Transforming Internal Audit in East Africa

Posted by Onesmus Ayaya, George Mang’oka and Jesse W Hughes

The IMF’s Regional Technical Assistance Center for East Africa organized a workshop for government internal auditors from the region[1] in Nairobi, Kenya, from November 6-9, 2012.

PEFA diagnostic assessment results and external audit reports indicate that reforms of internal audit (IA) have lagged behind. The workshop discussed modalities of strengthening internal audit in relation to the various themes: the legal mandate for IA, the governance structure, coordination with public sector integrity institutions, participation in the work of professional bodies, the contribution to the control environment, and capacity building. The main issues are summarized below.

The End of Ex-ante Audits? Belgium Takes a Leap Towards Westminster

Posted by Lewis Kabayiza Murara

Uncommon to countries applying the Westminster model of external auditing, the practice of ex-ante audits is not so rare to those following the Napoleonic (or judicial) model of public sector auditing. The Spanish world has also long known the practice of pre-expenditure audits, sometimes by multiple institutions. Ex-ante audits in their most common form mean that the Supreme Audit Institution (SAI) is responsible for checking and giving prior approval to certain types of public expenditure.

In countries following the Westminster model, the auditor role may in some cases be combined with that of comptroller, and authorization to spend may be released before payments are made by budget entities. In countries applying the Napoleonic model of external auditing, particularly Belgium, Italy, Portugal and some of their former colonies, it is common for SAIs to issue prior approval before individual payments are made. The difference between the pre-approval practice in the Napoleonic model and the comptroller role in the Westminster model is that the former is a transaction-based, detailed review of certain types of expenditure, while the latter is performed at a higher, aggregate level which does not involve detailed reviews of individual expenditure items. Authorization may involve approval of funds release from the consolidated fund to departmental accounts for a certain period, per expenditure type.

Recent Meetings of the PEMPAL Network in Europe and Central Asia

Posted by Deanna Aubrey, PEMPAL PFM Adviser

The three ‘communities of practice’ of budget, treasury, and internal audit of the Public Expenditure Management Peer Assisted Learning (PEMPAL) network had a series of meetings in the first six months of 2012. PEMPAL covers up to 22 governments in the Europe and Central Asia region and brings practitioners together regularly to discuss common priority issues in PFM reform. PEMPAL is supported by the World Bank, Switzerland’s State Secretariat for Economic Affairs (SECO), the Russian Federation, and OECD SIGMA.

Members of Treasury Community of Practice (TCoP) gathered in Tbilisi, Georgia from February 27-29. Treasury experts from 10 countries met to learn more about Georgia’s PFM reforms implemented by the State Treasury Service, who co-hosted the meeting. The workshop was an opportunity to exchange experiences in modernizing national treasury systems particularly related to issues of integration of external financing. Participants also had the opportunity to visit the customs clearance zone of the Ministry of Finance in Lilo district in Tbilisi as an example of modernization public services through information technology. More information can be found at http://www.pempal.org/event/read/55 and in IMF’s PFM blog at http://blog-pfm.imf.org/pfmblog/2012/04/georgian-state-treasury-hosts-workshop-on-treasury-and-external-financing-reforms.html

Fifty-seven participants from Ministries of Finance from 18 ECA countries from Budget Community of Practice (BCOP) met in Bohinj, Slovenia on March 27-29 to exchange experiences in program budgeting as part of the Budget Community of Practice (BCOP) work program. Country cases of France, Australia, Poland, and Slovenia were showcased and reform progress shared by Kazakhstan, Russian Federation, Armenia, Croatia, and Bosnia and Herzegovina. Most PEMPAL member countries have implemented elements of program budgeting including defining and identifying programs, formulating program objectives, and selecting performance information. However, the quality of performance information remains generally poor, is in many cases not systematically monitored, and has limited influence on budget decision making. Countries acknowledge that the reform process is long and ongoing and are planning on exchanging information and meeting more on this topic in the future. More information can be found at http://www.pempal.org/event/read/58 and in IMF’s PFM blog at http://blog-pfm.imf.org/pfmblog/2012/05/program-budgeting-is-on-the-reform-agenda-across-europe-and-central-asia.html

The Independence of Supreme Audit Institutions: Celebrated in New York, But Often Ignored Back Home

Posted by Guilhem Blondy

On December 22, 2011 the 66th United Nations General Assembly adopted the resolution "Promoting the efficiency, accountability, effectiveness and transparency of public administration by strengthening supreme audit institutions." 

