexplored range for research to the use of

accounting information among Dutch municipal councilors remains. Additionally, all research so far has been conducted on the users of this information, which leaves an open field for exploring the role of the suppliers of accounting information to councilors (civil servants, clerks). Altogether, the aim of this study will be to extend knowledge about the use of accounting information expressed in the planning and control documents by council

members in Dutch municipalities and to explore the role suppliers have in providing planning and control documents.

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2. Literature Review

In this literature overview, the concepts of accounting information and control will be explained, followed by their interdependent presence in Dutch municipalities, according to existing literature.

2.1 Accounting Information

Accounting information tends to be an often used, but rarely defined, concept in management accounting research. Nevertheless, Selto and Groot (2013, p. 3) provide a definition of accounting information as the financial and non-financial information for managerial decision making and control activities. Each organization is, bounded by specific governmental regulation, free to coordinate the accounting function and generate and use accounting information for its own purposes (Groot & Selto, 2013, p. 3). Financial accounting information can be seen as the product of corporate accounting and external reporting systems that formally measure and publicly disclose audited, quantitative data expressed in monetary terms concerning the financial position and performance of publicly held firms (Bushman & Smith, 2001, p. 238). Non-financial accounting information is non-monetary terms describing an organization’s condition, its activities, or its non-financial outputs. Non-financial accounting information can be both objective (market share) and subjective (atmosphere on the work floor). Subjective non-financial accounting information can be expressed as qualitative information; all other accounting information is quantitative

information (Groot & Selto, 2013, p. 343). Almost all organizations use a combination of non-financial and non-financial measures for their decision making and control processes (Bhirmani, Horngren, Datar, & Rajan, 2012, p. 511). Not all information collected by politicians in municipalities has a formal form. Ter Bogt (2001, p. 638) stated information for decision making is often informally collected in an informal way. Examples of informal information can be found in ordinary knowledge and daily interactions (Van Dooren, 2005).

Governmental organizations activities are always looked at critically, not only from an

economic perspective of efficiency but also on its effect on society. The ideology of NPM was to bring the public sector a more result-oriented approach by collecting information that specifically describes, supports, and evaluates a public organization’s outputs and outcomes, which can help to increase the efficiency and effectiveness of activities in the public sector (Bhirmani, Horngren, Datar, & Rajan, 2012, p. 631). Accounting information covers the total process from an organization’s issues and objectives to the final outputs and outcomes of its activities and typically describes both its inputs and its outputs, allowing managers to

6 (non)-financial outputs and throughputs of organizations, people and programs” (p. 25). Pollitt added that these outputs and outcomes do not have to be intended, but that the information describing these outputs and outcomes is intentionally generated. Information can be generated by performance monitoring systems, data flows from internal and external evaluation, performance audits, or other exercises with the purpose of developing

performance information (Pollitt, 2006, p. 39). The developed performance information can be seen as products produced for the management control processes and is often presented in policy documents, such as annual reports, budgets, strategies, analyses, statistics, and press releases (Johnson, 2005, p. 11). The performance and other accounting information considered in this research is in particular useful for the control of the municipality. Broadly defined management control includes all information about an organizations activities and tasks, from the formal, such as rules, procedures, and reports, to the informal information (daily interactions, general knowledge) that assist an organization in planning, steering, and controlling its activities, so it can achieve its objectives (Harrison & McKinnon, 2007). With regards to performance and other accounting information, studies found that is it difficult to execute a steering and controlling function solely based on formal information. When only using formal quantitative information, one will miss essential information for decision making that is not available via quantitative information. Therefore, it is important for a manager to combine formal information with informal information (Demski, 2013; Poister & Streib, 1999, p. 326). Managers in the private sector often seem to acknowledge this, as Daft and Macintosh (1978, p. 83) found, for example, managers preferred

information that was qualitative, timely, and specific. These characteristics tend to be opposite of formal accounting information. In this context, it could be noted that

performance information in the public sector often creates superfluous information that no one uses for decision making or monitoring. Ter Bogt (2004, pp. 235-237) found reasons for the lack of interest in formal information among alderman. He found that aldermen did not consider output-oriented performance information valuable and, probably therefore, made limited use of it. Literature includes, plenty of possible explanations for the alderman or other politicians’ attitudes, such as the following:

 Performance information often lacks relevance for decision making and control (Van Helden & Jansen, 2003, pp. 73-74)

 Output-budgeting led to considerable paperwork, which municipalities’ employees did not regarded as effective (Ter Bogt, 2007, p. 13)

 Performance information is often outdated and of poor quality, whereas verbal encounters with managers offers them rich information (Ter Bogt, 2004, p. 237) which encourages managers to rely on the latter

7  Provincial councilors find performance information to be too complex to base their

policies on (Ter Bogt, Van Helden, & Van der Kolk, 2015a, p. 309)

The predominantly negative attitude of aldermen toward formal information might reflect the opinion of politicians in general and, therefore, explain its limited use. Thus, Ter Bogt (2004) argued that the aim should not be to increase the use of performance information, before improving it to promote its popularity. In addition to questioning the value of

performance information councilors can also make “political” use of it. Askim (2007, pp. 456-457) suggested that politicians can easily use performance information in ways other than to objectively support its controlling function. He illustrated five potential situations where politicians use performance information in a more or less irrational way:

 Opportunistic use: Politicians use performance information as a rhetorical device and only when it supports pre-existing policy positions

 Disguised use: Politicians draw policy ideas from performance information but do not convey this as the source of ideation.

 Unknowing use: While some politicians make explicit, conscious use of performance information, others use it without knowing or recalling it.

