Four objectives of PFM:1. Macro economic statblixation 2. Allocative efficiency 3) operational efficiency 4) Fiscal transparency

Managing public finances:1) needs to be comprehensive 2)permit a balanced divsion of roles and responisibilities 3) financial relations bw govt & transactingparties

So how do countries using cash-basis of accounting monitor commitments and unpaid expenses?

Some countries have registers and records to monitor commitments and arrears outside of the typical books of accounts.

Some countries actually dont have any mechanism! The Public Expenditure and Financial Accountability (PEFA) indicators for commitment and arrears monitoring arerated very low for many countries. In accrual accounting there is no need for separate records or memorandum ledgers since the accounting system will capture these in the normal course of accounting.

In many countries, the budget execution report is the financial statement, as no separate financial statements are prepared.

However, some countries have now begun preparing separate accounting financial statements in addition to the normal budget execution reports.

The US has been preparing accrual-based financial statements for the last 15 years. The UK has also started to do so; it put together the first consolidated financial statement in 2007. France too has started doing the same.

But most countries still prepare only the budget execution reports.

Profile:untapped wealth. 6.5mn Populationgood GDP growth rate 5 to 8management fiscal deficit 3to6Public expenditure and financial accountability steady progress

periodic and annual budget execution report within 6 months

MoF leads.MoF Secretary chairs.Full poticial & Civil leadership support, qualified financial experts, not novel to PFM area.

Limited professional accountantsno training programlow pay so attraction is lower in govt sectors.Recommedation of sec: partial data, should implement accrual accounting on priority.

 

Both cash basis and accrual basis accounting system have certain advantages andlimitations:Cons of accrual accounting:It is difficult to manage and complex which involves large numbers of information processing. It also may be the cause of deception to other deparments which rely on the info provided by their counterparts.

Pros: Provides upto date info on business balance sheet. Current and actual position of the budget. Planning makes easier and decision making becomes more realistic. Control over the actual system of accounting.

Advantages of Cash Accounting:Its Simple to use and very handy to understand. Current number shows actual funds available instead of receivables as earned revenue.Disadvantges:Misleading information, distorted performance review, chances of error in over drafting revenue and expenditure details.

4)They lack in human resources as well as technical aspects as very few of professional accountants are available in Turenia. They need to develope a system at first.

In order to assess financial performance and financial situation it is not justenough to have information regarding receipts and payments, but also about revenues due but not collected, expenditures incurred but not paid, commitments already made, assets owned. Such information is rarely available in budget executionreports. Financial statements have much wider scope and provide extensive information than a typical budget execution report.

Accrual-based financial statements are complex and require a trained accountingteam, which is not easy to find in the public sector. Countries that have implemented accrual-based accounting have struggled to prepare reliable financial statements  for example, the United States GAO continues to provide disclaimer of opinion on the US government Consolidated Financial Statements for the 16th year in a row.

While accrual accounting has benefits, experience indicates that the transitionto this system can be time consuming and expensive. Many approaches for switching from cash-basis to accrual-basis of accounting are possible and should be considered in finalizing the plan of action.

Internal Controls:Effectiveness and efficiency of operationsreliability of financial reportingcompliance with laws and regulations

 

Objectives:Operations objectiveReporting objectiveCompliance objectives

Components of Internal Control:Control environmentRisk assesmentInformation and communicationControl activitiesmonitoring

Control activities can be:Preventive or detectiveautomated or manualex ante means before event or post ante means actual.part of all functions

Review mechanism:Overarching control environmentRisk assessment processcommunicating and reporting systemmonitoring process

Two models of Internal Audit:Centralixed model:

Decentralixed model:

Case study 2:Tone at the top: Ministers are not serious, involves in corruption, forgery.

Centralixed inspection agency: catches small wrong doings instead of high profile corruption,

It is very important to gain the support and equate with the tone at the top concerning the vitality of the health sector in the interest of larger public. Getthe support from top, understand the political economy, understand the sector for which assesment is going to be carried out, read the literature

It is important that top management and bureaucracy understsands the importanceof the control environment whereas turensia lacks the same as their top officials are involved in the corruption which shows they lack the tone at the top. Govt needs to understand its importance of developing the control environment.

Models of Internal Audit:

 

Westminister model: Accountability of Parliament.- single head.- powers vested with single head.- independance of head.- qualified accountants- SAI is not a court.

Judicial model:SAI part of judiciary. Independent.

Responsibility of public accountants: MoF responsible.SAI is a court and can punish.Staff have legal background instead of accountingSAi select its president.No PAC.Impose penality on its own.purpose is to seek legality of transactions and their members are judges.

Board model:jointly take decisions.SAI comprises a board.Several colleges conduct auditPAC acts on audit reportsprofessional qualification varies of members.good for weak financial control environment.

Types of Audits:Compliance auditsfinancial auditsperformance audits

Framework of SAI:-Legal Basis-Independnce-Broad Mandate-Follow up mechanism

Case study:Parliamentry democracy.Adopted judicial model

Features: Legality of transactions,Does not conduct financial auditno opinion on budge executionreport financial violations and irregularities and prepare annual report

Plan is to switch to westminister model:

Q1: Both have important independent of each others.Judicial models have qualified legal experts instead of qualified accountants. They are confined to seek the legality of transactions instead of auditing pointof view. It is independet and have right to punish. It has no PAC. Westministermodel has PAC and involves single head with powers vested to this office. It has no powers to penalixe any offence on its own.