The General Assembly recognizes that SAIs can accomplish their tasks objectively and effectively only if they are independent of the audited entity and are protected against outside influence, as well as the important role of SAIs in promoting the efficiency, accountability, effectiveness and transparency of public administration, which is conducive to the achievement of national development objectives and priorities.

The UN General Assembly also takes note with appreciation of the work of International Organization of Supreme Audit Institutions (INTOSAI), and encourages Member States to apply the principles set out in its Lima and Mexico declarations.

Job Offer: Position in the INTOSAI-Donor Secretariat, INTOSAI Development Initiative (IDI)

The IDI announces a new position in the Secretariat for the INTOSAI-Donor Cooperation. The position is temporary until end of 2015 with the possibility of an extension. 

Background

The INTOSAI-Donor Cooperation was established in 2009 by INTOSAI (the International Organization of Supreme Audit Institutions) and 15 Donors to intensify and strengthen work to support to Supreme Audit Institutions (SAIs) in developing countries. This entails a more strategic approach to capacity building of SAIs, improving the coordination and increasing the levels of support to SAIs from development partners.

The INTOSAI-Donor Cooperation is governed by a Steering Committee comprising representatives of INTOSAI and the Donor community. The Steering Committee decided in February 2010 that the IDI, located in Oslo, Norway, should host the INTOSAI-Donor Secretariat. The INTOSAI-Donor Secretariat is funded by Austria, Ireland and Norway and currently staffed with four positions/3,5 full time equivalents (one of whom is provided through a rolling secondment arrangement with the Office of the Auditor General of Norway). In February 2012 the IDI, in collaboration with its funding donors, decided to recruit one additional full time international staff member.

« Donner du temps au temps » : une proposition de stratégie pour la mise en œuvre de la comptabilité générale dans les Etats-membres de l’UEMOA

Posté par Guilhem Blondy et Xavier Rame

Les directives portant cadre harmonisé des finances publiques au sein de l’Union Economique et Monétaire Ouest-Africaine (UEMOA) de 2009 prévoient que « l’Etat tient une comptabilité budgétaire et une une comptabilité générale » et que la mise en oeuvre de cette dernière doit être effective au 1^er janvier 2019 au plus tard.[1]

Pour atteindre cet objectif, ce post propose une stratégie séquencée selon une logique d’enrichissement progressif sur 7 ans (2012–2018) de l’information financière produite par la comptabilité générale.

Pour comprendre la nécessité de privilégier une approche progressive, il est nécessaire de rappeler les trois innovations fondamentales associées à l’introduction de la comptabilité générale :

“Give time some time”: A Proposed Strategy for Implementing Financial Accounting in the WAEMU Member Countries

Posted by Guilhem Blondy and Xavier Rame

The directives establishing the harmonized fiscal framework in the West African Economic and Monetary Union (WAEMU) in 2009 state that “the government shall keep budgetary accounts and financial accounts” and that implementation of the latter must be completed by January 1, 2019 at the latest.[1]

To attain that objective, this post proposes a sequenced strategy aimed at gradually, over the course of seven years (2012-2018), improving the financial information generated by financial accounting.

To understand the necessity of choosing a gradual approach, it will be helpful to recall the three basic innovations associated with the introduction of financial accounting:

Budget Oversight: The Challenges of Establishing an Independent Supreme Audit Institution in Developing Countries

Posted by Lewis Kabayiza Murara

What does it take to establish a Supreme Audit Institution (SAI) that is and is seen to be immune from the influence and interference by the executive branch of government that the SAI is supposed to audit? Are great laws and well articulated statements sufficient? What are the practical, day-to-day realities SAIs face in developing countries in exercising their budget oversight role?