 Clean-up use: Politicians use performance information only when disasters, scandals, or breakdowns arise

 Circumstantial use: Politicians use performance information to different extents and in different ways under different circumstances

Although politicians themselves are not always enthusiastic about the use of performance information, other parties require such information and thus might enhance the use of it. Van Dooren (Van Dooren, 2005, p. 364) noticed that performance information may be considered goods and services with a market of supply and demand. Using this view, councilmembers do not have to be enthusiastic about formal information themselves as other parties demand information about the outcomes of their policies. For example, the central government might be interested in outcomes of its local governments to inspect whether their governmental grants are well spent and to hold them accountable for their actions. In this situation, demand for information about their outcomes requires the council to supply performance information. Pollitt (2006, p. 40) argued that performance

information can also be useful for other users as it makes the municipal’s activities transparent for end users, such as citizens. Pollitt’s research into a central government setting explains that members with a legislative function, a function fulfilled by councilors in a local setting, can use performance information to represent inhabitants’ concerns of and for public accountability. Osborne et al., (1995, p. 22) also recognized performance

information can help citizens detect possible threats or identify the benefits of governmental policy. They said that types of performance information citizens might want to receive are annual reports, audits, and budget-related performance information. A demand from

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to make use of it. Gao (2015, p. 90) advocates this reasoning by stating that an increasing demand for performance information will enhance the chances performance information is used. Following this argumentation, transparency, which is one of the main points of NPM and current BBVs, leads to a greater demand for and puts greater emphasis on local

politicians’ use of performance information.

After all, the basic idea of accounting information is to provide help in the steering and controlling processes of managers. Several reasons for and obstacles against politicians’ use of performance information were highlighted above. However, to gain better insight into the concept of controlling activities in a municipality, the next sections will outline some types of control and their links to and needs for performance information

2.2 Control

In academic research, organizational control has been researched extensively. Ouchi (1979) was one of the first to create a comprehensive theory that tried to present a typology of organizational control. He concluded that organizational control is nothing more than the mechanisms through which activities can be managed so that the organization moves toward realizing its objectives. (Ouchi, 1979, p. 833). He, then, differentiated between three types of control based on three different types of requirements: Market mechanisms where control is based on output; bureaucratic mechanisms where control is based on behavior, which can best be defined as a set of rules and procedures expected to lead to the required output; and clan mechanisms where control is based on education and shared traditions. Ouchi (1979) explained that clan control is a very demanding control mechanism in terms of social requirements because there needs to be a broad, shared set of values and beliefs among members of the clan. On the other hand, output control is dependent on

information, which can lead to an incomplete transmission of information because not all forms of information can be fully captured by measurements of outputs (Ouchi & Maguire, 1975). Thereby, a control mechanism based on explicit information requires a startup that brings monetary costs with it, whereas a control mechanism based on implicit information mostly needs time to grow in an organization. In reality, an overlap between these three mechanisms is usually present (Ouchi, 1979, p. 834). Therefore, the three types of controls are used in combination to form a control package (Malmi & Brown, 2008).

Merchant (1982) added more explicit insights into the work of management control, where feedback can be included in the process of controlling. Like Ouchi (1979) and Hofstede (1981), Merchant (1982) argues that the process of control basically consists of three steps:

1. Establishing standards 2. Measuring performance

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He explained the basis for control is the operating process, as this is the part of an

organization that must be controlled. An operating process can be controlled by measuring its inputs and its outputs, the results of the process from input to output. The results will be translated into information that can be compared and analysed to the standards and an organization’s strategic plan for possible feedback. If the feedback indicates the operating process must change to improve, a manager can intervene by changing the inputs, such as personnel, actions, or tools. Greater knowledge of the effects of certain inputs offers the manager more action controls as he or she understands the effects of these actions.

Like Ouchi (1979), Merchant (1982) recognized three types of control: Action control, which consists of rules and constraints and is similar to behavioural control; result control, which focuses on measurable outputs and outcomes; and personnel control, which is similar to clan control and aims at creating a homogeneous group by, for example, selecting and training employees and promoting shared goals. Later, Merchant and Van der Stede (2007) split the old personnel control into personnel control (related to selection and training and other instrumental tools) and cultural control (related to values, goals, and organizational culture). Regarding necessary control tools managers generally consider the following: The need for control, the amount of control that can be designed into each of the control devices, and the cost of each control tool (Merchant, 1982, p. 48). If a certain area of an organization is vital to that organization’s strategy, the organization must have good control over these areas even if they are difficult to control. In these cases, costs are allowed to be high, and managers will make use of tight controls. More and tighter control, which

corresponds with output and behavioural control, will generate more information than loose or less control as information is needed to manage outputs or apply rules.

Which control tools a manager should choose depends on the ability to measure outputs and other results and on the knowledge of which actions are desirable to achieve the required results. Knowledge of desired actions are best followed by action control. Result control is more useful if results are measurable. When outputs are difficult to measure and the knowledge of the “transformation process” (in which inputs via the process are turned into outputs) is limited, clan control can be used (or cultural control in terms of Merchant and van der Stede, 2007).

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unambiguous when there is consensus among organizational members with regards to the activity or a dominant group or coalition has enough power to impose specific objectives. Especially in politics, or in a situation where more than one organization is involved in the activity, this consensus will eventually be lacking because people have different interests in the outcome of an activity. Therefore, Hofstede introduced political control for situations where goals are unambiguous and suggests several options to resolve ambiguity: Hierarchy, rules or fixed policies, negotiation, use of experts, and control by crisis.

