CABRI PFM TRAININGACCRA, GHANA 20 NOVEMBER 2012

The Budget Execution & Other PFM Downstream Issues in the Public Sector

Kojo Oduro CPFA

Outline: Budget Execution & PFM Downstream

• The Budget Execution process

– Pre-conditions for an orderly execution & issues to be addressed

– The systems in the Budget Execution

– Internal control, including Internal Audit

– Comparison of the Anglophone and Francophone processes

• Cash Management and the Treasury Single Account(TSA). The definition of cash management & the STA, the underlying principles and issues.

• Accounting and Reporting ( incl. IFMIS issues)

The Budget Execution Issues

• Key Issue- Underpinning the budget credibility debate are problems of: – Releases of fund

– Internal Controls

– Commitments and Arrears– Ineffective Cash Planning & Management System: Overlap of Budget Execution

and Cash Management and the evolution of the Cash Budgeting System (i.e cash rationing)

– Transparency

– Timely reporting in the absence of well-established accounting systems

– Performance feedback from M&E systems

Some of the Pre-conditions & Issues

• Budget preparation: Budget must be realistic and costed properly

• Monitoring and control: good data collection system; and the feedback should be taken seriously

• Budget Discipline: compliance to regulations and sanctions should be in place

• Political commitment: otherwise sanctions cannot be applied

• Sound regulatory system( from both the Constitution and the PFM Act)

Budget Execution & Service Delivery

• Is at the heart of Service Delivery ( infrastructure, education, public health etc)

• It is about managing public resources optimally by ensuring that– the budget is managed consistently within agreed

financial limits– cash releases linked to resource availability– releases are in line with spending commitments– full delegation of budget management is given to line

ministries

The Good Financial Governance (GFG) in Africa Report Reported These Gaps• Cash planning and commitment practices must be

improved• Commitment controls are weak• Payroll controls must be developed• Procurement systems must be strengthened• Capacity for effective system-based internal audit is weak• Support& capacity for the adoption of generally accepted

accounting standards is inadequate• Reconciliations are not performed regularly enough• Management of FMIS reforms needs to be strengthened

The Budget Execution Process has 6 Stages

• Authorisation Stage: Managing the Budget Authority

• Commitment stage: Initiation of the procurement process

• Verification Stage: Goods are received

• Payment Stage

• Accounting and Reporting

• Monitoring

An Outline of the Budget Execution Processes: Stages of Spending

1. Allocation of Annual Appropriation

2. Commitment ( Government liability created)

3. Accrual (Goods and Services received and debt

incurred)- verification stage

4. Payment Run (by Line Ministry -prepare payment

voucher)

5. Payment ( by Line Ministry or MoF)

6. In-year reporting ( periodic reports prepared for

management) and monitoring

The processes are carried out on these systems

• The Warrant system

• Cash Management system

• The procurement system

• The payroll system

• Internal controls, including Internal Audit(IA)

• Payroll Management

• Accounting and in-year reporting system

• Monitoring and evaluation systems

2 Key Areas are Highlighted in this Presentation, as Example

• Internal Controls

• Accounting & Reporting

Internal Controls, including Internal Audit

• Internal Control

– What is Internal Control?

– Frameworks of Internal Control

– Basic Internal Controls

– Strengths and weaknesses of controls & limitation of internal controls

• Internal Audit

– Audit Methods

– Pre-audit or Post-Audit?

– Challenges of introducing systems audit

– Independence of internal audit

– Audit Committees 11

Definition: What is Internal Control?

• Internal control is an integral process that is effected by an entity’s management and personnel and is designed to address risks and to provide reasonable assurance that in pursuit of the entity’s mission, the following general objectives are being achieved:

– executing orderly, ethical, economical, efficient and effective;

– operations;– fulfilling accountability obligations;– complying with applicable laws and regulations;– safeguarding resources against loss, misuse and damage.

