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September 27, 2007

Public Financial Management and Anti-corruption: prevention through stronger PFM systems

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Corruption is a hot  topic in international circles these days, and particularly with respect to country public finance systems. The IMF Fiscal Affairs Department has made a contribution to understanding how improvements in  public financial management systems can help fight corruption.

While  not an 'idiots guide to corruption',  a recent FAD staff paper (Dorotinsky,  William and Shilpa Pradhan), published in "The  Many Faces of Corruption: Tracking Vulnerabilities in the Sectors" (World Bank, 2007), explores the conditions of PFM systems that enable corruption to flourish, the ways corruption commonly manifests itself, and  develops a model for assessing the vulnerability of country PFM systems to  corruption.

The authors find that "Countries with better-performing  PFM systems have lower corruption perception indexes," and  that "Countries with stronger participation of external stakeholders in the  public spending have lower corruption perception indexes."

The  paper argues there are five systemic factors that increase the risk of  corruption in PFM (four of which are internal to the executive branch). These  factors are:

     
  • weak PFM capacity—of systems and processes comprehensive and  accurate record keeping, reporting, and accounting as well as the capacity of  financial management staff;
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  • inadequate internal controls—absence of or weak processes providnig  reasonable assurance regarding achievement of organizational objectives in  effectiveness and efficiency of operations, reliability of financial reporting,  and compliance with statutes and policies;
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  • limited internal fiscal transparency—Internal transparency of fiscal information  ensures that information is recorded and reported accurately and in a timely  manner and that it is available to executives and decision makers.
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  • weak management and supervision—Management responsibility for overseeing PFM  system performance, using information, holding others to account, or accepting  responsibility for failure of the system to operate properly provides strong  incentives for deterrence of fraudulent behavior. The role of senior management  in formalizing and institutionalizing the response to fraud and other corrupt  practices is essential to mitigate the risk of fraudulent behavior. And,
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  • weak external accountability in public spending—including legislatures and public accounts  committees, national audit offices, civil society, the media, and NGOs.

The five-point model  offers a structured way of analyzing country PFM systems, identifying the  weakest link, and developing strategies for improving PFM systems to minimize  opportunities for corruption. The model is applied to Ghana,  with suggestions for a reform path. In developing reforms, the authors caution that "In identifying entry points for participation of  external stakeholders in the budget process, it is essential to balance  external demand-side pressures for increased accountability with supply-side  measures to improve PFM."

As  the paper notes, "The challenge is  creating a robust public finance system that maximizes detection and  remediation of corruption, thereby minimizing opportunities for corruption."  This has high relevance for government officials wanting to tackle the issue,  for agencies providing technical assistance, and for country  PFM reform strategy development.

Posted  by Bill Dorotinsky

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