Principles for designing the finance organization: a guide for reform efforts and leadership transitions.

• Author: Chan, James L.
• Position: Includes related articles on characteristics of an effective finance structure and roles of proposed City of Los Angeles budget and finance offices

The authors outline seven design principles for effective finance organizations and illustrate their application in a large city government.

Since the turn of the century, many state and local governments have reformed their organizational structures by centralizing authority and clearly defining lines of responsibility. Over time, additional modifications were made through reorganizations by newly elected officials, changes in statutes, and external forces. Today, the finance organization for many state and local governments is more the result of incremental piecemeal changes than thoughtful and rational design. Especially in larger governments, finance organizations are associated with terms such as red-tape, bureaucracy, overlap, and duplication. Incremental efforts at reorganizing the finance function have at best produced marginal benefits. If genuine reengineering of the finance function occurs through the combination of technology modernization and organizational restructuring, it is useful to establish some fundamental principles to guide reform efforts.

In this article, the authors propose a small number of finance organization design principles and illustrate their application by examining the recent charter reform effort in the City of Los Angeles. The term "finance organization" is used to encompass all of the financial management units in the government. Leadership transition teams and charter reform efforts in other jurisdictions can use these principles to guide their restructuring efforts; those that have made recent changes can use the principles to evaluate past actions.

Design Principles

In the authors' view, institutional designers should consider the following seven principles. An effective finance organization:

* has a scope that is comprehensive enough to carry out major finance activities,

* establishes independence for key finance activities,

* helps the government and its managers discharge accountability,

* contributes expertise to influence policy formulation and implementation,

* improves the performance of service delivery,

* minimizes overhead costs of itself and the government as a whole, and

* makes continuous improvements.

Comprehensive Scope Principle. An effective finance organization should have authority and responsibility sufficiently comprehensive in scope to encompass the core and related finance functions. The core functions are financial planning and budgeting, implementation (including budget execution, accounting, and reporting), and financial performance evaluation (including auditing). The related functions include purchasing, risk management, and evaluation of compliance with finance-related laws and regulations. Unless the finance organization as a whole encompasses these functions, it runs the risk of frequent "turf wars" that lead to conflict and inefficiency.

Independence Principle. The government should ensure independence for certain key finance activities such as auditing and financial reporting. Such independence is essential to promoting the confidence of the public and the financial community. These resource providers view checks and balances in government as ways to prevent fraud and waste.

Accountability Principle. A successful finance organization strengthens accountability. There are three mutually reinforcing lines of accountability in state and local government. Department heads are accountable to higher-level executive officers. The executive branch is accountable to the legislative body. And the government as a whole is accountable to voters and taxpayers. Since financial accountability is an integral aspect of performance, the finance organization is instrumental in both demonstrating and enforcing accountability. Timely release of the budget document and the annual audit are two well-established means of demonstrating accountability.

Policy Influence Principle. An effective finance organization does more than implement controls. When resources are scarce, financial considerations often make or break policy or program proposals. The finance organization should possess the expertise to provide objective information and advice in policy formulation and implementation. Its senior members often participate in deliberations of financial strategies, and are actively involved in high-level decision making. This consideration should be examined in designing a finance function especially as it relates to the appointment of a chief financial officer (CFO).

Service Performance Principle. An effective finance organization is staffed by individuals who are familiar with operations and can work with the line departments to analyze and implement alternative service delivery approaches. Finance staff should be able to apply their cost accounting knowledge to help the service departments measure performance, change practices, and organize efficiently.

Exhibit 1 ATTRIBUTES OF AN EFFECTIVE FINANCE STRUCTURE Principle Organizational Attributes Comprehensive scope * Finance activities should either fall under a finance unit or be subject to its guidance. Independence * Maintains the trust and confidence of the public and financial community. * Has the capacity to detect/prevent fraud, waste, and abuse. * Promotes checks and balances. Accountability * Exercises financial discipline on government. * Has a clear line of authority and responsibility. * Facilitates meaningful citizen participation in the budget process. * Develops the capacity to carry out adopted policies and programs. Policy influence * Provides objective information and advice to decision makers. * Has established standard...