Description
conduct of his naval affairs was not to defend the province at all. No, it was to extract personal financial profit out of what was meant to be expended on the fleet
Public Financial
Management and
Corruption
Bill Dorotinsky
Shilpa Pradhan
May 2, 2006
2
Outline
? Introduction
? Definitions and Scope
? Patterns of Corruption and PFM
Systems
? Measuring Corruption
? Entry Points and Mitigating Measures
3
Rome 70 BCE
“[His] conduct of his naval affairs was not to defend the province at all. No, it
was to extract personal financial profit out of what was meant to be
expended on the fleet.”
“The power of your position…..was enormous…….Yet it never….crossed
your mind that these assets had not been placed in your hands … just to
make it possible for you to treat any and every man?s possessions as your
own personal loot….” *
Conscripted sailors could buy out their service requirements, and the
Governor simultaneously pocketed the pay and sustenance allowance for
the sailor.
From Governor’s trial on corruption charges
Example of:
Theft of public funds, bribery, abuse of office
* Cicero, „Against Verres?
4
Introduction
? Governments throughout history
have had a public financial
management (PFM) system
? And corruption has always been a
concern
? The development of PFM systems
over time have been largely due to
concerns over waste, fraud, and
abuse
5
Definitions
Diversion of public resources
for private (personal or other
non-public) gain, or abuse of
public authority and position
for private gain
Corruption is not necessarily
?Political leveraging
?Leaky Bucket
?Diversion of public resources from
intended to another public purpose
All phases of public resource
acquisition, safeguarding and
use
• revenue collection and
administration (tax, customs, and
non-tax revenue)
• cash management and banking
• debt issuance and management
• asset management (physical and
financial)
• budget preparation
• budget execution
• accounting and reporting
• internal control and audit
• procurement
• external audit and legislative
oversight.
Corruption
Public financial
management (PFM)
6
Basic PFM Functions
Resource
Acquisition
Resource
Safeguarding
Resource
Application
• taxes (cash, in-kind)
• non-tax revenue (fees,
asset sales)
• debt (bonds, loans)
• labor
• land
• Treasury
• National Bank
• Warehouse
• Holding site (e.g.
grainery)
• Investments
• Personnel
• Goods and Services
• Capital
• Debt Repayment
• Direct Transfers
• Tax Collection
• Customs
• Debt Management
• Draft Office, Ministry
Requisition Office
• Skimming Receipts
• Under Collection
• Write-offs of receivables
• Lending
• Abetting draft dodging
• Staff for personal use
• Under pricing assets
• Theft
• Lending
• Skimming interest
• Favoritism in fund
placement
• Unrecorded interest or
delayed transfer of
resources to Treasury
• Theft of assets
• Contract steering
• Fraudulent invoices
• Ghost workers
• Kick-backs
• Ghost beneficiaries
• Substandard goods
• Over pricing goods, services
F
u
n
c
t
i
o
n
I
s
s
u
e
s
C
o
r
r
u
p
t
i
o
n
A
g
e
n
t
s
• Treasury, MoF
• General Services
• Spending Ministries
• National Bank
• Land management
agency
• Treasury, MoF
• General Services
• Spending Ministries
• Civil Service Admin
• Public Works Admin
• Procurement Office
+
+
+
+
7
Resource
Safeguarding
Resource
Application
• Treasury
• National Bank
• Warehouse
• Holding site (e.g.
grainery)
• Investments
• Personnel
• Goods and Services
• Capital
• Debt Repayment
• Direct Transfers
• Theft
• Lending
• Skimming interest
• Favoritism in fund
placement
• Unrecorded interest or
delayed transfer of
resources to Treasury
• Theft of assets
• Contract steering
• Fraudulent invoices
• Ghost workers
• Kick-backs
• Ghost beneficiaries
• Substandard goods
• Over pricing goods, services
• Treasury
• General Services
• Spending Ministries
• National Bank
• Land management
agency
• Treasury
• General Services
• Spending Ministries
• Civil Service Admin
• Public Works Admin
• Procurement Office
Oversight and
Accountability
F
u
n
c
t
i
o
n
I
s
s
u
e
s
C
o
r
r
u
p
t
i
o
n
A
g
e
n
t
s
• Internal Control,
Management Control
• Internal Audit
• External Audit
• Accounting, Reporting
• Planning
• Bribery
• Favoritism
• Treasury
• Min Finance
• Min Planning
• Internal Auditor
• External Auditor
• Legislature
• Pres./PM-Cabinet
• Procurement Office
Basic PFM Functions (2)
8
Basic PFM Cycle
Budget
Execution
Accounting and
Reporting
Budget
Formulation
External Audit
and Oversight
-review of prior
year spending
-setting policies
and objectives for
new year
-planning future
spending
-drafting budget
document
-implementation
of budget
-managing
resources
-changing budget
or managing PFM
crises
-collecting
revenues, making
payments
In-year reporting; year-end reporting;
accounting and recording
External audit; legislative review;
civil society
9
There are many weeds in the
untended garden
? PFM system nature and quality will
largely determine the ease with which
public corruption can occur
• and also the risk and personal cost of
detection.