• Source: INTOSAI Guidelines on Internal Control

Some Important Distinctions

• Distinction btw Control and Controls

• Distinction between Strategic Control and Management Control

3 Types of Controls

• Action ( or Behavioural) Controls: focus is on the action employees take- where managers know what actions are desirable and undesirable: use– Behavioural constraints ( e.g password)– Pre-action review– Detection and prevention

• Personnel and Cultural ( or clan and social )Controls: e.g selection, placement, training and job design

• Results (or outputs ) controls

Results Controls are Cybernetic

• Results control can be seen as a simple Cybernetic Control

• It has 3 elements ( the process; deviation; and corrective action)

• Conditions to be satisfied for CC to be in place (4)– Objective of the process: Aim or purpose must exist– Outputs must be measureable in the same dimensions

of the objectives ( you cannot mix pears and oranges)– A predictive model ( to enable comparison between

standard and actual)– Capacity for taking action must be there

Components of Internal Control

• In line with the Commission of Sponsoring Organisations (COSO) framework Internal Control consists of five interrelated components:– control environment– risk assessment– control activities– information and communication– Monitoring

Source: INTOSAI Guidelines on Internal Control

Strengths and Weaknesses of Types of Controls: 3 Considerations

• The relative cost and effectiveness of the different controls– Personnel of cultural controls: relatively few harmful side-

effects, but personnel must be have capacity and motivated

– Action Controls: direct effect by giving instructions & close supervision, but suitable for routine jobs and kills creativity

– Result controls: useful where what is desired is not given, thereby giving autonomy is helpful; but problems with measurement, and separating controllable from uncontrollable factors

• Dealing with Leads & Lags in the system • Goal Congruence:

Lead & Lag Problem

• Cybernetic control is a feedback system: use correction– Main weakness is that errors are allowed to occur before action

is taken– Useful if the time lag is not long to enable corrective action to

be taken– Can be made simple and does not require a sophisticated

forecasting capability

• Feed-forward system: where likely errors are anticipated and steps taken to avoid them– Useful when the time lag is long– Requires a sufficiently accurate predictive model

• Budget systems are feed-forward system whereas the whole accounting system is both fforward & fback

Goal Congruence

• Ensuring that the system of organisational rewards achieve the right behaviour

• What is being measured are – Organisational goals – Individual goals

• A problems is that formal performance measurement system is imperfect to ensure congruence btw OG & IG

They spell out the Limitations of Control

Internal control cannot by itself ensure the achievement of these general objectives because of

– Human error

– Resource constraints

– Change

– Management attitude

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The Nature of Management Accounting Control Systems

• There are two elements: • First Element- Formal planning

– The process ( such as budgeting and long-term planning)

• Second Element- Responsibility Accounting for each centre– Setting a performance target– Measuring the performance– Comparing the performance against target– Analysing the variances– Taking Action where variances are significant

Internal Audit

Session Objectives

• Understand the Role and Function of Internal Audit

• Appreciate the debate between pre-audit and post-audit

• Appreciate different types of audits including:– System Audits, Financial Audits, Performance Audits, Risk Based Audits,

Compliance Audits and Materiality Audits

• Understand the importance of the Independence of the Internal Auditor

• Appreciate basic elements of the rationale for designing an audit work plan

What Is Internal Audit?

• Internal audit is to be understood as an independent and objective appraisal service within an organization.

• The Institute of Internal Auditors of UK and Ireland defines Internal Audit as: – “Internal Auditing is an independent, objective assurance and

consulting activity designed to add value and improve an organization's operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.”

• The Institute of Internal Auditors New York defines Internal Audit as: – “Internal audit is an independent, appraisal activity within an

organization for the review of accounting, financial and other operations as a basis of service to the organization. It is a managerial control which functions by measuring and evaluating the effectiveness of other controls”.

The Importance of Internal Audit

• An active continuous review of the adherence to controls help in the prevention of opportunities for corruption and mismanagement

• Helps to improve and maintain the quality of expenditure (VFM)and to continually seek to minimize loss and reduce fiduciary risk (FR).

• It serves as additional eyes and ears of management rather than to help fulfil an oversight function.

Main Functions of Internal Audit

• Reviewing and appraising the appropriateness, adequacy and application of authorisations, financial and other operating controls, and promoting effective control at reasonable costs;

• Ascertaining the extent of compliance with established policies, plans and procedures;

• Ascertaining the extent to which government assets are accounted for and safeguarded from losses of all kinds;

• Ascertaining the usefulness and reliability of management data developed within the Civil Service;

• Appraising the quality of performance in carrying out assigned responsibilities;

• Recommending improvements to the operating systems.