The major feature for an independent SAI is to enjoy financial, administrative and operational autonomy (see the 1998 Lima Declaration issued by INTOSAI that has won international acceptance as best practice set of basic principles on SAI independence, powers of examination and enforcement of recommendations). In other words, the SAI’s ability to develop a robust human resource development system to attract and retain good auditors is as vital as its ability to stay away from interference in identifying audit priorities and executing them.

In practice many developing countries have established SAIs and have ensured that the constitution guaranties the SAI’s independence. Most have passed audit laws defining how the SAI’s autonomy would be exercised. In doing so, most developing countries have followed best practices in drafting these pieces of legislation. Despite relatively strong legal frameworks, a number of factors hamper the effective autonomy of SAIs in developing countries. This blog post discusses only four of these key factors: funding, appointing authority, tenure and the “civil servants trap”.

Job Offer: IDI Seeking Consultants for SAI Capacity Development (Framework Agreement)

The IDI is looking for several consultants experienced in providing capacity development to Supreme Audit Institutions. Candidates should have experience of working with and for SAIs, and implementing SAI capacity development initiatives in a variety of developing countries. A number of consultants will be awarded a place on the framework agreement, to provide IDI with access to consultants with working level proficiency across the INTOSAI languages (Arabic, English, French, German and Spanish) as well as Russian and Portuguese. Applications, based on the terms of reference below, should be received by October 31, 2011.

The opportunity is also advertised on the IDI website

The IDI is a non-profit organisation that aims to enhance the institutional capacity of Supreme Audit Institutions in developing countries through needs-based, collaborative and sustainable development programmes in INTOSAI regions and groups of SAIs to meet the existing and emerging needs of stakeholders.

Canaries in a Coal Mine

Posted by David Gentry

 
It is well known that animals and other living things can be used to detect a problem before people become aware of it. These are called sentinel animals or indicator species. A dog barking at noises that people cannot hear is an obvious example. More interesting are certain species in a marine environment that are sensitive to low levels of pollution. For more than a century canaries were used in coal mines to detect toxic gases. They became sick before people became sick, and thus gave miners a chance to escape.

To be effective, indicator species must be sensitive to known dangers. They are used to easily, cheaply and accurately monitor the presence of that danger. It is plain to see if the canary is active and happily chirping or not. A reliable relationship must exist between the state of the canary and toxic gases.

But there are limits to what canaries can tell miners. Dead canaries won’t tell where the gas is coming from or even the specific toxic gas (canaries are sensitive to multiple gases injurious to humans, such as methane and carbon monoxide). Once the canary falls off its perch, the miners know they are facing a hazard but must investigate further to find the source, exact nature and severity of the problem, and then decide what to do about it.

Rwanda: A Decade of Difficult but Sustained Public Financial Management Reforms

 

Posted by Lewis Kabayiza Murara

Only a decade ago Rwanda did not possess a properly articulated public financial management system, and there were few qualified staff to run the system, especially public accountants. Since then the government has put in place many of the elements required for a sound system of public financial management. Some weaknesses remain, in particular in relation to local accounting capacity, but the government of Rwanda appears firmly committed to establishing a modern, efficient, transparent and accountable PFM system. In 2006, the government put in place a Public Financial Management Action Plan aimed at strengthening several aspects of the existing public financial management system. In particular, the government sought to strengthen accounting capacity, improve the audit function, and put in place more robust financial controls and reporting procedures, new rules on fiscal and financial decentralization, and procurement reforms. Subsequently, and following the first-ever PEFA assessment on Rwanda in 2007, a comprehensive and ambitious five-year Public Financial Management strategy was prepared in 2008 and is now being implemented, with some degree of success as evidenced by a repeat PEFA assessment concluded in December 2010.

This blog post attempts to summarize salient features of Rwanda’s public financial management landscape, including a short paragraph on public procurement (which tends to be forgotten by IMF and other PFM specialists as a key area in public financial management and tends to be treated separately).

METAC Workshop on Expenditures Control and Internal Audit: A Good Example of Donor Coordination

Posted by Pierre Messali

 
As part of its work program in the area of public financial management, METAC organized a regional workshop in Cairo, Egypt from May 30 to June 1. The objectives of the workshop were to review the systems of expenditure control and internal audit in the Middle East and North Africa (MENA) region and to come up with reasonable and practical recommendations for reform and modernization. The event was very successful and gathered a large number of officials from the METAC and Gulf Cooperation Council (GCC) countries (some 50 participants).