2.3 New Public Management

The use of accounting information was a part of public management long before the

introduction of NPM. In 1949, the American government noted improving the knowledge of the process from inputs to outputs using performance budgeting. (United States General Accounting Office, 1997, p. 5). As public management is characterized by waste, there have been new initiatives regarding performance management ever since (Jackson, 2011, p. 15). From these initiatives, in the late 70s, especially in the Anglo-American world, a new trend of shifting public managing styles, later described as New Public Management (NPM), emerged (Hood, 1995, p. 94). NPM is an ill-defined term offering a new administrative doctrine for public and semi-public managers in OECD countries (Hood, 1991). This new administrative design transfers market principles and management techniques to the public sector to improve efficiency and reduce governmental costs, as well as promoting the use of accounting information in the decision-making process as it will provide insights into activities’ performance (Dreschler, 2005). Different countries and regions might have their own way of interpreting NPM because NPM can be regarded as a rather loose “container” term that changes along with time and place (Pollitt, 2007, p. 110; Ter Bogt et al., 2010, p. 241).

Currently, whether NPM leads to more efficiency in the public sector is unclear. Several researchers describe there is little evidence NPM has fulfilled the promises. These

researchers, in particular, doubt the rational use of performance information by politicians, who seem to prefer informal information in decision making and do not often have the knowledge to make appropriate use of advanced accounting information; when they use performance information, it is often for accountability instead of steering and controlling (Askim, 2007; Lapsley, 1999, p. 205; Ter Bogt et al., 2015a, p. 288). Other findings indicate that NPM is an active stream that still develops along with the environment (Hyndman & Lapsley, 2016). An example of such a change is the shifting, efficiency-based, focus from the traditional outputs to outcomes and effectiveness (Ter Bogt et al., 2015a, p. 308).Although, not everyone considers NPM a success, it seems NPM has definitely left its mark in

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2.4 Planning & Control Cycle in Dutch Municipalities

Beginning in 1982, when the central government was forced to cut budgets for

municipalities, the NPM trend towards more output-oriented budgeting garnered more attention in the Netherlands, eventually followed by the introduction of PMI projects for municipalities in 1988 (Aardema, 2002, p. 10; Ter Bogt, 2004, p. 221; Van Helden, 1998, p. 88). PMI, although not obligated, stimulated the use of output budgeting in municipalities and was based on the assumption that all an organization’s objectives and outputs of could be quantified (Korsten, 2016, p. 7; Ter Bogt, 2001, p. 623; Ter Bogt, 2004 pp. 244-245; Van Helden, 1998, p. 90). When these quantitative objectives were transformed into targets, policies could be adjusted by comparing targets with realizations (Ter Bogt & Van Helden, 2000, p. 269). These planning and control documents were composed by civil servants and could provide information to the council to plan and execute the policies it initiated.

According to Van Helden (1998), the PMI project served three purposes. Its first goal was to strengthen councilors’ positions by using high quality information. Second, more cost-efficient behavior was encouraged by output budgeting, which should lead to a stronger planning and control process. The third purpose of PMI for municipalities was to become more customer oriented (Van Helden, 1998). The PMI project lasted until 1995 when most municipalities adopted the new system (Bac, 2002, pp. 269-270). Product budgeting was received enthusiastically by almost all Dutch municipalities and led to decentralization and the adoption of output-oriented budgets, interim reports, and annual reports (Ter Bogt, Van Helden, & Van der Kolk, 2015a, p. 290) However, as with NPM, it remains to be seen

whether this enthusiasm can be fully justified from an academic perspective.

PMI’s objectives of more efficiency and transparency live on in the current guidelines for steering in control in municipalities composed in the BBV. The BBV (Besluit Begroting & Verantwoording) presents regulations for all planning and control documents of local

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adoption of the program budget was meant to expand the focus on cost effectiveness and to strengthen the link between budgets and accountability (Bac, 2002, p. 279). Municipalities are now supposed to address three main questions in their program budgets (and related annual reports):

1. What do we want to achieve? 2. How can we achieve this? 3. How much will it cost?

The BBV did not provide rules on how to answer these questions which, therefore, allowed every council to freely determine their own answers. The different styles of answering these questions might cause problems in the process of comparing different municipalities on similar tasks or activities. Therefore, some changes in the BBV were introduced in 2016, which aim to make accounting information more comparable and more understandable to those without financial backgrounds to give more insights into a municipality’s performance, with the objective to further strengthen the council’s steering role and to allow the council to deal with an increasing uncertainty with respect to its policies and policy results.

Simplified, the changes in the BBV require municipalities to include 39 performance and 5 financial indicators in their budget, which should make it easier to benchmark and evaluate a municipality’s performance with respect to those indicators.

2.5 Accounting Information & Control in Dutch Municipalities

As explained in section 2.2, research in management control distinguishes between three forms of control: Behavioral control, output control, and clan control. Feedback from

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specifically hold for public organizations, where their main activities are not always

expressible from an economic perspective. The freedom municipalities had composing the program budget offered opportunities to add social effectiveness as one of the outcomes. When focusing on social and behavioral perspectives, other forms of control might be more applicable. When desired actions for a social goal are known, behavioral control can be used to guide an activity’s executioners using rules and procedures. When policy cannot be expressed in certain actions, but is targeted at a change of norms and values, Ouchi’s (1979) clan control is appropriate. The objectives are more abstract, which makes collecting formal information, which helps steer and control the process, complex.