• Carrying out materiality controls

• Appraise the economy and efficiency with which resources are employed

Internal Audit Code of Ethics

• Integrity

• Objectivity

• Competency

• Confidentiality

• Independence

Approaches to INTERNAL AUDIT

Three approaches:

– Pre-Audit: Pre-payment checking as part of the authorisation process

– Inspectorate System: where they undertake inspection or compliance audit

– Post- Audit: Operationally independent unit checking that internal controls are working properly and making recommendations for optimisation of controls

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Examples of Internal Audit Checks

• Checks on expenditure within budget (warrants) ceilings and incidents of virement

• Checks on implementation of commitment controls

• Checks that procurement procedures as implemented promote cost efficiency and are based upon fair competition. (Fake competition is a common practice)

• That goods paid for are received in the quantity and quality specified. (Incomplete or sub quality supplies are a common occurrence)

Systems Audits

• System Audits focus upon an assessment of systems such as:

– The Legal and Regulatory Framework

– The financial management procedures and practices

– The reporting and accounting procedures

– The separation of authorities

– The filing and archiving systems and the financial management effectiveness it provides

– The security controls on banking

• The Legal and Regulatory Framework requires clarity, precision and non-ambiguity to serve as an effective audit standard

• Institutional Arrangements and the lines of accountability

Systems Audit

Internal audit’s scope should include all the entity’s systems, procedures and locations

Internal audit should audit all the entity’s internal control systems, its risk management and corporate governance procedures

Plan to cover the most significant (risky) systems each year

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Financial Audits

• Financial Audits focus upon:– Adherence to standard accounting practice in the

preparation of accounts– The accuracy and completeness of accounting and

financial data (double entry book keeping)– The reconciliation of financial accounts with bank

statements– The proper recording of transactions– Adherence to any financial agreements and or

statutory obligations• Review and certify financial statements as

meeting materiality criteria

Compliance Audits

• Compliance Audits focus upon:– The adherence in practice to the legal and regulatory framework, official

procedures and practices

– The adherence in practice to proper procurement methods, tendering procedures, contract administration especially with respect to contract variations, selection of vendors, issuance of commitment instruments, confirmation of goods and services received, and the issuance of payments

– The probity of procurement and expenditure documentation

– The occurrence of fake competition

– The integrity of visas and signatures on accountable documentation

– Checks against the allocation of expenditure to budget lines

– Checks of expenditure within budget ceilings

Performance Audits

• Performance Audits :– Focuses upon the achievements against stated output

targets– Requires an activity based budgetary framework that

clearly defines the output targets– Focuses upon efficiency achievements and losses that

occur other than direct financial losses– May be extended to staff performance tests based upon

pre-set performance agreements. These though must be devoid of all subjectivity and require the agreement of the staff member at the time of signing the performance on the type of performance measures and standards to be applied

Risk Based Audits

• Risk Based Audits assess the fiduciary risks and focus their audit activity accordingly

• Seek to advise upon risk mitigation strategies

Materiality Audits

• Materiality Audits seek to establish that purchases were actually made

• They may also extend to value for money determinations to establish of purchases made were done at market prices

• They may address also the quality of materials purchased

• The management and control of materials (e.g. drugs) in warehouses and check expiration dates and adherence to rules on destruction of expired materials

• Review the application of safety controls

Pre-Audit

• In the case of Pre-Audit the Internal Auditor’s activities are incorporated as a step within the procurement – expenditure cycle. The rationale is that error’s be caught prior to payment. Further, the Internal Audit staff serve to oversee and strengthen the accounting staff

• However:– This undermines the Auditor’s independence. What happens when in spite of

such pre-audit checks difficulties persist?

– In practice it has led to many instances of rent-seeking

– Even where difficulties are identified, without a stop order authority, the exercise can become meaningless

– The administrative burden and delays in processing can become excessive

Post Audit

• In the case of Post Audit the Internal Auditor can maintain their independence, however any anomalies discovered occurs after the loss has occurred.

• This approach is one that is adopted by the external auditor and some argue begs the question as to the need for an Internal Auditor

• The introduction of computerised financial management facilitates a real time perspective to financial transactions that permit intervention prior to completion of the payment cycle

Independence of the Internal Auditor

• The Internal Auditor reports administratively directly to the Accounting Officer to advise on weaknesses in financial management

• The Internal Auditor has a functional reporting relationship to the Internal Controller (Internal Auditor General) who approves the annual audit work plans

• The budget of the Internal Audit Department within the Line Ministry should be a fully funded line item in the budget to ensure that Internal Audit is not made ineffective by withholding funding.