This was a collaborative effort of METAC[1], the Ministry of Finance of Egypt, and donors. These included the European Union (EU), jointly with the SIGMA-OECD program[2], the USAID, jointly with the Egypt Competitiveness Project (ECP) program[3], the World Bank[4]  (HQ and Cairo and Beirut offices), and ADETEF[5], affiliated to the Ministry of Finance of France. 

The workshop exemplified a high degree of collaboration between donors and it should set a precedent for future activities. Such cooperation: (i) avoids duplication of efforts and waste of resources; (ii) gives more consistent messages to recipient countries; and (iii) benefits   participants from exchanging experiences with donors and making full use of respective comparative advantages. This is also in line with the Paris Declaration on aid effectiveness which calls for donors to harmonize their actions and to work together to reduce duplication of work and promote joint training to share lessons learnt and build a community of practice.

Following the workshop, USAID issued a newsletter highlighting the success of the workshop (attached). Other collaborators, the EU and the WB and ADETEF have also expressed a great deal of satisfaction with the workshop and agreed on further cooperation.

Malaysia National Audit Department Applies Accountability Index to Rank Management Performance

Posted by Mario Pessoa

 
The National Audit Department (NAD) created a ranking system to measure effectiveness of administrative controls. NAD is the Malaysian Supreme Audit Institution responsible for evaluating management performance of all ministries, departments, and autonomous entities at the central, states and local governments in Malaysia. To respond to concerns of the government on the repeated cases of non-compliance and weak internal controls mentioned in the annual audit reports, NAD developed a detailed rating system to measure control performance according to eight major criteria: (i) organizational management control; (ii) budgetary control; (iii) receipts control; (iv) expenditure control; (v) bank accounts control; (vi) asset and inventory management; (vii) investment and loan management; and (viii) financial statements. The methodology used is based on a four-star rating classification of a set of indicators and sub-indicators to indicate if performance is considered excellent, good, satisfactory, and not satisfactory. The Accountability Index is a very objective way to measure and compare control effectiveness across the entire government. The information since 2007 is available at NAD webpage www.audit.gov.my under the label “Accountability Index”.

Discussions of PEM PAL Treasury Community of Practice on Public Sector Accounting and Reporting Reforms

Posted by Anila Çili (Director, Central Harmonization Department on Financial Management & Control
Ministry of Finance, Albania) and Deanna Aubrey (Budget, Treasury and Internal Audit Community Facilitator, PEM PAL CEF Secretariat, Center of Excellence in Finance, Slovenia)

 
From 18-22 April 2011, 41 participants from Ministries of Finance and Treasuries from 15 European and Central Asian countries[1] met in Ljubljana, Slovenia to discuss public sector accounting and reporting reforms as part of the ongoing network activities under the Public Expenditure Management Peer Assisted Learning Program (PEM PAL) program.[2]  This program has 21 member countries from across the Europe and Central Asia (ECA) region who regularly meet in ‘communities of practice' to discuss reform issues in the areas of budget, treasury and internal audit (www.pempal.org). The event was also linked to a conference on international trends in public sector accounting reforms organized by the Center of Excellence in Finance, Ljubljana Slovenia held on 20-22 April.[3] The conference involved discussions on the increased role of accounting in the public sector, especially in the post financial crisis era, its evolution in the recent years and the lessons learned.

Trust is Good, Control is Better

Posted by Xavier Rame

 
Since May 2007, the French Public Finances General Directorate (DGFiP) has published an annual report on central government accounting internal control which is annexed to the Settlement Act. The report for fiscal year 2009[1] is a summary description of the device of risk control in financial reporting implemented by the French administration. It illustrates the quantum leap governments that are considering implementing accrual accounting must make.

The purpose of this report is to describe the control environment, the risk management actors and the approach applied. The report is confined to the accrual accounting internal control of the central government which is defined as "all arrangements organized, formalized and permanent, selected by management, implemented by all actors to control the operations related to financial activities of the central government and thereby provide a reasonable assurance on financial reporting reliability.” 