? PFM system conditions enable
corruption to flourish
? PFM systems where corruption can
flourish are characterized by high
informality and the absence of an
ethos of professionalism in the public
finance cadre
10
Better PFM systems have lower
perceived corruption
Corruption and Capacity
0
1
2
3
4
5
6
0 1 2 3 4 5 6
Capacity - CPIA - Quality of Budget and Financial
Management
F
r
e
e
d
o
m
f
r
o
m
C
o
r
r
u
p
t
i
o
n
(
T
I
-
C
P
I
I
n
d
e
x
)
11
PFM Characteristics Enabling Corruption
? absence of rules and procedures for routine or annual
processes (e.g. budget formulation, execution), or general
disregard for rules and procedures where they exist
? absence of records, record-keeping, for key transactions, or
inability to access the information in a timely way for
management control or audit
? highly inaccurate, untimely, non-user friendly reporting,
recording, or absence of procedures for testing accuracy
? absence of controls on spending, goods, stores and
equipment, or absence segmentation of key duties/roles
in expenditure chain (the latter increases the opportunity for
individuals to engage in theft or corrupt practices, while
segmentation requires collusion and raises risk of detection and
prevention)
? excessively complex or rigid procedures that impede
routine program operations and create incentives for special
spending procedures or breaking rules
? absence of sound, time-bound, explicit plans for using
funds (budgets, necessary for management control and
accountability)
? excess fragmentation of funds, procedures for
accounting, reporting (making information consolidation,
reporting and management control difficult)
? absence of staff or qualified public finance staff, or
adequate training, no standardization of PFM positions across
government (no cadre of PFM staff or professional ethos,
inadequately compensated staff)
12
PFM System Principles Countering
Corruption
? Comprehensiveness
• - include all revenue and expenditure, all agencies, in common
treasury, reporting, budgeting systems
? Accuracy
• record actual transactions and flows, report accurately
? Annuality
• funding allocations, budgets, and reports should cover a
defined (stated) period of time (e.g. one year budget, multi-
year forecasts) (with explicit accounting standards)
? Authoritativeness
• only spend as authorized by law (budget and finance laws,
statutes authorizing ministries and programs), and according
to established procedures
? Transparency
• information on spending is public, timely, understandable;
rules are explicit, and publicly available
13
Measuring Corruption Potential
? Directly measuring corruption is not
feasible
? no direct measures of bribery, asset theft, contract
steering, cash theft, etc.
? External audit capture only some corrupt practices
? PFM system quality can be measured
and monitored
? There is now an internationally-accepted set of
actionable PFM performance indicators (PEFA)
? See www.pefa.org
? PFM system quality assessment
measures corruption potential
14
PFM PEFA Indicators
Budget
Execution
Accounting and
Reporting
Budget
Formulation
External Audit
and Oversight
1. Aggregate expenditure out-turn
2. Composition of expenditure out-turn
3. Aggregate revenue out-turn
4. payment arrears
5. Classification of the budget
11. Orderliness in annual
budget process
12. Multi-year perspective
13. Transparency of taxpayer obligations
and liabilities
14. Effectiveness of taxpayer registration
and assessment
15. Effectiveness of tax collection
16. Predictability of funds for commitment
17. Recording/management of cash, debt
and guarantees
18. Effectiveness of payroll controls
19. Competition, value for money and
controls in procurement
20. Effectiveness of internal controls
21. Effectiveness of internal audit
22. Accounts reconciliation
23. Resources received by
service delivery units
24. Quality and timeliness of
in-year budget reports
25. Quality and timeliness of
annual financial
statements
26. External audit
27. Legislative scrutiny
of budget
28. Legislative scrutiny
of external audit
reports
6. Comprehensiveness of information
7. unreported government operations
8. Transparency of inter-governmental fiscal relations
9. Oversight of aggregate fiscal risk
10. Public access to key fiscal information
Cross-cutting Indicators
15
Over-all PFM System Features
Budget
Execution
Accounting and
Reporting
Budget
Formulation
External Audit
and Oversight
PFM Indicators and Corruption
Indicator Corruption Relevance
PI-
5
Classification
of the budget
Enabling factor through transparency of
government spending. A good budget
classification enables good information on
government activities for costing and budgeting,
for planning, for monitoring and control of
spending, and for auditing and accountability.
PI-
6
Comprehensi
veness of
information
included in
budget
documentati
on
The more information included in budget
documents (greater transparency), the greater
the ability of stakeholders to evaluate budget
credibility, policies and intentions, and hold
Government to account ex poste.
