Budgeting is the cornerstone of the management control process in nearly all organizations including government agencies. Practitioners express concerns about using budgets for planning and performance evaluation. The practitioners argue that budgets impede the allocation of organizational resources to their best uses and encourage myopic decision making and other dysfunctional budget games. They attribute these problems, in part, to traditional budgeting’s financial, top-down, command and control orientation as embedded in annual budget planning and performance evaluation processes (as cited in Hansen, Van der Stede & Otley, 2008 pp. 95)
A government budget is the financial plan of a government for a given period, usually for a fiscal year. The budget is the government’s key instrument in promoting its socio-economic objectives. The use of government funds is based on Article VI, section 29 of the 1987 constitution that “No money shall be paid by the Treasury except in pursuance of an appropriation made by law.” (Domingo, Liz, & Ruado, 2013) Funds are used by the government for public interest in which it has the sovereignty, but in general, budgets can differ from the actual expenditures. These differences should be justified and presented to the Congress and Senate for the approval of the next annual budget. Background of the Study
The Philippines’ Department of Energy (Filipino: Kagawaran ng Enerhiya), abbreviated as DOE is the executive department of the Philippine Government responsible for preparing, integrating, coordinating, supervising and controlling all plans, programs, projects and activities of the Government relative to energy exploration, development, utilization, distribution and conservation.
It was created by President Marcos as he issued Presidential Decree No. 1206 which created the Ministry of Energy and attached the National Power Corporation and Philippine National Oil Company to this new agency. The Ministry was abolished during the Regime of Corazon Aquino. During the Regime of President Fidel V. Ramos, that Department was created by virtue of Republic Act No. 7638 otherwise known as the Department of Energy Act of 1992. The Department was vested additional powers and functions under pertinent energy and power related legislations, such as Republic Act No. 9136 or the “Electric Power Industry Reform Act of 2001”, Republic Act No. 9367 or “Biofuels Act of 2006”, and Republic Act No. 9513 or “Renewable Energy Act of 2008.”
In this study, the interviewees are the officers in the budgeting and accounting department. They are given the chance to evaluate themselves whether they have formulate their budgets in compliance with the guidelines included in the Budget Call that DBM issues every year. These guidelines are essential for the formulation of the budget of every government agency because it sets the ceiling that each of them may expend and contains required documents they need to submit.
Each government agency receives Budget Call that is similar with the other government agency and this Budget Call is what each of the government agency considers as their bible since all that is written in the Budget Call must be complied; otherwise, they will be subject for further questioning which may have a positive or a negative result. They can also evaluate the controls adopted so as to determine if the present controls are sufficient to guarantee an effective implementation of the approved budget and to assure that the actual expenditures are not exceeding the allotted amounts for that type of expense.
Furthermore, the researchers would be able to determine how the government agencies make sure that their budgets will be sufficient, to see how government units justify their budgeted expenditures if those expenditures were above the ceiling that is set by the Development Budget Coordination Committee (DBCC), and to familiarize themselves with the Budget Process that a government agency undertakes.
The budgeting process is an essential component of management control systems and has been an effective system by which management can successfully plan, coordinate, and control. The process involves the creation and implementation of the broad objectives of an organization, the
detailed objectives, and a short-term and long-term financial plan. There exist a variety of techniques for establishing budgets. Some of the most common techniques include, Incremental budgeting, Program budgeting, Zero-Based budgeting, and Site-Based budgeting. But this study focuses more on the Zero-Based Budgeting (ZBB approach) because the time on which the researchers conducted the study was under the administration of President Benigno Aquino III who vowed to shift from the old “incremental” system of budgeting to the ZBB approach on his first State of the Nation Address (SONA) in July 2010. The philosophies and procedures used to implement zero-based budgeting in industry and government settings are quite similar, but somewhat different with the mechanics to fit the specific needs of each organization.
The basic process of zero-based budgeting is to justify budget requests in every budgeting cycle, regardless of prior period budgets. (http://www.referenceforbusiness.com/management/Tr-Z/Zero-Based-Budgeting.html#b. Retrieved August 4, 2013) ZBB approach is a technique that sets all budgets to nil at the beginning of the year or period and requires from the departments that they justify all of their expenditures, not just those exceeding the budget. Money is allocated to the departments based on merit and not based on the previous year budget plus or minus some percentage such as in many traditional budgeting systems.