Australia is a Front Runner in Public Sector Internal Auditing

Posted by Stephanie Koehn, Manager, Technical Institute of Internal Auditors-Australia

A recent blog article, Internal Audit in the Public Sector: Underdeveloped and Underused, stated that there continues to be a lack of effectiveness in the internal audit functions of public sector organisations, globally. The author, Sanjay Vani, presents what he believes to be the key factors that have contributed to this situation. 

Notably absent from his commentary are recent Australian based initiatives aimed at increasing the effectiveness of the internal audit function as a whole, and in some instances focus primarily on the public sector. 

Interactive Financial Data and XBRL: the Way Forward?

Posted by Dimitar Vlahov

 

Today’s means of exchanging financial data have entered a process of global synchronization and standardization. Intuitively, this makes sense given the interconnected and interdependent nature of economic and business entities around the world, coupled with advances in computing power. In practice, the trend is evidenced by the rapid spread of XBRL, a novel set of programming rules for recording and reporting financial data electronically. Over the last several years this new freely-available open standard has been employed by more than 550 major companies, organizations and governments, including many central banks, finance ministries, the International Accounting Standards Board (IASB), the U.S. Securities and Exchange Commission (SEC), and the Tokyo Stock Exchange. A Forbes report estimates that XBRL encoding is used by companies representing more than 75% of the world's market capitalization. So popular has XBRL become that one can now even buy “XBRL for Dummies” on Amazon. This note provides a quick account of what XBRL is and why it is relevant for public financial management.

New Issue of International Journal of Governmental Financial Management (IJGFM) Now Online

Posted by Andy Wynne, Editor of the IJGFM

The first issue, for 2010, of the International Journal of Governmental Financial Management is now available for download from: www.icgfm.org/digest.htm

As usual the Journal covers a wide range of issue relating to public financial management especially in developing countries.

The first paper provides an insightful critique of the draft conceptual framework recently issued by the International Public Sector Accounting Standard Board. Petri Vehmanen of the University of Tampere, Finland observes that whilst the prime aim of private sector financial statements is to provide information for investors to make decisions about the entity, the prime purpose of public sector financial statements is to enhance accountability. This should be recognised and would result in the definitions of such prime elements as assets and liabilities being revised. His paper also recasts the qualitative characteristics of public sector financial statements. Petri concludes by saying that his proposals “are by no means radical”, but they do suggest that the specific characteristics of public sector financial reporting needs greater consideration.

India: Public Financial Management Performance Assessment Report

Posted by Pratap Ranjan Jena (jena@nipfp.org.in), National Institute of Public Finance and Policy, New Delhi

The PFM Performance Assessment Report for India (Download INDIA_PEFA2010[1]) at the central Government level (carried out during the period March 2009 to June 2009) provides a comprehensive assessment of the current status of the PFM system following the Public Expenditure and Financial Accountability (PEFA) framework. The performance of PFM systems, procedures, and practices are assessed based on six critical dimensions of the PEFA framework; credibility of the budget, comprehensiveness and transparency, policy-based budgeting, predictability and control in budget execution, accounting, recording and reporting, and external scrutiny and audit. Some of the major assessment results are summarized here. The assessment indicates both the strengths and weaknesses of the existing PFM system and serves as a baseline against which progress on PFM performance can be measured over time.

While the role of PFM systems in contributing to fiscal discipline, strategic resource allocation through better programme management, and improving service delivery has gained attention in India in recent years, the focus and implementation of reform initiatives in this regard leaves much to be desired. The initiatives to improve the PFM systems and processes in recent years include the introduction of outcome budget in 2005-06 to move to clearly defined outcomes of all government programmes, adoption of rule based fiscal management by enacting the Fiscal Responsibility and Budget Management (FRBM) Act, appointing a Task Force to suggest reform measures to strengthen internal audit, initiating the process to move to an accrual based accounting system, revising the responsibilities and duties of the Financial Advisors placed in spending departments in a system of delegated financial powers, and tightening cash management through monthly expenditure limits. However, the intents did not match the outcomes due to discontinuities and indifferent implementation. The achievement of economy, efficiency, and effectiveness in PFM systems has remained elusive.