What Undermines the Independence of the Internal Auditor

• Lack of Funds and Tools

• Political Interference from the Accounting Officer to whom he reports

• Direct involvement in a financial transaction

The Role of the Audit Committee

• Based Upon the findings of an Audit, specific recommendations are made by the auditor

• The Accounting Officer then agrees to implement corrective measures to ensure that future difficulties are not repeated. This agreement should be reflected in an Protocol of Regularization

• The Audit Committee’s responsibility is to ensure that all of the corrective measures agreed to are indeed implemented right across the agency

Comparison between Anglophone and Francophone budget execution systems

1. Budget execution

2. Accounting, banking and fiscal reporting

3. Oversight: External audit and parliamentary control

1. Budget Execution: Key actors

Similarities • The spending ministries initiate spending

& places the order and receive the goods and services

Differences• Anglophone has more decentralised

management- spending ministries are mainly responsible for budget execution.

• In Francophone the central MoF plays an important role at each step of the spending process

– A priori commitment controls exist before expenditure is initiated

– MoF prepares the payment order

– All payment order received and checked in MoF before invoice is paid

2. Budget Execution: Key actors

Similarities The steps in the processes are almost the

same - from appropriations to payment

Differences Centralised/decentralised management

Role of Accounting officers have wide ranging powers while Gestionnaires de Credit have a limited role of mainly initiating the expenditure at the commitment stage

The Minister of Finance has a unique position in francophone systems ( compared to his colleague ministers who have virtually no responsibility for effective financial management)

2. Budget Execution: Expenditure Control

Similarities • Both systems have a system of

expenditure controls: In Anglophone countries expenditure controls are largely exercised by the Warrant System while the Francophone allocates the Credit Ouverts

• Experiences of expenditure arrears- but caused by different reasons

• Weak salary controls: Both have experienced the phenomenon of ‘ghost workers’ due to the lack of maintenance of , and/or integration with personnel records

Differences• Overdue unpaid invoices caused by AOs

ignoring ‘Cash budgeting’ or cash limits or expenditure in Anglophone countries. Where such limited are below the warrants which may be in line with budget appropriations. unpaid invoices

• In Francophone it happens MoF officials because seldom take into account cash availability. There are formal controls at each stage( commitment, payment order issuance, and payment) and compliance with budget appropriation is observed but cash management is poorly integrated into the treasury procedures

Budget Execution: Payment

• In Anglophone countries, payment is either centralised or decentralised.

• In Francophone , it would be inconceivable for payments to be made outside the Treasury.

2. Budget Execution: Internal Control & Internal Audit

• In Anglophone countries internal controls is semi-decentralised ( Internal Auditors in spending ministries may be employees of the MoF)

• In Francophone countries MoF have a strong system of centralised internal controls ( internal auditors –I’Inspection des finances - are generally attached to the MoF)( note Uganda has a similar Inspectorate Division in the MoF)

• In Francophone you may also get a higher-level agency with investigative powers and responsibilities broader than the Finance Inspectorates ( the closest equivalent is the Anti-Corruption Commissions ( eg in Kenya, Nigeria, Uganda)

3. …Accounting, Banking and Fiscal Reporting: Accounting Framework

Similarities

• Cash basis of accounting

• Weaknesses in accounting records that

often lack reconciliation with bank records

• Annual accounts not available within the

statutory deadlines

Differences

• Francophone countries have:– A more complex accounting

framework ( double entry have been used after the payment order stage)

– Accounting centralised in the MoF

– A Single Treasury Account ( with some exceptions)

• Anglophone Countries have;– Annual accounts prepared by line

ministries

– A multiplicity of government bank accounts ( some countries)

3. …Accounting, Banking and Fiscal Reporting: Accounting Framework

Similarities

• Increasing accounting systems are

being specified by law

Differences• In Francophone countries:

– (i) Accounting systems are typically formally specified by law or decrees( now also the case in Anglophone countries)

– (ii) Spending ministries are not responsible for preparing accounts ( they are centralised in MoF)

– (iii) Better information on commitments in the treasury because of the “double-entry” system that had been in place

• In Anglophone Countries:– (i) Accounting Regulations were

prepared by MoF, and hence could be modified more easily

– (ii) Spending Ministries are required to prepare accounts

– (iii) poor information on commitments in the treasury

3. …Accounting, Banking and Fiscal Reporting: Annual Accounts

Similarities

• Both have suffered from a common

problem of non-availability of annual

accounts (5-10 years delays were not

uncommon)