PI-
7
Extent of
unreported
government
operations
A highly relevant issue for enabling corruption is
the absence of reports on spending for some
types of operations, frequently a characteristic of
extrabudgetary funds, state-owned enterprises,
and autonomous agencies. Related to this is the
use of different accounting and auditing systems
that make consolidation of accounts difficult, and
opens reporting to errors.
Honduras: 14 % of
spending was recorded
ex ante and ex poste as
‘assignaciones globales’
16
Budget Execution - Expenditure
Budget
Execution
Accounting and
Reporting
Budget
Formulation
External Audit
and Oversight
PFM Indicators and Corruption
Indicator Corruption Relevance
PI-
16
Predictability
in the
availability of
funds for
commitment
of
expenditures
Predictable flow of funds to spending units is critical for plan
fulfillment and accountability, and unpredictable funds flow leads
to arrears and opportunities for discretionary decision-making and
corruption in payment of government liabilities. Cash flows should
be forecasted and monitored, and variations from predictions
understood. Information needs to flow regularly to spending units
on fund availability for program operations and fulfillment of
plans.
PI-
17
Recording
and
manageme
nt of cash
balances,
debt and
guarantees
Absent records of debt incurred, there is no way of monitoring
total debt and any irregular debt issued outside formal
procedures, or debt improperly contracted or contracted at
excessive rates. A formal system, with authorized officials, for
contracting debt and issuance of guarantees is critical for
accountability and minimizing opportunities for corruption or
favoritism. Consolidation of cash balances is important for efficient
cash management, and also safeguarding cash from improper
transfer, theft, or lending. A single treasury account simplifies
recording of payments and monitoring for irregularities, enabling
better management control and accountability.
PI-
18
Effectivene
ss of
payroll
controls
Absent payroll controls, funds can easily flow to fictitious
employees, and nepotism and favoritism can be rampant.
Important elements include the degree of integration and
reconciliation between personnel and payroll records to detect
anomalies, timeliness of changes to personnel records and payroll
records, effective internal controls in personnel and payroll record
management, and payroll audits to identify control weaknesses
and ghost workers.
Loan guarantees were
non-transparent in
Macedonia, issued by the
Minster of Finance.
Macedonia changed its
budget law, requiring all
guarantees to be
approved by Cabinet and
Parliament. Requests for
guarantees stopped.
17
A Framework for assessing
reform strategies
Country Capacity and Government Willingness
0.00
1.00
2.00
3.00
4.00
0 1 2 3 4 5 6 7
Government Willingness (CPIA)
C
o
u
n
t
r
y
C
a
p
a
c
i
t
y
(
K
K
Z
)
Outliers
18
Key Challenges
Type of
States
Key Challenges
Fragile States
(Guinea-Bissau,
Haiti, Equatorial
Guinea)
? Low political leadership and managerial commitment
to anti-corruption reforms
? Absence of rules and regulations (authoritativeness)
governing the budget process
? Poor quality fiscal information
? Civil Society is not engaged in the budget process
? Absence of internal and external oversight
Reforming
States
(Ghana,
Armenia)
? Improving the accuracy of fiscal information
? Disregard for rules governing the budget process
? Limited transparency of budgetary information
? Ineffective internal and external audits
? Sustaining political commitment to reform
Capable States
(Brazil, South
Africa)
? Increase performance orientation in public spending,
increase coordination and integration between
central institutions
? Strengthening transparency, external audit and
external scrutiny of public spending
? Strengthening accountability and enforcement
19
High Level Focus & Sequencing of
Interventions
Fragile States
? Build internal demand for information
?Develop basic PFM systems
Reforming
States
?Refine basic PFM systems
?Progressively introduce complex PFM
System reforms
?Strengthen commitment for AC reforms
Capable
States
?Implement complex PFM systems
reforms with a performance orientation
?Strengthen transparency, accountability
and enforcement
?Sustain commitment for reforms
20
Budget
Execution
Accounting and
Reporting
Budget
Formulation
External Audit
and Oversight
Fragile States
Assessing Detail Interventions
Key Issues that increase the risk of corruption in budget
formulation:
?Adhoc budget formulation and delays in budget formulation,
? Limited or no involvement of key actors in budget formulation
?Incomplete budget classification, budget classification system does
not facilitate a direct link between programs and executing agencies
and does not conform to international standards
?Budget not comprehensive and budget documents are incomplete
Suggested mitigating measures:
?Increase internal demand for information
?Strengthen the ability of the PFM system to capture the budget information
?Authoritativeness: Review the legislative framework for budget formulation to establish a
timetable, with clear mandates for key actors (Political leadership commitment is key)
?Comprehensiveness:
?Annual budget document to include all sources of revenues, expenditures
?Strengthen budget classification: economic, administrative and functional
21
Fragile States
Assessing Detail Interventions
Budget
Execution
Budget
Formulation
External Audit
and Oversight
Accounting
& Reporting
Key Issues that increase the risk of
corruption:
