Public Financial Management and Corruption Bill Dorotinsky Shilpa Pradhan May 2, 2006
Outline n n n Introduction Definitions and Scope Patterns of Corruption and PFM Systems Measuring Corruption Entry Points and Mitigating Measures 2
![Rome 70 BCE From Governor’s trial on corruption charges “[His] conduct of his naval](https://present5.com/presentation/148a1b0b07ff2f80da31075680d11c4f/image-3.jpg "Rome 70 BCE From Governor’s trial on corruption charges “[His] conduct of his naval")
Rome 70 BCE From Governor’s trial on corruption charges “[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. Example of: Theft of public funds, bribery, abuse of office * Cicero, ‘Against Verres’ 3
Introduction n 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 4
Definitions Corruption 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 n. Political leveraging n. Leaky Bucket n. Diversion of public resources from intended to another public purpose Public financial management (PFM) 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. 5
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 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 • 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 + • Treasury, Mo. F • General Services • Spending Ministries • Civil Service Admin • Public Works Admin • Procurement Office + • Tax Collection • Customs • Debt Management • Draft Office, Ministry Requisition Office • Treasury, Mo. F • General Services • Spending Ministries • National Bank • Land management agency + 6
F u n c t i o n Basic PFM Functions (2) Resource Safeguarding Resource Application I s s u e s • Treasury • National Bank • Warehouse • Holding site (e. g. grainery) • Investments • Personnel • Goods and Services • Capital • Debt Repayment • Direct Transfers C o r r u p t i o n • 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 A g e n t s • 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 • 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 7
Basic PFM Cycle -review of prior year spending -setting policies and objectives for new year -planning future spending -drafting budget document Budget Formulation Budget Execution External Audit and Oversight -implementation of budget -managing resources -changing budget or managing PFM crises -collecting revenues, making payments Accounting and Reporting External audit; legislative review; civil society In-year reporting; year-end reporting; accounting and recording 8
There are many weeds in the untended garden n 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. n n 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 9
Better PFM systems have lower perceived corruption 10
PFM Characteristics Enabling Corruption n n n n 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) 11 absence of staff or qualified public finance staff, or adequate training, no standardization of PFM positions across
PFM System Principles Countering Corruption n Comprehensiveness • - include all revenue and expenditure, all agencies, in common treasury, reporting, budgeting systems n Accuracy • record actual transactions and flows, report accurately n Annuality • funding allocations, budgets, and reports should cover a defined (stated) period of time (e. g. one year budget, multiyear forecasts) (with explicit accounting standards) n Authoritativeness • only spend as authorized by law (budget and finance laws, statutes authorizing ministries and programs), and according to established procedures n Transparency • information on spending is public, timely, understandable; rules are explicit, and publicly available 12
Measuring Corruption Potential n Directly measuring corruption is not feasible n n n PFM system quality can be measured and monitored n no direct measures of bribery, asset theft, contract steering, cash theft, etc. External audit capture only some corrupt practices There is now an internationally-accepted set of actionable PFM performance indicators (PEFA) See www. pefa. org PFM system quality assessment measures corruption potential 13
PFM PEFA Indicators 11. Orderliness in annual budget process 12. Multi-year perspective Budget Execution Budget Formulation 26. External audit 27. Legislative scrutiny of External Audit budget 28. Legislative scrutiny of and Oversight external audit reports Accounting and Reporting 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 Cross-cutting Indicators 1. 2. 3. 4. 5. Aggregate expenditure out-turn Composition of expenditure out-turn Aggregate revenue out-turn payment arrears Classification of the budget 6. 7. 8. 9. 10. Comprehensiveness of information unreported government operations Transparency of inter-governmental fiscal relations Oversight of aggregate fiscal risk Public access to key fiscal information 14
PFM Indicators and Corruption Over-all PFM System Features Indicator Budget Formulation Budget Execution External Audit and Oversight PI-5 Classification of the budget Accounting and Reporting Corruption Relevance 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 The more information included in budget documents (greater transparency), the greater veness of Honduras: 14 % of stakeholders to evaluate budget the ability of information spending was recorded and intentions, and hold credibility, policies included in Government to ex ante and ex poste as account ex poste. budget ‘assignaciones globales’ documentatio n 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. 15
PFM Indicators and Corruption Budget Execution - Expenditure Indicator Budget Formulation External Audit and Oversight PIBudget Execution 16 Accounting and Reporting PI 17 PI 18 Corruption Relevance 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. ss of payroll controls 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 16 and ghost workers. Loan guarantees were non-transparent incurred, there is no way of monitoring Recording Absent records of debt in and total debt and any irregular debt Macedonia, issued by the issued outside formal manageme procedures, or debt improperly contracted or contracted at Minster of Finance. nt of cash excessive rates. A formal system, with authorized officials, for balances, contracting changed its Macedoniadebt and issuance of guarantees is critical for debt and accountability and minimizing opportunities for corruption or budget law, requiring of cash balances is important for efficient guarantees favoritism. Consolidation all cash management, and also safeguarding cash from improper guarantees to be transfer, theft, or lending. A single treasury account simplifies approved bypayments and monitoring for irregularities, enabling recording of Cabinet and better management control and Parliament. Requests for accountability. Effectivene guarantees controls, funds can easily flow to fictitious Absent payroll stopped.