Prioritizing PFM Reforms: A Robust and Functioning Accounting and Reporting System is a Prerequisite

Posted by Sanjay Vani, Lead Financial Management Specialist, World Bank

Much has been written about prioritizing and sequencing PFM Reforms, including Allen Schick’s often-quoted 1998 article, Why Most Developing Countries Should Not Try New Zealand's Reforms.  While working on the OECD-DAC Report on the Use of Country Systems in PFM a year or two ago, I was struck by how much more we know about what does not work than about what does work. For example, almost all PFM professionals would agree that introducing a medium-term budget formulation or performance budgeting in an environment of poor budget execution is not likely to be effective; and attempting performance audit without agreed performance benchmarks and proper systems to record and track performance is equally unlikely to be effective.

Here I would like to develop a hypothesis that, I am convinced, deserves serious attention from the community of PFM professionals. The hypothesis is this:  NO significant PFM reforms are likely to succeed unless a robust and functioning accounting and reporting system is in place.  In other words, a robust and functioning accounting and reporting system is a prerequisite to other PFM reforms.

Taxpayer Audits: Development of Effective Audit Plans & Use of Indirect Methods

Posted by Edmund Biber 1/

   
 
 

The IMF 's Fiscal Affairs Department has recently published two issues in the Technical Notes and Manuals (TNM) series, both on taxpayer audits: the first one on the Development of Effective Audit Plans and the second on the Use of Indirect Methods.

The key points in these two TNMs are as follows:

Taxpayer Audit – Development of Effective Audit Plans

Can audits encourage taxpayer compliance, or do they merely verify compliance and provide a means of correcting tax assessments?

TNM/10/03 provides guidance on how tax administrations can plan their audit programs to have a significant impact across the community rather than only affecting the taxpayers subjected to audit. Developing audit plans at strategic, operational, and case levels can provide administrations with valuable opportunities to go beyond detecting and correcting non-compliance, to actually improving the overall management of the tax system, including addressing deficiencies in the law and influencing future compliance.

The technical note provides a description of what factors need to be considered in planning an effective audit program as well as a “how to” guide using a step by step explanation of the processes involved in developing tiered and cascading strategic, operational, and case plans.

GAO Critical About U.S. Government Financial Reporting

Posted by Sanjay Vani

It may be a strange kind of reassurance to developing countries that governments in advanced economies can also have serious problems with getting their annual accounts certified by the Supreme Audit Institution (SAI). You may have read in the newspapers that the U.S. Government Accountability Office (GAO) has refused to provide an opinion on the fiscal year 2009 consolidated financial statements of the U.S. government. This is now for the 13th time in a row that such an opinion has been refused. The GAO can hardly be accused of not being consistent! Not providing an opinion is similar, but technically not exactly the same, as not certifying the accounts. 

The GAO notes three major impediments that prevented it from rendering an opinion (see also http://www.gao.gov/financial/fy2009financialreport.html). First it notes serious financial management problems at the Department of Defense (DOD) that have prevented DOD’s financial statements from being auditable. In addition, the financial statements of the Department of Homeland Security and the National Aeronautics and Space Administration for fiscal years 2009 and 2008 were determined as not being auditable. Second, the U.S. federal government was unable to adequately account for and reconcile intragovernmental activity and balances between federal entities and the Department of Treasury’s (Treasury) records of disbursements. Third, the federal government’s process for preparing consolidated financial statements is seen as ineffective due to a number of important issues, including having inadequate systems, controls, and procedures to ensure that the consolidated financial statements are consistent with the underlying audited entity financial statements, properly balanced, and in conformity with U.S. generally accepted accounting principles (GAAP).

Assessing Health Sector Support in Africa– EU Court of Auditors Only Partly Satisfied

Posted by Duncan Last.

The 2008 Court of Audit assessment of the European Commissions (EC) health sector support to Sub-Saharan Africa raises some important issues in its recommendations, for the broader development community to consider, and, more importantly, beneficiary countries to take note of. The audit found that health sector funding as a proportion of total EC funding has remained unchanged since 2000, indicating a disconnect between the stated objectives of achieving MDGs (where the health sector is one of the priorities) and the actual year-to-year allocation of available funds.