It is also a technique of planning and decision-making which reverses the working process of traditional budgeting. In traditional incremental budgeting, departmental managers justify only increases over the previous year budget and what has been already spent is automatically sanctioned. No reference is made to the previous level of expenditure.
By contrast, in ZBB, every department function is reviewed comprehensively and all expenditures must be approved, rather than only increases. It requires the budget request be justified in complete detail by each division manager starting from the zero-base. The zero- base is indifferent to whether the total budget is increasing or decreasing. It also refers to the identification of a task or tasks and then funding resources to complete the task independent of current resourcing. An important element of this budgeting procedure is that it forces prioritization of government programs and activities. With the prospect of insufficient revenue for matching the demand of spending, it is useful for the government to have a ranking of programs and activities based on proven effectiveness as well as suggested alternatives to expensive or ineffective programs. There are two steps in the process of zero based budgeting.
The first step is to develop what is called as “decision packages” which includes an analysis of cost, purpose, alternative courses of action, measures of performance, consequences of not performing the activity, and the benefits. The second is to rank the decision packages. The decision package is a document that identifies and explains the specific and goals and objectives, measurement of performance, costs, benefits and alternative courses of action. Ranking of decision packages is then accomplished at each management level until a comprehensive agency wide ranking is obtained. Conceptually, zero-based budgeting is a systemic logical approach to allocating resources where they will do the most good. ZBB is often encouraged by fiscal watchdog groups as a way to ensure against unnecessary spending. It is used, or some modified version of it, in the private- and public sectors for decades.
Peter Phyrr used ZBB successfully at Texas Instruments in the 1960s and authored an influential 1970 article in Harvard Business Review but only in 1977 the concept of ZBB gained notoriety because President Jimmy Carter announced to implement a ZBB system at a federal level thus spread more rapidly. The impact of budgeting on organizations was probably first studied by Argyris in the 1950s. These studies show some of the behavioral effects resulting from the way budgets are used in organizations. The results of his research showed that the particular process used could cause dysfunctional behavior in subordinates, regardless of the degree of technical refinement of the budgetary system. In the 1970s, Hopwood’s studies inquired into the effects of budgets on human behavior.
These studies showed that the use by a superior of a budget-constrained style of evaluation gave rise to significant levels of job-related tension; had adverse effects on peer and subordinate-superior relationships, and was implicated in manipulative behavior on subordinates. A long line of studies have been performed since then to uncover an array of variables that govern the effects of reliance on budgets on behavioral outcomes, including managerial performance. Examples of these variables include budgetary participation, task uncertainty, environmental uncertainty, strategy, and culture.
It may require an extensive amount of time, money, and paper work; but it does provide a systematic method of addressing an organization’s financial concerns, in turn enabling an organization to better allocate its resources. (http://www.referenceforbusiness.com/management/Tr-Z/Zero-Based-Budgeting.html#b. Retrieved August 4, 2013) The aforementioned theory have supported the study for better understanding of the budgeting process and the people’s state of mind involved in describing the overall cycle of the budget process of DOE as well as the valuation of controls applied.
The conceptual framework discussed the flow of the study to be taken. The study used the systems approach. The system of three (3) frames is composed of input whish went through the process and emerged as the output.
The input contains the leading variables regarding the budget of the DOE. It includes the phases of the budget process. It discusses in detail the activities conducted in the first phase of the process which is the budget preparation. Next is about the activities conducted in the second phase which is the budget legislation. Then, discussions about the budget implementation phase. And the last phase of the budget process which is the budget accountability. As inputs, problems encountered by the agency and also the possible solutions they adopt are included. The second frame contains methods and procedures used to describe those variables by making observations, research and conducting an interview and statistical analysis The third frame is the output. It contains recommendations in conducting trainings and seminars of the employees about controlling their funds. Recommendations in monitoring the controls are also addressed.
Statement of Problem
This research is aimed to describe the budget formulation and implementation of the Department of Energy (DOE). Moreover, the budget made by the DOE is also compared to the actual operations of the department to know whether the budget is being conformed to and if such differences are being justified well.
Specifically, the study endeavored to answer the following: 1.0 What are phases of the budgeting process in DOE?