Although tools for applying these types of controls have changed overtime, current regulations on the use of accounting information in the public sector are still in line with NPM’s ‘loose-container term’. In current politics, demand for the production of accounting information to monitor effectiveness in the public sector remains. The most recent BBV illustrates this by the institution of a set of performance indicators to compare outcomes of similar activities among different municipalities. However, councillors might still be able to base their decisions on grounds other than these indicators and, therefore, use other forms of information since literature on control mentions different types of control require

different types of information. Although there is a clear emphasis on accounting information for output and outcome control in local governments from the ministry level, it remains questionably what type of information local politics deem necessary for steering and controlling their municipalities. Research concerning the developing topic of performance measurement has not yet delivered an unambiguous view on the use of performance information by councillors in Dutch municipalities. Overall, there are few analyses

concerning politicians’ use of performance information (Askim, 2007). Ter Bogt et al. (2015a) researched provincial governmental layers and found, like Pollitt (2006), that the use of performance information among politicians is rather limited. Politicians seem positive about and interested in performance information, but for some reason, the information seems unaligned with the politicians’ wishes since they do not use it. Earlier research of Ter Bogt (2004) into the use of performance information of aldermen contradicts these findings; aldermen regarded formal planning and control documents as less valuable than informal verbal information. The limited use of performance information was not recognized in Askim’s (2007) study of Norwegian councilors, as he stated councilors need and use

performance information throughout the whole decision-making process. When the use of performance information was regarded as economically irrational, Askim (2007) explained several irrational and unpredictable ways in which performance information might be useful for politicians. Additionally, Askim (2009) conducted a survey among Norwegian local

councilors and particularly focused on individual and environmental factors that influenced councilors’ use of performance information. He found that, among members of the

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use of performance information was not enhanced by the institution of rules (such as PMI, BBVs), but by increasing the demand for performance information of councilors. This could, for example, be achieved when civil servants encourage councilors to make use of the performance information in the planning and control documents or provide training on the use of performance information on an individual level.

Historical research shows a greater emphasis on effectiveness in OECD governments generated a significant amount of, still ambiguous, research about the use of performance information in the public sector to build on, but never specifically addressed the case of Dutch municipal councilors. Ter Bogt (2004, 2015a) and Pollitt (2006) reflected the use of performance information among groups of politicians other than municipal councilors. Askim (2009) specifically looked for differences among councilors’ use of performance information and found some possible relationships between their role and their use of performance information. As Askim conducted his study in Norway and NPM is described as a trend that varies over time and place, the use and appreciation of accounting information in Dutch municipalities may differ from those in Norway. Because of the uniqueness of the Dutch system, the fact that NPM is regarded as a loose term that differs across regions, plus the absence of research into a similar local environment, makes this topic of interest for a study describing how and what kind of information councilors use in this still unexplored setting. Moreover, these studies did not describe the (possible) role of civil servants in producing and providing this information to councilors. The following research question will try to provide answers to these gaps in existing literature:

Main question: How do Dutch councilors use accounting information to strengthen their steering and controlling function, and how can providers of information support councilors in this role?

Sub questions

Several sub-questions will help in answering the main research question. As the main

question consists of two parts, the following sub-questions are also divided according to two separate themes:

Use of accounting information among councilors:

To what extent and in what situations do councilors make use of accounting information for controlling the municipality?

What type of (accounting) information do councilors prefer to use in the planning & control cycle?

15 How do councilors believe accounting information might strengthen their planning & control function?

How would councilors be more inclined to make use of accounting, and specifically performance, information?

Supply of accounting information by providers:

What do suppliers of accounting information believe to be useful information for the planning & control cycle?

How can specifically this information be provided by civil servants in such a way councilors make use of it?

How do the providers of information (civil servants) and users of information (councilors) interact?

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3. Methodology & Case Introduction

This section will describe the setting of the cases. Furthermore, this section contains a methodology where it will be outlined how the research will be executed. This will be done by explaining the methods in the following 3 subparts: Research design, Data collection, Data analysis. Moreover, this section will go in depth on the controllability, reliability and validity of this study.

3.1 Research Design

This study aims to provide a deeper understanding in the processing and usage of accounting information in Dutch municipalities. To create more knowledge of this phenomena and get possible insights in the way councilors are influenced by accounting information during their work a qualitative case study will be conducted. Qualitative

research entails the collection, analysis & interpretation of data that are not easily expressed in numbers (Anderson, 2010, p. 1). Eisenhardt (1989) describes case study research “as a research strategy which focuses on understanding the dynamics present within single settings. The goal of case study is the development of new theories. Case study is relevant when researching a ‘how’ or ‘why’ question about contextual conditions that you believe can give more insights in a, relatively unexplored (Eisenhardt, 1989), phenomena (Yin, 2011). Because this study is about the use of accounting information in the context of Dutch

municipalities, where not much research has been conducted, case study fits the purpose of this study.

3.2 Case Introduction

Our research focuses on the councilors in the most decentralized layer of the governments in the Netherlands: municipalities. Municipalities are responsible for tasks that directly influence their inhabitants such as: The collection of garbage, infrastructural maintenance & social support. The organization of a municipality is similar to the central governments in the Netherlands, which means there is an executive and a controlling part. The executive part of the organization is led by aldermen (2-10, depends on population) and a major, together they are called the “the board of executives” (Or: Burgemeester & Wethouders/B&W). These executives are appointed by the council and are responsible for the daily governance of the municipality by carrying out the council’s plans. At their turn, councilors are elected by the local inhabitants in a quadrennial cycle, and have the function to control and steer the board of executives and to represent the inhabitants. Since 2002 both functions cannot be combined anymore to enhance the independence of the council, this new system is called dualism. The council is supported in their steering & controlling role by the council clerk. (Tweede Kamer der Staten-Generaal, 2000-2001; VNG, 2017)

Field research is done in two municipalities: Assen & Lelystad:

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councilors of the opposition party (SP, VVD, CDA, GL, Op Assen). Lelystad is the local capital of the province Flevoland. According to CBS, Lelystad has 77108 inhabitants and is the second largest municipality in Flevoland. The council consists of 35 councilmembers, of which 21 of coalition party’s (VVD, SP, IPL, CU, PvdA) and 14 of opposition parties (Leefbaar Lelystad, D66, Groenlinks, CDA, OPA plus). At first sight these municipalities seem highly comparable, as they are both regional capitals with a similar population. However, there are several differences between both municipalities. The obvious difference is the geographical position. Lelystad is very close to the Randstad, which is the economical and political center of the Netherlands. Assen is a city in the north of the Netherlands and receives some more governmental financial support in recent years which, which may cause a different political focus or a less scrutinized view on the control documents.