?Irregular reconciliation of Bank accounts
with government accounting data, existence
of multiple accounts or the Single Treasury
Account is not respected
? Accounting books remain open for a long
time after year end
?Fiscal reports not being produced in a
timely manner, are inconsistent and
incomplete
Key Issues that increase the risk of
corruption:
External audits weak, non-existent or
politically captured
Key Issues that increase the risk
of corruption:
?Cash management on a day to day basis
?Absence of clear rules and controls
during budget execution
?Absence of payroll control
?Absence of internal audits
Authoritativeness in budget
execution
Establish budget execution
procedures
Regular reconciliation of Government
accounts with bank data
Regularity, timeliness of reports
Establish external audit
capacity
22
Reforming States:
Assessing Detail Interventions
Budget formulation
? Budget regaining its role as a primary resource
allocation mechanism, budget increasingly
realistic with actual expenditures closer to
budgeted …… but budget still not a policy
instrument
? Comprehensiveness of the annual budget
document increasing
? Extent of unreported government operations is
still high
? Budget classification may not be along
recommended economic, administrative and
functional (including sub-functional lines)
? Public Access to key budget information is
limited
23
Reforming States:
Assessing Detail Interventions
Budget
Execution
Accounting and
Reporting
Budget
Formulation
External Audit
and Oversight
Key Issues increasing the risk of corruption in budget
execution:
?Weak cash planning and management (planning not based on
realistic budgetary requirements of line ministries, no systematic
review of cash forecasts) affecting predictability of funds for
commitment
?Weak internal controls during budget execution (controls on
commitments may be poor or disregarded, weak controls on
payments)
?Weak quality of internal audits not conforming to international
standards
?Weak coordination between key actors during execution
Suggested mitigating measures:
?Recording and management of cash balances, debt and guarantees
?Strengthen internal controls that manage risks, are comprehensive and are widely
disseminated and understood
?Strengthen internal audit process
24
Reforming States:
Assessing Detail Interventions
Budget
Execution
Accounting and
Reporting
Budget
Formulation
External Audit
and Oversight
Key issues increasing the risk of corruption (Accounting
and Reporting):
?Accounting procedures are not uniformly observed during record
keeping
?Weak internal accountability for not conforming with accounting
procedures
?Reconciliation is not regular and comprehensive
?Inaccurate and inconsistent in-year budget reports
?Inaccurate and inconsistent annual statement
Suggested mitigating measures:
?Streamline, disseminate and train staff on accounting principles
?Incremental implementation of FMIS
?Regularity in reconciliation of Bank accounts with government accounting books
?Regularity and reconciliation of suspense accounts and advances
?Consolidated annual statements are prepared which include full information on revenues,
expenditures and financial assets and liabilities
25
Capable States:
Assessing Detail Interventions
Budget Formulation
? Generally high capacity of PFM systems and reliable tracking of
public expenditures, well established and respected legal
framework for the budget process, budget fairly
comprehensive, integrated budgeting
Budget Execution
? Fairly high adherence to well-developed Internal controls, good
cash planning and management, internal audits functioning but
may be limited to financial and compliance audits.
Accounting and Reporting
? Accounting standards adhere to established standards, timely
accounts reconciliation, regular and accurate fiscal reports
produced and made available to all key internal actors, and
may be available to civil society
There is room for improvement in the basic PFM
systems and processes…..
26
Capable States:
Assessing Detail Interventions
Budget
Execution
Accounting and
Reporting
Budget
Formulation
External Audit
and Oversight
Key issues increasing the risk of corruption (External
Audit, Oversight and Accountability):
?External audit institutions are not independent and do not have clear
mandate
?Scope and coverage of external audit is limited
?Audit reports not submitted to the parliament
?Ineffective follow up of audit recommendations
?Civil society engagement in budget formulation but not in audits
Suggested mitigating measures:
?Authoritativeness: Legislative mandates for independent external audit institutions with clear
mandates, coverage and scope
?Develop clear and timely follow up procedures
?Timely submission of audit reports to the parliament
27
Back to the Basics…..
Mitigating the risk of corruption in public expenditures, is as
much about strengthening technical capacity of PEM
systems as about changing institutions, both formal and
informal, within which the system operates.
Improvements to PEM system performance occur in incremental
steps with the fundamental elements of expenditure management
strengthened before more complex reforms can be undertaken
Sustaining reforms requires (i) commitment from stakeholders in
the budgetary process, in particular the implementers of the
budget, and (ii) capacity of key budgetary departments.
Reforming the PFM systems can be a large and complex
undertaking which requires strengthening the interlinkages
between the different elements of the system and the principles
underlying the PEM systems.