A Framework for assessing reform strategies Outliers 17
Key Challenges Type of States Fragile States (Guinea-Bissau, Haiti, Equatorial Guinea) Key Challenges Ø Ø Ø Reforming States (Ghana, Armenia) Ø Ø Ø Capable States (Brazil, South Africa) Ø Ø Ø 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 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 Increase performance orientation in public spending, increase coordination and integration between central institutions Strengthening transparency, external audit and external scrutiny of public spending 18 Strengthening accountability and enforcement
High Level Focus & Sequencing of Interventions Capable States Reforming States Fragile States ØImplement complex PFM systems reforms with a performance orientation ØStrengthen transparency, accountability and enforcement ØSustain commitment for reforms ØRefine basic PFM systems ØProgressively introduce complex PFM System reforms ØStrengthen commitment for AC reforms Ø Build internal demand for information ØDevelop basic PFM systems 19
Fragile States Assessing Detail Interventions Budget Formulation Key Issues that increase the risk of corruption in budget formulation: Budget Execution ØAdhoc budget formulation and delays in budget formulation, Ø Limited or no involvement of key actors in budget formulation External Audit and Oversight Accounting and Reporting ØIncomplete budget classification, budget classification system does not facilitate a direct link between programs and executing agencies and does not conform to international standards ØBudget not comprehensive and budget documents are incomplete Suggested mitigating measures: ØIncrease internal demand for information ØStrengthen the ability of the PFM system to capture the budget information üAuthoritativeness: Review the legislative framework for budget formulation to establish a timetable, with clear mandates for key actors (Political leadership commitment is key) üComprehensiveness: v. Annual budget document to include all sources of revenues, expenditures v. Strengthen budget classification: economic, administrative and functional 20
Fragile States Assessing Detail Interventions Authoritativeness in budget execution Key Issues that increase the risk Establish budget execution of corruption: procedures ØCash management on a day to day basis Budget Formulation External Audit and Oversight Key Issues that increase the risk of corruption: Establish external audit capacity External audits weak, non-existent or politically captured ØAbsence of clear rules and controls during budget execution ØAbsence of payroll control ØAbsence of internal audits Budget Execution Accounting & Reporting Key Issues that increase the risk of Regular reconciliation of Government corruption: accounts with bank data ØIrregular reconciliation of Bank reports Regularity, timeliness of accounts with government accounting data, existence of multiple accounts or the Single Treasury Account is not respected Ø Accounting books remain open for a long time after year end ØFiscal reports not being produced in a timely manner, are inconsistent and incomplete 21
Reforming States: Assessing Detail Interventions Budget formulation n n 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 22
Reforming States: Assessing Detail Interventions Budget Formulation Budget Execution External Audit and Oversight Accounting and Reporting Key Issues increasing the risk of corruption in budget execution: ØWeak 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 ØWeak internal controls during budget execution (controls on commitments may be poor or disregarded, weak controls on payments) ØWeak quality of internal audits not conforming to international standards ØWeak coordination between key actors during execution Suggested mitigating measures: ØRecording and management of cash balances, debt and guarantees ØStrengthen internal controls that manage risks, are comprehensive and are widely disseminated and understood ØStrengthen internal audit process 23
Reforming States: Assessing Detail Interventions Budget Formulation Budget Execution Accounting and Reporting External Audit and Oversight Key issues increasing the risk of corruption (Accounting and Reporting): ØAccounting procedures are not uniformly observed during record keeping ØWeak internal accountability for not conforming with accounting procedures ØReconciliation is not regular and comprehensive ØInaccurate and inconsistent in-year budget reports ØInaccurate and inconsistent annual statement Suggested mitigating measures: ØStreamline, disseminate and train staff on accounting principles ØIncremental implementation of FMIS ØRegularity in reconciliation of Bank accounts with government accounting books ØRegularity and reconciliation of suspense accounts and advances ØConsolidated annual statements are prepared which include full information on revenues, expenditures and financial assets and liabilities 24
Capable States: Assessing Detail Interventions Budget Formulation n 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 n 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 n 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…. . 25
Capable States: Assessing Detail Interventions Budget Formulation Budget Execution External Audit and Oversight Accounting and Reporting Key issues increasing the risk of corruption (External Audit, Oversight and Accountability): ØExternal audit institutions are not independent and do not have clear mandate ØScope and coverage of external audit is limited ØAudit reports not submitted to the parliament ØIneffective follow up of audit recommendations ØCivil society engagement in budget formulation but not in audits Suggested mitigating measures: ØAuthoritativeness: Legislative mandates for independent external audit institutions with clear mandates, coverage and scope ØDevelop clear and timely follow up procedures ØTimely submission of audit reports to the parliament 26
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. 27
Q&A 28
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