3.3 Data Collection

After an extensive literature study, this thesis will look for possible new contributions to theory by collecting data from primary and secondary sources. For primary sources semi-structured, individual, in-depth interviews will be used, (these interviews will be

recorded/manually or automatically and transcribed thereafter). The list of questions used for the interviews is in included in appendix A. Interviews will be conducted with two councilors, a financial employee of the municipality and the council clerk. The data collected by the in-depth interviews has to be transcribed. Illustrative quotes are used to underpin findings (Anderson, 2010). Semi-structured interviews are particularly useful when searching for opinions and perceptions of respondents facing complex or sensitive problems. It enables the researcher to ask follow-up question and be flexible to receive more accurate and clarified answers and it creates interactive opportunities between interviewer and respondent (Barriball & While, 1994). Existing planning & control documents from both municipalities will be studied as secondary data source with two objectives. Firstly, the planning & control documents provide a better understanding about the accounting information used in municipalities. Secondly, they will help to control and possibly support or contradict, our findings from primary data.

In both municipalities interviews will be held with two randomly chosen councilors, a

member of the council clerk department and a member of the municipal organization with a financial function. In Assen this will be an interview with an employee who functions as an extra layer of control within the organizations as is familiar with the process of composing planning & control documents and in Lelystad the interviewed employee of the municipality is project leader on the steering documents (Springnote & Program Budget). The interviews are all held in a one-on-one setting and took about 45 minutes. These interviews are

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interviewer tried to create a view of both councilors’ opinions. Therefore, this interview took about 20 minutes longer but was not able to discuss every questions into the details.

3.4 Methods of Analysis

On the collected data with-in analysis will be applied. With-in case analysis is the making of detailed, but simple descriptions of each case that eventually will help in the generation on insight (Eisenhardt, 1989, p. 540). The observations will be compared with the findings from secondary data. Both municipalities will be viewed as a single case, so for both municipalities the relations and patterns in the use of accounting information will separately described. After this, cross-case analysis will be performed. Cross-case analysis enables the researcher to look for similarities and differences between both municipalities. It will help when looking from divergent ways to the problem, so poor processing of information can be avoided (Eisenhardt, 1989, p. 540).

3.5 Controllability, Reliability and Validity

Controllability, reliability and validity are the most important pillars for conducting good quality research. With these three pillars inter-subjective agreement on the research results can arise among actors who deal with the same research problem (Van Aken, Berends, & Van der Bij, 2012)

The first necessary requirement for reaching inter-subjective agreement is controllability. Controllability in this study will be achieved by a detailed description of all undertaken actions, so it would be possible for another researcher to replicate the study. Thereby, a very serious attempt will be made to present clear and precise results. The second condition for inter-subjective agreement is reliability. Van Aken et al. (2012) define reliability as: “are independent of the particular characteristics of that study and can therefore be replicated in other studies”. The last prerequisite for inter-subjective agreement is validity. If a study is valid can be best proven by answering the question: Does the results of this study relate to the generation of these results? Or to put it even more simple: Do we measure what we want to measure? (Van Aken, Berends, & Van der Bij, 2012)

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minimalize interviewer’s bias. The combinative use of primary data and secondary data will lead to triangulation and help in decrease instrument bias. Because this study conducts interviews with multiple participants who have different roles in the processing and use of accounting information, respondent’s bias will be limited. (Van Aken, Berends, & Van der Bij, 2012)

Three concepts of validity will be taken into account when attempting to meet these

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4. Empirical findings

This section describes the empirical findings of the case studies in Assen & Lelystad. It consists of 3 subparts. The first part will highlight the characteristics of the documents used in the council. This is followed by a description of the use of the accounting information by councilors in both municipalities. Finally, the last section illustrates the facilitating role of civil servants and council clerks for the steering and controlling tasks for the council.

4.1 Description of Documents

In both municipalities the planning & control cycle consists of a more or less traditional structure. Although the documents were sometimes given different names and Assen was till last month in debate about the design of their planning & control cycle, four different types of P&C documents could be distinguished in both municipalities:

 -Springnote (In Dutch: Kadernota, Kaderbrief, Voorjaarsnota)  -Programbudget (In Dutch: Programmabegroting)

 -Annual report(In Dutch: Jaarstukken, Slotrapportage)

 -Interimreport (In Dutch: Voortgangsrapportage, begrotingsmonitoren) Lelystad:

In Lelystad the planning & control cycle starts with a springnote, composed by the civil servants and B&W, which broadly sketches the financial framework and finances, the new policy initiatives and sometimes also indicators expected on desired levels of performance and thereby provides the B&W, when approved by the council, with the frameworks to compose the program budget. All of the planning & control documents are produced by the civil servants, but have to be formally accepted by the council. In the program budget the council provides the executive board with specific budgets allocated to themes that are called programs. Lelystad directly introduced the concept of the new BBV in the program budget of 2017 and will report according to the 53 task fields and includes both the 5

financial and 39 policy related performance indicators which are mandated now according to the recent changes in BBV. An example of an output indicator in Lelystad’s program budget is:

A reduction of the number of violence offenses in the city from 140 now to 125 in the years 2017-2018

These output indicators are followed by an outcome indicator such as:

Retaining an average grade for the feeling of safety Lelystad’s neighborhood (7,1) above the Dutch average (7,1)

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governments and activities of individuals. The planning & control documents in Assen do not contain output or outcome indicators that give partial indications of the efficiency &

effectiveness of the municipality’s policy. However, Assen does provide straightforwardly numbers which measure the output of municipal activities (e.g.: the number of working streetlights, collection of kg garbage, planted trees etc.). Surprisingly, the planning & control documents do give insights into the extent to which the financial results can be influenced by activities of the municipality, but they do not provide a contextual note to the non-financial performance indicators

The budget is digitalized and accessible via the website. It provides certain programs from which one can go in depth by clicking on specific policy notes and and task fields.