28
Q & A
doc_822684083.ppt
conduct of his naval affairs was not to defend the province at all. No, it was to extract personal financial profit out of what was meant to be expended on the fleet
Public Financial
Management and
Corruption
Bill Dorotinsky
Shilpa Pradhan
May 2, 2006
2
Outline
? Introduction
? Definitions and Scope
? Patterns of Corruption and PFM
Systems
? Measuring Corruption
? Entry Points and Mitigating Measures
3
Rome 70 BCE
“[His] conduct of his naval affairs was not to defend the province at all. No, it
was to extract personal financial profit out of what was meant to be
expended on the fleet.”
“The power of your position…..was enormous…….Yet it never….crossed
your mind that these assets had not been placed in your hands … just to
make it possible for you to treat any and every man?s possessions as your
own personal loot….” *
Conscripted sailors could buy out their service requirements, and the
Governor simultaneously pocketed the pay and sustenance allowance for
the sailor.
From Governor’s trial on corruption charges
Example of:
Theft of public funds, bribery, abuse of office
* Cicero, „Against Verres?
4
Introduction
? Governments throughout history
have had a public financial
management (PFM) system
? And corruption has always been a
concern
? The development of PFM systems
over time have been largely due to
concerns over waste, fraud, and
abuse
5
Definitions
Diversion of public resources
for private (personal or other
non-public) gain, or abuse of
public authority and position
for private gain
Corruption is not necessarily
?Political leveraging
?Leaky Bucket
?Diversion of public resources from
intended to another public purpose
All phases of public resource
acquisition, safeguarding and
use
• revenue collection and
administration (tax, customs, and
non-tax revenue)
• cash management and banking
• debt issuance and management
• asset management (physical and
financial)
• budget preparation
• budget execution
• accounting and reporting
• internal control and audit
• procurement
• external audit and legislative
oversight.
Corruption
Public financial
management (PFM)
6
Basic PFM Functions
Resource
Acquisition
Resource
Safeguarding
Resource
Application
• taxes (cash, in-kind)
• non-tax revenue (fees,
asset sales)
• debt (bonds, loans)
• labor
• land
• Treasury
• National Bank
• Warehouse
• Holding site (e.g.
grainery)
• Investments
• Personnel
• Goods and Services
• Capital
• Debt Repayment
• Direct Transfers
• Tax Collection
• Customs
• Debt Management
• Draft Office, Ministry
Requisition Office
• Skimming Receipts
• Under Collection
• Write-offs of receivables
• Lending
• Abetting draft dodging
• Staff for personal use
• Under pricing assets
• Theft
• Lending
• Skimming interest
• Favoritism in fund
placement
• Unrecorded interest or
delayed transfer of
resources to Treasury
• Theft of assets
• Contract steering
• Fraudulent invoices
• Ghost workers
• Kick-backs
• Ghost beneficiaries
• Substandard goods
• Over pricing goods, services
F
u
n
c
t
i
o
n
I
s
s
u
e
s
C
o
r
r
u
p
t
i
o
n
A
g
e
n
t
s
• Treasury, MoF
• General Services
• Spending Ministries
• National Bank
• Land management
agency
• Treasury, MoF
• General Services
• Spending Ministries
• Civil Service Admin
• Public Works Admin
• Procurement Office
+
+
+
+
7
Resource
Safeguarding
Resource
Application
• Treasury
• National Bank
• Warehouse
• Holding site (e.g.
grainery)
• Investments
• Personnel
• Goods and Services
• Capital
• Debt Repayment
• Direct Transfers
• Theft
• Lending
• Skimming interest
• Favoritism in fund
placement
• Unrecorded interest or
delayed transfer of
resources to Treasury
• Theft of assets
• Contract steering
• Fraudulent invoices
• Ghost workers
• Kick-backs
• Ghost beneficiaries
• Substandard goods
• Over pricing goods, services
• Treasury
• General Services
• Spending Ministries
• National Bank
• Land management
agency
• Treasury
• General Services
• Spending Ministries
• Civil Service Admin
• Public Works Admin
• Procurement Office
Oversight and
Accountability
F
u
n
c
t
i
o
n
I
s
s
u
e
s
C
o
r
r
u
p
t
i
o
n
A
g
e
n
t
s
• Internal Control,
Management Control
• Internal Audit
• External Audit
• Accounting, Reporting
• Planning
• Bribery
• Favoritism
• Treasury
• Min Finance
• Min Planning
• Internal Auditor
• External Auditor
• Legislature
• Pres./PM-Cabinet
• Procurement Office
Basic PFM Functions (2)
8
Basic PFM Cycle
Budget
Execution
Accounting and
Reporting
Budget
Formulation
External Audit
and Oversight
-review of prior
year spending
-setting policies
and objectives for
new year
-planning future
spending
-drafting budget
document
-implementation
of budget
-managing
resources
-changing budget
or managing PFM
crises
-collecting
revenues, making
payments
In-year reporting; year-end reporting;
accounting and recording
External audit; legislative review;
civil society
9
There are many weeds in the
untended garden
? PFM system nature and quality will
largely determine the ease with which
public corruption can occur
• and also the risk and personal cost of
detection.