Differences

• In Anglophone

– The AOs are expected to prepare the main accounts (“the Appropriation Accounts”) and other statements

– Accounts closing procedure: accounts are generally closed on the final day of the fiscal year ( in practice with few days may be allowed)

• In Francophone

– Payment order may be made up to final day and then 2-3 months or even longer complementary period after y/e for authorisation

3. Accounting, Banking and Fiscal Reporting: In-year reporting

Similarities• In-year reporting may be incomplete in

both systems, but for different reconciliation difficulties

Differences• In Anglophone:

– Regular reporting by line ministries to the MoF is critical for preparing in-year reports( ministries Vote Books should be kept to date and reconciled with the Accountant General’s (AG) data)

• In Francophone: In-year reporting is centralised in MoF: – The upstream accounting ( expenditure

commitment and payment orders is the responsibility of the Budget Department

– The downstream accounting ( payments and revenue) are the responsibility of the Treasury

– The challenge is that the nomenclature of the budget and accounting may not be the same, so difficult to track expenditure of specific budgetary expenditure

3. Accounting, Banking and Fiscal Reporting: Banking arrangements

Similarities

• In principle TSA held at the Central Bank is used,

in practice a number of ‘special accounts’

outside the TSA are held (incl. donor accounts)

• Dedicated funds, each with separate bank

accounts are commonplace in both system ( off-

budget funds for oil revenues( for example in

Nigeria , Cameroon)

Differences

• In Anglophone decentralised payment systems are common and accounts are held in commercial banks ( eg 1,000 accounts in Zambia)

• In Francophone the Treasury ensures that funds are pooled for central, local government, subvented agencies, and public enterprises. So cash is managed more effciently

Relative performance of each system

• Is one superior?

– In principle the French-based system should result in better expenditure control ( because of the a priori controls)- something the warrant system in British based systems is designed to ensure

– Neither system is geared to obtain efficiency objectives of PEM ( and of performance)

– There seem to be other factors in play ( causing a generalised lack of financial discipline)

Cash Management and the Treasury Single Account (TSA)

Cash management: What it is not !!

• Not about controlling the expenditure:Modern cash management is not concerned with controlling expenditure authorizations so that the timing of cash disbursements matches the timing of cash receipts (Ian Leinert)

• Not the same as Budget Execution:Cash management is distinct from budget management or budget execution

• Not about paying your bills late: it destroy the credibility of the government and increases transactions cost for government in the long run

Definition of Cash Management

• The strategy and associated processes for managing cost-effectively the government’s

– short-term cash flows and

– cash balances

• both within government, and between government and the private sector

Objectives of cash management

• The overriding objective of cash management is to

ensure that the government is able to fund its

expenditures in a timely manner and meet its

obligations as they fall due

• Cost-effectiveness, risk reduction and efficiency are

also important.

Objectives of Cash Management

A better cash flow management in public sector

organisations can reduce the demand for taxable

resources by:

– Reducing administrative costs

– Reducing interest rate charges that they bear or

increasing the amount of interest earned

– Reducing stock levels

– Reducing procurement costs

• Supporting other financial policies

Objectives

It can also:

• Increase the reputation of the government for

efficiency by:

– Paying creditors at the appropriate time, and

– Collecting debts promptly and efficiently

• Supporting a credible budget process

• Reducing risks

Principles to be Established to Support Good Cash Management

• Budget setting procedure: budget ought to flow from management decisions about volumes of activity, efficiency and forecasts of prices

• Cash forecasting procedures: accuracy will depend on approved budget programmes

• Management Control system: good controls will ensure that budget variations are kept to the minimum

• Adoption of proper purchasing policies: procurement planning is useful

• Minimise stocks, debtors and prepaid expenses: clear policies in these areas needed

• Establish policies for collection of revenue, granting of credit or subsidy

The Advantages of Cash Management

• Increases certainty that payments will be made

• Reduces operational risk by not keeping too much cash

• Reduces need for borrowing

• Reduces idle balances

• Improves spending visibility and transparency

• Gives the government more flexibility in its borrowing

• Offsets flows in and out and reduces changes in liquidity

• Contributes to an efficient short term securities market

Key features of a cash forecasting framework

• Have a comprehensive framework that includes all inflows of government cash resources

• Align expenditure planning and actual cash spending by line ministries ( use of action plans/procurement plans in cash forecast)

• Provide incentives to budget institutions to supply realistic cash plans.