Then, at the start of the second quarter, the council gets the annual report, which did in 2015 gave insights into the financial results of last year’s activities and provides the performance on indicators from the program budget, which, as already mentioned, most often do not present results that can be attributed only to municipal policies and activities, but sketches general intentions and the activities itself. Over the year the municipality produces three budget monitors. These budget monitors, In January, May & September, provide a financial update of the execution of the program budget with possible internal and external developments that might explain deviations. Two of these budget monitors are presented before the springnote so councilors “know what’s going on in the current budget year”. One of the council members from Lelystad described the budget monitors as

“hamerstukken”: these documents, which are also provided by the civil service, are mostly to inform the council, but are not often actively used to ask for accountability of the

aldermen or to propose new or adjust old policies. Although they are not critically discussed in the council, they are according to councilor M of a significant higher quality than the annual report because the budget monitors are so specifically financial, whilst in the annual report the financial effects are lost in the mass of other numbers and results. He states that the annual report tries to provide an explanation for all deviations, however not all these explanations directly relate to the deviation.

Assen:

The municipality of Assen is currently changing their planning & control cycle. Until 2016 there were two interim reports (a “spring and autumn note”) and a program budget and annual report. Currently, the council expresses a wish to strengthen their steering &

controlling role. To achieve this the council created and accepted anew design that consists of a better distribution of the workload over the year and thereby gives clear information on strategic main lines and relevant details, whereby the council can steer on goals and control on results and deviations

22 Figure 1

One of the main aims of this change is to discuss the annual report and springnote separately. So the council has more opportunity to ask critical questions during the

discussion of the annual report and can use this evaluation of last year’s policies during the discussion of the springnote where new policy frameworks can be established for next year by introducing new or changed policies or committing to last year’s policies. Assen’s planning & control cycle does meet the obligations of the BBV and presents in their program budget 2017 both their own developed programs, including the new set of policy indicators (as standard) and the design based on the programs/task fields of the BBV (appendix) The program budget remains also in the new planning & control cycle the only document that is discussed in two special council meetings, the other planning & control documents are discussed during regular council meetings. The introduced indicators of BBV is by councilors considered as something “interesting to follow”. 2017 will be considered and evaluated as an experiment that, if successful will be implemented from 2018. Assen’s program budget strictly follows the 3W questions explained in the theory section. However, it consist of “highlights” that describe certain policy goals, that are based on intentions and non-measurable goals and are not backed up with output or outcome indicators that directly measure performance of municipal activities. Attached in the program budget itself, a link to the indicators of waarstaatjegemeente.nl is found, which mostly gives insights into output and outcome indicators that are not directly or only influenceable by municipal activities and therefore might not explain the effectiveness of these activities and policies, as they include the effects of externalities. The annual report 2015 provides an extensive focus on financial results and describes the inputs and intentions to achieve the set targets, but does, just like the program budget, rarely contain clearly controllable output or outcome indicators. An example:

We experienced a successful cooperation with local entrepreneurs, in which we both took our responsibilities and took benefit of both our qualities. (Assen, Jaarverslag en Jaarrekening 2015, 2016, p. 49)

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indicators. As already mentioned these indicators do describe certain trends or outcomes in a municipality, however a municipality cannot exert an exclusive influence on most of these trends with their own activities. Therefore it seems that these indicators cannot directly measure their organizational performance. Interviewees showed different opinions on the BBV. Both the council advisor and the financial expert in Lelystad were enthusiastic about these new indicators as they offered them an easy benchmark and the new design offered great options for a structured lay out of the documents. However, the interviewees in Assen were less positive about the recent changes in the BBV. The council clerk in Assen stated that these obligated performance indicators often complicated the decision making for councilors, as they did not give clear insights into the municipal’s output’s and outcomes. The municipal controller believes the task fields might be helpful in bringing structure in the documents, but explains that these numerical statistics and comparisons are of less interest for the councilors as they do not tell them what the most urgent problems in the

municipality itself are. One of the councilors supports him as she argues that it could be a tool for the municipality to enhance communication among municipalities, but she did not regard the indicators as a useful tool to for her own role as a councilor in reviewing

municipal performance as they lack context.

Next to these documents, which are part of a yearly structured planning & control cycle, both B&W’s provide the council with more detailed information per subject area with policy notes (e.g. sport, safety, mobility), which in both Assen and Lelystad mostly include more external outcome indicators and financial results that cannot be directly related to municipal policy. Further, such policy notes give an extensive description of the planned procedures and intentions for the next 4 years, without formulating measurable goals that can be

realized by the municipality itself. (Lelystad, 2017)i (Beleidsthema's, 2017) Councilors explain that where the documents of the planning & control cycle give a more general view on how ‘things go in a municipality”, the policy notes zoom in on certain themes and provide them with a sketch of policy ambitions and more detailed information on a specific subject. One of the councilors in the municipality of Lelystad explained that these policy notes were extremely detailed descriptions of the plans which made it, even with his 20 year experience as a councilor, hard to find relevant information as he scans this documents on main lines and therefore misses important plans and side notes that he disagrees on. One of the councilmembers in Assen told that policy notes in the past where presented every four years to reflect the results on this specific activity, but this obligation is removed from the

regulations which led to a decrease of the production of these policy notes. This statement cannot be backed up with certainty from secondary sources, but it is noticeable that most, but definitely not all, municipalpolicy notes in Assen date from 2013 or earlier.