2.0 What are the activities conducted in the budget preparation phase of the budgeting process in regard with the following: 2.1 The determination and valuation of the items in the budget proposals; 2.2 Identifying the functions of some government agencies in the budget cycle; 2.3 Identifying the expenditure priorities of the agency; and, 2.4 Identifying the external parties involved in the budget proposals and deliberation? 3.0 What are the activities conducted in the budget legislation phase of the budgeting process regarding the following: 3.1 Budget Deliberation/Review; and,
3.2 As to the importance in conducting deliberation/review in different offices of the national government? 4.0 What are the activities conducted in the budget implementation phase of the budget process regarding the following: 4.1 Guidelines on implementation of the budget;
4.2 Controls the agency uses to monitor the implementation of the approved budget; 4.3 The treatment on the variance between the budgeted amounts and the actual results; and, 5.0 What are the activities conducted in the budget accountability phase of the budget process? 6.0 What are the problems encountered by the agency and the possible solutions they adopt?
Scope and Limitations
This study will look into the budget formulation and implementation of the Department of Energy based on the rules and regulation issued by the National Government to all government units. This was done to have an understanding on the actual budgeting process of a government unit.
The respondents of the study were the OIC financial services director- Araceli Soluta, chief of the budget division- Elisa Morales and the OIC – Chief Accountant – Arturo M. Cudia. The interview was administered in July 24, 2013. The interview questions were made by the researchers based on what they need to know.
Significance of the Study
This study was anticipated to contribute additional information to serve the following individuals and organizations. Department of Energy. The Department of Energy (DOE) will benefit from this study as they will be able to evaluate the controls adopted by the DOE in valuing the items in the budget proposal and in monitoring the items approved by the Department of Budget and Management (DBM). Thus, the controls can be improved as needed. This can also serve as evidence that the DOE is complying with the guidelines set by the DBM.
Department of Budget and Management. This study can help the Department of Budget and Management (DBM) in assuring that the DOE was able to comply with the guidelines set by them. They can also evaluate the controls that they implement and improve it so as to guarantee the compliance of each government agency in every step of the process.
Students. This study will contribute to students to gain basic knowledge about the budgeting process of government agency. This is applicable to students required to gain an understanding on how the budget process took place and the justifications required in each line item in the government agency’s budget proposal. Although not all students need to know this study, it will be beneficial for them to have an idea about it.
General Public. This study can give the general public some basic information that can be easily understood for them to have an idea on how the government funds are allocated and what projects are being prioritized by the President. They are not forced to learn this issue but understanding this would be useful for them. Taxpayers. This study will be advantageous for the taxpayers because it discusses the budgeting process that a government agency undertakes. The taxpayers will be assured that the government funds, which mostly came from the taxes paid by the public, are used for the projects or programs that could help the residents of this country and the country itself. Other Researchers. This study will be an effective tool and reference for the subsequent researchers who would want to conduct further study about the budgeting process undertaken by each of the government agency and the justifications required on each item included in their budget.
Definition of Terms
For better understanding and interpretation of this study, the following terms are operationally defined. Allocation. This refers to the allotment or assignment of funds to be used by the government agencies to different projects and programs and to the operation of the agency itself in accordance with the rules promulgated by the Department of Budget and Management (DBM). Budget. This is the allocated funds for the implementation of various government programs or projects and for the operation of the government agency that is set by the agency for approval by the DBM. Budget Call. This is issued by the DBM that defines the budget framework, sets the economic and fiscal targets, subscribe the priority thrusts and budget level and spells out the guidelines and procedures and timetable for budget preparation. Budget Ceiling.
The Development Budget Coordination Committee (DBCC) sets a budget ceiling for expenditures that the government agencies may obligate themselves which gives an allowance of about 10% from previous budget. Funds allocated in a project or program in excess of the budget ceiling must be justified. Budget Authorization. This involves reviews/deliberations and a separate deliberations conducted by the Congress and the Senate. Once approved, the President signs the bill into law. Budget Deliberation/Review. It is a process were the Congress or the Senate or both question the budget proposals of the government agency before submitting it to the President. Budget Formulation. This is the first step in the budget process in which the government agency prepares its budget proposals that will be submitted to the DBM who holds hearings for the agencies to justify their budget proposal. Budget Implementation.
This is the phase where the approved budget is being executed. The DBM will issue and release allotment and notice of cash allocation to government agencies. Budget Monitoring. This is the last phase that involves evaluation of the financial reports and performances by management. The Commission on Audit (COA) will also evaluate the agencies financial reports and performances through audit. Budget Process. It is the systematic, repetitive procedures that every government agency must follow. Budget Proposal. It is the budget being prepared by DOE which subject to review and justification. Compliance. It is making decisions in accordance with the rules and guidelines