? PFM system conditions enable
corruption to flourish
? PFM systems where corruption can
flourish are characterized by high
informality and the absence of an
ethos of professionalism in the public
finance cadre
10
Better PFM systems have lower
perceived corruption
Corruption and Capacity
0
1
2
3
4
5
6
0 1 2 3 4 5 6
Capacity - CPIA - Quality of Budget and Financial
Management
F
r
e
e
d
o
m
f
r
o
m
C
o
r
r
u
p
t
i
o
n
(
T
I
-
C
P
I
I
n
d
e
x
)
11
PFM Characteristics Enabling Corruption
? absence of rules and procedures for routine or annual
processes (e.g. budget formulation, execution), or general
disregard for rules and procedures where they exist
? absence of records, record-keeping, for key transactions, or
inability to access the information in a timely way for
management control or audit
? highly inaccurate, untimely, non-user friendly reporting,
recording, or absence of procedures for testing accuracy
? absence of controls on spending, goods, stores and
equipment, or absence segmentation of key duties/roles
in expenditure chain (the latter increases the opportunity for
individuals to engage in theft or corrupt practices, while
segmentation requires collusion and raises risk of detection and
prevention)
? excessively complex or rigid procedures that impede
routine program operations and create incentives for special
spending procedures or breaking rules
? absence of sound, time-bound, explicit plans for using
funds (budgets, necessary for management control and
accountability)
? excess fragmentation of funds, procedures for
accounting, reporting (making information consolidation,
reporting and management control difficult)
? absence of staff or qualified public finance staff, or
adequate training, no standardization of PFM positions across
government (no cadre of PFM staff or professional ethos,
inadequately compensated staff)
12
PFM System Principles Countering
Corruption
? Comprehensiveness
• - include all revenue and expenditure, all agencies, in common
treasury, reporting, budgeting systems
? Accuracy
• record actual transactions and flows, report accurately
? Annuality
• funding allocations, budgets, and reports should cover a
defined (stated) period of time (e.g. one year budget, multi-
year forecasts) (with explicit accounting standards)
? Authoritativeness
• only spend as authorized by law (budget and finance laws,
statutes authorizing ministries and programs), and according
to established procedures
? Transparency
• information on spending is public, timely, understandable;
rules are explicit, and publicly available
13
Measuring Corruption Potential
? Directly measuring corruption is not
feasible
? no direct measures of bribery, asset theft, contract
steering, cash theft, etc.
? External audit capture only some corrupt practices
? PFM system quality can be measured
and monitored
? There is now an internationally-accepted set of
actionable PFM performance indicators (PEFA)
? See www.pefa.org
? PFM system quality assessment
measures corruption potential
14
PFM PEFA Indicators
Budget
Execution
Accounting and
Reporting
Budget
Formulation
External Audit
and Oversight
1. Aggregate expenditure out-turn
2. Composition of expenditure out-turn
3. Aggregate revenue out-turn
4. payment arrears
5. Classification of the budget
11. Orderliness in annual
budget process
12. Multi-year perspective
13. Transparency of taxpayer obligations
and liabilities
14. Effectiveness of taxpayer registration
and assessment
15. Effectiveness of tax collection
16. Predictability of funds for commitment
17. Recording/management of cash, debt
and guarantees
18. Effectiveness of payroll controls
19. Competition, value for money and
controls in procurement
20. Effectiveness of internal controls
21. Effectiveness of internal audit
22. Accounts reconciliation
23. Resources received by
service delivery units
24. Quality and timeliness of
in-year budget reports
25. Quality and timeliness of
annual financial
statements
26. External audit
27. Legislative scrutiny
of budget
28. Legislative scrutiny
of external audit
reports
6. Comprehensiveness of information
7. unreported government operations
8. Transparency of inter-governmental fiscal relations
9. Oversight of aggregate fiscal risk
10. Public access to key fiscal information
Cross-cutting Indicators
15
Over-all PFM System Features
Budget
Execution
Accounting and
Reporting
Budget
Formulation
External Audit
and Oversight
PFM Indicators and Corruption
Indicator Corruption Relevance
PI-
5
Classification
of the budget
Enabling factor through transparency of
government spending. A good budget
classification enables good information on
government activities for costing and budgeting,
for planning, for monitoring and control of
spending, and for auditing and accountability.
PI-
6
Comprehensi
veness of
information
included in
budget
documentati
on
The more information included in budget
documents (greater transparency), the greater
the ability of stakeholders to evaluate budget
credibility, policies and intentions, and hold
Government to account ex poste.