4.2 Use of Information

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contain opinions and preferences of councilors and providers of the information about the use of accounting information.

Councilors as well as civil servants indicated that the planning & control documents are primarily used during council meetings that specifically focus on discussing them. In both councils, and to the councilors own words, this was common good in the world of

municipalities, the main focus throughout the year lays on the creation and discussion of the programbudget, as this is where the financial plans are nailed down . The discussion of the program budget is planned for multiple evenings, where the other documents are

sometimes planned together with other subjects or are on the list for a regular council meeting. In Assen, where the discussion of the annual report was combined with the springnote, the discussion of the annual report is according to one of the councilors “rushed” to get started with the discussion of the “springnote”. Although the councilors state they perceive their controlling and steering roles as equally important, the councilors in Assen mention that they are more interested in discussing new policies and the annual report is not always critically evaluated. Besides the already mentioned combined discussion of planning & control documents, it was in both municipalities suggested that the annual report would be less interesting as the accountant already gave green light on the financial aspects, which suggest that the councilors are not specifically interested in the non-financial performance of the municipality. Another reason heard in Assen was that it was not part of the culture to be overly critically op municipal performance as one of the councilors called it, it was very unusual to ‘burn the aldermen down to the ground’. The councilors in Lelystad do not explicitly state that they critically evaluate the annual report. However it should be noted that the annual report does not lead to a discussion about B&W’s performance and in so far there is a discussion, this is highly concentrated on the financial details.

The concern controller in Assen implied that there are significantly more questions during discussions about new policies in the future, than in reflecting on what has been achieved in the past. During these discussions councilors are focused on bringing their own political views into policy. One of the councilors in Lelystad implied that he controlled the future direction of municipal policy by comparing it to their own party line, but did not mention to check this also for any output or outcome information. His fellow councilor explained that when a policy is accepted it almost always remained uncriticized the years after. To change this, these policies and outputs and outcomes to be realized would have to be discussed and approved every year by the council.

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mentioned that small detailed adjustments in municipal policy targets tend to dominate the debate because these adjustments can be politically beneficial. The extensive political focus on achieving one’s own political agenda has according to the concern controller led to a culture where there is little control and interest for the information on realizations of last year’s policies in Assen’s planning and control documents. Councilors are not interested in these deviations and do not regard the output results and indicators as a measurement instrument to assess the performance of municipal policies, or do at least not ask for context on the achieved results. Although the style of answering is different and the councilors in Lelystad hint on a slightly more intensive use of the annual report than in Assen, it seems that there too the average councilor, especially those not interested in financial results is not really interested in using the annual report as a tool to control the outputs and outcomes of municipal activities. Furthermore, councilors in both municipalities seem to be interested in the springnote because this gives them the opportunity to represent their political views. However, in practice the content of these documents in terms of steering new policies are a proposal from aldermen to council, with an influence of council meeting which mostly only relates to details.

Most of the interviewees seem to find that the annual report is especially useful for controlling the financial performance of the municipality, this is underlined by the

importance of the accountant in reviewing this report. According to both the council clerks and the financial servant in Assen this might be a reason for councilors to be less interested in controlling documents.:

“Because the annual report is already approved by the accountant, it is very tempting for councilors to focus on the establishment of new frameworks”.

Therefore, Assen organized a presentation for the audit committee, where the accountant highlighted some specific features of the annual report. Other members of the council were invited, but the popularity of this meeting turned out to be minimal. In both municipalities the financial responsible councilmembers state that councilors with a ‘feeling’ for numbers are more interested in the planning & control documents. All of the four interviewed

councilors have some kind of financial affinity and are members of the audit committee. One of the council members from Lelystad expresses that he is interested in the more technical, although it always has a political character, points of control. He states that he, as a

councilor, came up with various technical initiatives to improve the financial parts of the planning & control cycle. These initiatives have always been accepted unanimous in the council meetings

An often heard claim is that the program budget is in principle the main document to discuss and achieve political targets. A councilor in Assen states that because all the themes are discussed, these discussions provide the opportunity to highlight party-based opinions that can be used for political gains. On the other hand a councilor in Lelystad argues that

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politically interesting points. But in both municipalities they agree the discussion of the program budget is the moment to review the intentions provided by the B&W and compare them with the own political agenda. Other possibilities for altering municipal’s policy, especially as an opposition party, are rather limited, as for the acceptance of motions and amendments the majority of the council needs to support it. Other options to influence municipal where mentioned, such as composing an counter budget or an ‘initiatief voorstel’ (Initiative proposal), but tend to be extremely difficult and time consuming whilst their success still depends on the majority of the councilors. This makes these more rigorous tools to a rareness in Lelystad & Assen. The counterbudget has occurred once in Lelystad and an initiative proposal has occurred once in the last 5 years in Assen.”