Components of the Cash flow Forecasts

1. A Budget Implementation Plan

2. Annual Cash Plan

3. Monthly Cash plan

4. In-month Forecast ( weekly or daily)

Components and Operational Outline

• A Budget Implementation Plan:

– Must be consistent with the budget

– Must be driven by the budget not by cash concerns

– Take into account the timing of payments and payment obligations arising from commitments over the fiscal year (schedule of disbursements from investment projects –lumpy)

– This plan should be compatible with the cash plan

– Should include revenue forecasts updated regularly by treasury and tax administration departments jointly

– Revenue forecasts should take into account fiscal and economic developments after budget preparation

– Non tax revenue forecast requires close collaboration between treasury and line agencies

Components and operational outline-2

• Annual Cash Plan

– Prepared in advance to reflect projected monthly cash inflows, outflows and borrowing requirements

– Should have quarterly updates for the entire fiscal year

– Should have monthly updates for the succeeding month

– Requires close coordination between treasury department, budget department and tax administration department

Monthly Cash Plan

• Should be derived from the budget implementation plan (informed by the work plans and procurement plans)

• Shows forecasts of financial flows before new borrowing

• Should be on a pure cash basis (even in accrual accounting systems)

• Requires good monitoring of both payments and obligations

• Preparation is a treasury task than budgeting task (coordination required)

In-Month Forecast: Purpose

• To determine the date of auctions, the date of transfers to agencies within an imprest account

• For other expenditures: need for appropriate recording of obligations and expenditures at the verification stage (including the date on which payments are due)

• Requirements may differ for centralised compared to decentralised systems

• Should be reviewed and updated every week or daily (some countries use weekly Treasury committee meetings) – caution not for day to day budget management or political priorities management

The Treasury Single Account (TSA)

What is the TSA?

• The TSA is a unified structure of government bank accounts to give a consolidated view of government cash resources.

• A fully-fledged TSA shares three essential features:– Government banking arrangements should be unified, to give

the Treasury oversight of government cash flows in and out of these accounts. A unified structure allows complete fungibilityof all cash resources.

– No other government agency operates bank accounts beyond oversight of the Treasury

– Consolidation of government cash resources should be comprehensive and include all government cash resources, both budgetary and extra-budgetary

• Sub-account structure may have cash or notional accounts (i.e. ZBA)

Why is it important?

• Allows the Treasury to minimize the volume of idle balances in the banking system, with consequent cost savings – Extra cash requirement has to be financed by borrowing, the cost of

which is usually much greater than the interest earned on any ‘excess’ cash.

• Helps the Treasury to plan and implement budget execution efficiently and transparently; less uncertainty about cash availability

• Facilitates effective reconciliation between the government accounting systems and cash flow statements

• Reduces transaction costs associated with budget execution – Makes it easier to monitor and reduce delays in remittance of

revenues by collecting banks, and also to process expenses without the use of intermediate accounts

TSA Works with Different Payments Systems

• Dispersal of payment responsibility tends to be associated with dispersal to the banking system

• Growing complexity and volume of transactions suggest that the dispersed model is likely to more robust in the longer term – but some countries centralise before decentralising

• Where transactional accounts are necessary, any end-of-the-day cash balances should be swept back into the TSA.

Central Bank

responsible for banking

operations

Commercial banks

responsible for banking

operations

Treasury responsible for

payment processing

Spending units responsible

for payment processing

TSA: Problems and Choices

• Balances of extra-budgetary funds should preferably be included in TSA– May be policy resistance – who controls the cash?– Ideally the fund’s account is closed, and cash absorbed

in TSA – Cash balances integrated in the TSA; but the EBF

retains a claim on the resources - ‘a permission to spend’

– Fall back: allow the EBFs to hold their cash but set up arrangements to allow EBF to ‘lend’ the cash to TSA as needed

• In principle apply similar arrangements to donors’ accounts to finance projects– Donors need to be reassured.

Accounting and Reporting

• The key issues are:

– The Financial Accounting framework is weak

– Management Accounting function not well developed to enable use of costing data to support management decisions

Accounting & Reporting stage

• Budget Execution transactions are recorded in the books to prepare accounts and other reports

• The question arises on what basis should the transactions be recorded?