PI-
7
Extent of
unreported
government
operations
A highly relevant issue for enabling corruption is
the absence of reports on spending for some
types of operations, frequently a characteristic of
extrabudgetary funds, state-owned enterprises,
and autonomous agencies. Related to this is the
use of different accounting and auditing systems
that make consolidation of accounts difficult, and
opens reporting to errors.
Honduras: 14 % of
spending was recorded
ex ante and ex poste as
‘assignaciones globales’
16
Budget Execution - Expenditure
Budget
Execution
Accounting and
Reporting
Budget
Formulation
External Audit
and Oversight
PFM Indicators and Corruption
Indicator Corruption Relevance
PI-
16
Predictability
in the
availability of
funds for
commitment
of
expenditures
Predictable flow of funds to spending units is critical for plan
fulfillment and accountability, and unpredictable funds flow leads
to arrears and opportunities for discretionary decision-making and
corruption in payment of government liabilities. Cash flows should
be forecasted and monitored, and variations from predictions
understood. Information needs to flow regularly to spending units
on fund availability for program operations and fulfillment of
plans.
PI-
17
Recording
and
manageme
nt of cash
balances,
debt and
guarantees
Absent records of debt incurred, there is no way of monitoring
total debt and any irregular debt issued outside formal
procedures, or debt improperly contracted or contracted at
excessive rates. A formal system, with authorized officials, for
contracting debt and issuance of guarantees is critical for
accountability and minimizing opportunities for corruption or
favoritism. Consolidation of cash balances is important for efficient
cash management, and also safeguarding cash from improper
transfer, theft, or lending. A single treasury account simplifies
recording of payments and monitoring for irregularities, enabling
better management control and accountability.
PI-
18
Effectivene
ss of
payroll
controls
Absent payroll controls, funds can easily flow to fictitious
employees, and nepotism and favoritism can be rampant.
Important elements include the degree of integration and
reconciliation between personnel and payroll records to detect
anomalies, timeliness of changes to personnel records and payroll
records, effective internal controls in personnel and payroll record
management, and payroll audits to identify control weaknesses
and ghost workers.
Loan guarantees were
non-transparent in
Macedonia, issued by the
Minster of Finance.
Macedonia changed its
budget law, requiring all
guarantees to be
approved by Cabinet and
Parliament. Requests for
guarantees stopped.
17
A Framework for assessing
reform strategies
Country Capacity and Government Willingness
0.00
1.00
2.00
3.00
4.00
0 1 2 3 4 5 6 7
Government Willingness (CPIA)
C
o
u
n
t
r
y
C
a
p
a
c
i
t
y
(
K
K
Z
)
Outliers
18
Key Challenges
Type of
States
Key Challenges
Fragile States
(Guinea-Bissau,
Haiti, Equatorial
Guinea)
? Low political leadership and managerial commitment
to anti-corruption reforms
? Absence of rules and regulations (authoritativeness)
governing the budget process
? Poor quality fiscal information
? Civil Society is not engaged in the budget process
? Absence of internal and external oversight
Reforming
States
(Ghana,
Armenia)
? Improving the accuracy of fiscal information
? Disregard for rules governing the budget process
? Limited transparency of budgetary information
? Ineffective internal and external audits
? Sustaining political commitment to reform
Capable States
(Brazil, South
Africa)
? Increase performance orientation in public spending,
increase coordination and integration between
central institutions
? Strengthening transparency, external audit and
external scrutiny of public spending
? Strengthening accountability and enforcement
19
High Level Focus & Sequencing of
Interventions
Fragile States
? Build internal demand for information
?Develop basic PFM systems
Reforming
States
?Refine basic PFM systems
?Progressively introduce complex PFM
System reforms
?Strengthen commitment for AC reforms
Capable
States
?Implement complex PFM systems
reforms with a performance orientation
?Strengthen transparency, accountability
and enforcement
?Sustain commitment for reforms
20
Budget
Execution
Accounting and
Reporting
Budget
Formulation
External Audit
and Oversight
Fragile States
Assessing Detail Interventions
Key Issues that increase the risk of corruption in budget
formulation:
?Adhoc budget formulation and delays in budget formulation,
? Limited or no involvement of key actors in budget formulation
?Incomplete budget classification, budget classification system does
not facilitate a direct link between programs and executing agencies
and does not conform to international standards
?Budget not comprehensive and budget documents are incomplete
Suggested mitigating measures:
?Increase internal demand for information
?Strengthen the ability of the PFM system to capture the budget information
?Authoritativeness: Review the legislative framework for budget formulation to establish a
timetable, with clear mandates for key actors (Political leadership commitment is key)
?Comprehensiveness:
?Annual budget document to include all sources of revenues, expenditures
?Strengthen budget classification: economic, administrative and functional
21
Fragile States
Assessing Detail Interventions
Budget
Execution
Budget
Formulation
External Audit
and Oversight
Accounting
& Reporting
Key Issues that increase the risk of
corruption:
?Irregular reconciliation of Bank accounts