The interviewed councilors, who all were the financial “specialists” in their political party, explained that they used the P&C documents to get a general view of the functioning of municipal policies. In several interviews, such as with the project manager municipal finance in Lelystad, the use of the financial part of the P&C documents by councilors is described as looking if the executive board did not spend more money than they received. He believes that the financial numbers should be put together to create an overview of the

consequences of a decision, but most of the time the discussion in the council is about specific financial numbers and ratios. Thereby it is called that the annual report, which is regarded as the main document for control, does primarily exist from financial data and the description of intentions and actions, but lacks measurable output and good outcome

indicators which are desired by all four interviewed councilors and are recommended by civil servants and clerks in both municipalities. Some examples of this common opinion can be illustrated by the following quotes:

Assen: ‘A great shortage of our way of reporting is that social effects are non-measurable Lelystad: The most prominent drawback of our annual report is that it lacks indicators or consists of bad performance and outcome indicators which makes it only possible to control for spending budgets

Councilors and civil servants in Lelystad provide several possible reasons for the lack of output and outcome information such as a lack of good indicators, and the easiness to control activities solely on financial numbers when output indicators are difficult to acquire for these activities(Councilor L1), The financial servant explains that it is very difficult to give a simple description or a simple indicator that capture the insecureness of future

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tension between these characteristics and a qualitative good description of outputs and policy effects. Civil servant S illustrates this by stating:

If I try to explain the scenarios regarding such an important investments I’m writing easily over 5 pages which makes it impossible to understand. But if I’m explaining it in Jip & Janneke style, I get Jip & Janneke decisions. (Jip & Janneke is a Dutch children’s book)

However there are also municipal activities of which an output can be measured and shown in an indicator. The council advisor in Lelystad explains that the pure outputs are aldermen’s business and councilors in both municipalities don’t mention the control of outputs as their main business. Moreover, a councilor in Assen admits that there are options to ask for output documents, but he and his colleagues don’t make us of these options and trust the aldermen in their functioning. The councilors in Lelystad indicate that the output data is offered to them, but only for notification. Councilor L2 states that in the execution of policies mistakes can be made and does not hold aldermen responsible for small setbacks on output objectives. So although output indicators can be, and in Lelystad are, offered to the council, this information does not seem to be regarded by councilors in both municipalities as important information for their steering and controlling task.

Despite they do not seem to actively search for clearly defined policy goals and outcomes, all interviewees recognize that targets are not clearly defined in steering documents and

express it would be best to have measurable, or as four of the respondents say, SMART formulated output and outcome targets, which, according to councilor L2, ideally, can be controlled to a large extent by the municipality. Councilors from Assen explain that it is difficult to control municipal policy when, even if good indicators where available,

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situation is extremely comfortable for the aldermen in Lelystad, because they are in the current situation free to see what’s coming out of a their financial investments:

“It is of course extremely comfortable for as well the board of executives as its partners to say: Let’s come together and we’ll see what it brings us”

It is heard that with the absence of good output and outcome indicators and SMART

formulated targets it is for councilors an “easy way out” to control for budgeted and realized financial goals, because they are included in the reports. Most parties are large enough to divide roles and have a councilor responsible for financial matters, as their fellow members specialized on other topics. All interviewed councilors were having, among other

responsibilities, the financial role in their party. They pointed out that they were the

heaviest users of the planning & control documents and they often received questions from fellow councilors about the financial part of the documents. One of the councilors in Assen recognizes that the focus on general financial controls has its drawbacks:

With the focus on financial controls we do not find mismanagement before there are extreme deviations. When this happens the council is on tilt, digs into the problem and the responsible aldermen will be held accountable. But focusing on social effects in an early phase is still uncommon.

The civil servant does agree with him: councilors become alert when the shit hits the fan, but that is only because it lies politically sensitive and they acknowledge there is a lot of money at stake.

Although councilors in both municipalities use the planning & control documents primarily to extract financial information, they indicate several ways of collecting information in other ways.

 Journalists (Who can put pressure on council/aldermen by providing information to civilians, sometimes without nuance)

 Colleagues, who are specialists or know much about certain topics. (Clerk, fellow councilors, civil servants, aldermen)

 ‘Feelers’ (voelsprieten) in local communities (Only called in Assen)  Initiatives from citizens or council meetings on location

 Meetings with external experts, such as the accountant

Some parties in Lelystad tend to represent a small group’s interests because this can lead to a political gain. This can according to councilors lead to a focus on small and detailed

problems in many debates that do not seem relevant for overall municipal performance. One of them believes a key characteristic of the council should be, that even in these details, the focus remains on benefits for more common interest.

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contributed more to the total knowledge about municipal performance than they could extract solely from the documents. He implies this information is richer and he trusts on the qualities and experience of these individuals. Councilors of coalition parties mentioned in both municipalities that they could not influence the planning & control documents before they were offered to the entire council. However, there was a slight different perspective between opinions of some of the interviewees. During one of the political parties

represented in B&W, such as lunch or party meetings, it was said to be uncommon to discuss new policy ideas or current affairs, where a councilor of a coalition party and his colleague of an opposition stated that members of coalition parties were in close contact with their aldermen, which made it certainly easier for them to ask some informal questions or collect information about current affairs.

Although both financial employees have the opinion that the discussion in the council with the aldermen should be based on the planning and control documents, almost all

interviewees claim that the extent of the use of accounting and performance information by is dependent on personal differences and preferences. Some councilors get a ‘good feeling’ by numbers in documents, in both municipalities such councilors are said to mostly refer to the financial aspects in these documents, they do not seem to use them in controlling the non-financial performance of municipal activities. Others seem to prefer more descriptive, qualitative information, which mainly consists of intentions and actions and not of

measurable results (i.e. words). Further, there are some others who do not seem to consider formal documents as an important source of information at all.

4.3 Supply of Information

This section will focus on the way councilors are facilitated in their steering and controlling roles by members of the civil service and council clerk departments. It will focus on the communication between providers of information and users of information by describing the daily tasks and especially highlight the opinions of providers of information on current

accounting and performance information and the perception of councilor on the quality of the supplied information.

The council clerk departments in both Lelystad as Assen are relatively large and autonomous departments, which are responsible for supporting the council in the broadest sense. The council fulfills three roles: the steering, controlling and a representative role. The council clerk department mainly helps in the first two roles, as the third role has a more political character and the council clerk needs to be independent.