• Cash Accounting versus Accrual Accounting:

– Cash-based accounting only recognizes expenditure when it is paid and income when it is received

– Accrual-based accounting requires that expenditure and liabilities are accounted for when goods and services are delivered, even if payments have not been made; and revenue and receivables are recorded when goods are sold, even if proceeds have not been received.

• There are many grounds for recording government expenditure transactions on an accrual basis and some OECD countries have now begun to do so.

Cash Basis versus Accrual: Usefulness of accrual accounting for government entities

• Shows full cost: Facilitate assessment of programme performance by showing full cost of programmes

• Shows financial Position: Facilitate assessment of financial position by showing all resources and obligations

• Accountability: Enhance the accountability of management for their performance

• Transparency: Act as a spur to better management performance due to increased transparency

• Decision Making: Provide a wider range of information needed for decision making

• Enhances use of resources: Enable more effective use to be made of a given level of resources

• Support identification of savings: Provide a more effective basis of decision about such matters as user charging, and identifying savings options to finance high priority objectives.

Capital Use ChargesType of Charges Examples of Possible use

Net Assets: Charging determined on the total assets controlled by agencies less liability under their control

Allows fair comparison between public and private sector providers

Gives agencies an appreciation of their cost of capital

Capital Flow: Charge is levied on funds committed to new capital expenditure, net of sales

Can be linked with appraisal of capital projects

Debt Assignment: debt is assigned to agencies based on the proportion of assets they control, and charge is applied to agencies’ proportion of the debt

Provides incentives to reduce debt

Debt Equity: assign debt and equity to agencies and charge agencies on their proportion of debt ,and in addition a capital charge to the residual government equity after deducting the debt allocated to them

Identifies the separate debt and equity elements of the assets base

Encourages focus on all assets and provides a full costing of outputs

Argument Against the Implementation of an Accrual Basis Accounting

• Dubious Relevance (Jack Diamond-2002)– Seems to entail decentralised budget management which is said to inherent

dangers– Complexity of accrual accounting can be used to hide and distort information(

creative accounting)– Limited administrative capacity will support the reforms implied to gain the

benefits– Accruals can only be considered as long term option

• High costs of AA: even Advanced middle-income countries find the costs and challenges of introducing AA too great

• The benefits of AA may be exaggerated: – the benefits may not be realised without adopting the fully fledged

performance budgeting system, based on a decentralised modern agency model of budget management

– The main benefits will be at the agency or department level, not at aggregate level

Implementation of IPSAS: Some issues to consider

• The introduction of the Cash Basis IPSAS is should be considered as an integral part of the introduction of accrual accounting. Cash basis IPSAS is one of the pre-conditions for the introduction of an accrual based accounting

• The technical part of introducing the Cash Basis IPSAS is not too difficult as often made up to be.

• The more difficult aspects come into play when the intentions of the authorities are to embark on reforms as part of the change process– To deliver the relevant information to stakeholders to support decision

making– To change behaviour

• Countries that do not have reliable cash based system should first concentrate on improving the existing systems and processes, before considering any move to accrual accounting.

Some of the Pre-requisites include:

• An adequate budget classification

• A COA or double-entry based general ledger system, and

• An adequate fiscal reporting, without having large unexplained differences between revenue and expenditure on the one hand, and financing data on the other”

Other pre-conditions include

• Political ownership

• Technical Capacity

• Systems

The GFG reported:

• Weak resolve to implement accounting standards: There has been several initiatives to adopt IPSAS or GAAP in Africa countries, but weak support by senior management for these processes and weak professional capacity in the public sector constrain their implementation in practice

• The research shows that bank reconciliations occur more regularly on average, but that the reconciliation and clearance of suspense accounts and advances lags behind, with many countries undertaking only an (often late) annual reconciliation (CABRI 2010). This potentially can leave significant resources out of the reporting net, with a negative impact on budget management and governance.

IFMIS

• Well-established accounting system IFMIS is a powerful tools for:

• Commitment control

• Expenditure Reporting

• However there have been several challenges:

• There have been several implementation failures at high cost

• Backlog of data/ or accounts

• In some countries the system often goes down- and the use of manual systems in parallel

• Line Ministries do not use it as intended- transactions introduced just before the payment stage, so commitment information may be incomplete

The GFG reported

• FMIS reforms are weak:

• Sometime reforms have not been appropriate to requirements, and not cost-effective and sustainable.

• There have also been political and bureaucratic obstacles

Thank You

• Questions ?