with government accounting data, existence
of multiple accounts or the Single Treasury
Account is not respected
? Accounting books remain open for a long
time after year end
?Fiscal reports not being produced in a
timely manner, are inconsistent and
incomplete
Key Issues that increase the risk of
corruption:
External audits weak, non-existent or
politically captured
Key Issues that increase the risk
of corruption:
?Cash management on a day to day basis
?Absence of clear rules and controls
during budget execution
?Absence of payroll control
?Absence of internal audits
Authoritativeness in budget
execution
Establish budget execution
procedures
Regular reconciliation of Government
accounts with bank data
Regularity, timeliness of reports
Establish external audit
capacity
22
Reforming States:
Assessing Detail Interventions
Budget formulation
? Budget regaining its role as a primary resource
allocation mechanism, budget increasingly
realistic with actual expenditures closer to
budgeted …… but budget still not a policy
instrument
? Comprehensiveness of the annual budget
document increasing
? Extent of unreported government operations is
still high
? Budget classification may not be along
recommended economic, administrative and
functional (including sub-functional lines)
? Public Access to key budget information is
limited
23
Reforming States:
Assessing Detail Interventions
Budget
Execution
Accounting and
Reporting
Budget
Formulation
External Audit
and Oversight
Key Issues increasing the risk of corruption in budget
execution:
?Weak cash planning and management (planning not based on
realistic budgetary requirements of line ministries, no systematic
review of cash forecasts) affecting predictability of funds for
commitment
?Weak internal controls during budget execution (controls on
commitments may be poor or disregarded, weak controls on
payments)
?Weak quality of internal audits not conforming to international
standards
?Weak coordination between key actors during execution
Suggested mitigating measures:
?Recording and management of cash balances, debt and guarantees
?Strengthen internal controls that manage risks, are comprehensive and are widely
disseminated and understood
?Strengthen internal audit process
24
Reforming States:
Assessing Detail Interventions
Budget
Execution
Accounting and
Reporting
Budget
Formulation
External Audit
and Oversight
Key issues increasing the risk of corruption (Accounting
and Reporting):
?Accounting procedures are not uniformly observed during record
keeping
?Weak internal accountability for not conforming with accounting
procedures
?Reconciliation is not regular and comprehensive
?Inaccurate and inconsistent in-year budget reports
?Inaccurate and inconsistent annual statement
Suggested mitigating measures:
?Streamline, disseminate and train staff on accounting principles
?Incremental implementation of FMIS
?Regularity in reconciliation of Bank accounts with government accounting books
?Regularity and reconciliation of suspense accounts and advances
?Consolidated annual statements are prepared which include full information on revenues,
expenditures and financial assets and liabilities
25
Capable States:
Assessing Detail Interventions
Budget Formulation
? Generally high capacity of PFM systems and reliable tracking of
public expenditures, well established and respected legal
framework for the budget process, budget fairly
comprehensive, integrated budgeting
Budget Execution
? Fairly high adherence to well-developed Internal controls, good
cash planning and management, internal audits functioning but
may be limited to financial and compliance audits.
Accounting and Reporting
? Accounting standards adhere to established standards, timely
accounts reconciliation, regular and accurate fiscal reports
produced and made available to all key internal actors, and
may be available to civil society
There is room for improvement in the basic PFM
systems and processes…..
26
Capable States:
Assessing Detail Interventions
Budget
Execution
Accounting and
Reporting
Budget
Formulation
External Audit
and Oversight
Key issues increasing the risk of corruption (External
Audit, Oversight and Accountability):
?External audit institutions are not independent and do not have clear
mandate
?Scope and coverage of external audit is limited
?Audit reports not submitted to the parliament
?Ineffective follow up of audit recommendations
?Civil society engagement in budget formulation but not in audits
Suggested mitigating measures:
?Authoritativeness: Legislative mandates for independent external audit institutions with clear
mandates, coverage and scope
?Develop clear and timely follow up procedures
?Timely submission of audit reports to the parliament
27
Back to the Basics…..
Mitigating the risk of corruption in public expenditures, is as
much about strengthening technical capacity of PEM
systems as about changing institutions, both formal and
informal, within which the system operates.
Improvements to PEM system performance occur in incremental
steps with the fundamental elements of expenditure management
strengthened before more complex reforms can be undertaken
Sustaining reforms requires (i) commitment from stakeholders in
the budgetary process, in particular the implementers of the
budget, and (ii) capacity of key budgetary departments.
Reforming the PFM systems can be a large and complex
undertaking which requires strengthening the interlinkages
between the different elements of the system and the principles
underlying the PEM systems.
28
Q & A
doc_822684083.ppt