The United States Government Accountability Office: Role and Functions -- Comparison with France and the UK's Cases

Posted by Tej Prakash.

 

The Acting Comptroller General of the USA (Gene L. Dodaro) in a recent meeting with parliamentarians from Georgia, Kosovo, Macedonia and Mongolia, talked about the role of the United States Government Accountability Office (GAO) -- click here for a copy of the presentation. This blog provides a brief summary of the main points. In the second part it also briefly reviews the roles and responsibilities of the National Audit office of the UK and of the French Court of Audit.

The US Federal Audit Practices are updated...

Posted by Abdul Khan

The United States Government Accountability Office (GAO) and the President’s Council on Integrity and Efficiency (PCIE) issued in July 2008 the latest version of its financial audit manual (FAM). The FAM sets out a methodology for financial statement audits. The latest version updates the FAM for significant changes that have occurred in auditing financial statements in the federal government since 2004, when it was previously updated. The FAM is in three volumes. Volume 1 sets out audit methodologies, volume 2 contains audit tools, and volume 3 provides check lists for accounting, reporting and disclosures.

Regulatory System for Financial Institutions are “High Risk”

The GAO announced on January 22, 2009 that the regulatory system governing U.S. financial institutions and markets is considered at “high risk” for waste, fraud, abuse, and mismanagement or in need of broad-based transformation. Depending on your inclination to view glasses as half full or half empty, you may find this announcement either comforting that the GAO has identified the problem and therefore something might be done about it, or disconcerting that so much taxpapers’ money is being thrown at such institutions.

The revisions to the FAM are primarily due to changes in professional auditing and accounting standards and laws. These include the effects on financial audits of Federal Accounting Standards Advisory Board (FASAB) accounting concepts and standards issued through May 31, 2007, e.g., on social insurance, heritage assets, and earmarked funds. Major changes include:

• consistent with OMB audit guidance, performance measures are excluded from internal control definitions;

• identification of treasury processes and reports that are being substantially revised as a result of the implementation of the government wide accounting (GWA) system and other changes;

• a new section provides guidance on auditing the Statement of Social Insurance.

Do you know AISCCUF?

Posted by Franck Bessette

AISCCUF, created in 1994, is an association of Supreme Audit Institutions (SAI) using French as their working language (Association des Institutions Superieures de controle ayant en commun l’usage du français). The Association has 43 members, most of them countries, but regional organizations like CEMAC [1] and UEMOA [2] are also members.

Canada and Quebec enjoy separate membership, as well as countries in which French is not the official language but maintain strong historical ties with the “francophonie”, like Vietnam, Sao Tome e Principe, Rumania, Mozambique, Moldova, Guinea Bissau, Cape Verde and Bulgaria. Switzerland and Belgium are also very active members. The French Cour des comptes holds the Secretariat of the association and the Cour des comptes of Belgium serves as Treasurer.

Internal Audit in the Pacific

By Suhas Joshi

Despite considerable work in the external audit area in the Pacific internal audit has largely been an orphan. In all the Pacific Island Countries (PICs) Internal Audit has been limited to the conduct of compliance audit and it’s ineffective implementation has led to misappropriation of funds, lack of compliance, incorrect payments and errors in financial reporting.

US Government Annual Financial Report

Posted by Eivind Tandberg

Comprehensive, transparent and reliable financial reporting is a cornerstone of good public financial management. The US Government financial report for fiscal year 2008 (October 2007 - September 2008) was released in December 2008. The report provides many examples of good international practices. However, the accompanying audit report from the US Comptroller General, which includes negative opinions for key government sectors, illustrates that it may be difficult to meet all requirements in this area, even for an advanced economy government with significant financial management resources.

Norway’s Government Pension Fund–Global

Posted by Thomas Ekeli

A recent post by Mauricio Villafuerte and Jon Shields described newly established guidelines for sovereign wealth funds (SWFs). One of the best known SWFs is the Norwegian Government Pension Fund–Global, formerly known as the Government Petroleum Fund. The Petroleum Fund was established in 1990 as a fiscal policy tool to support a long-term management of the petroleum revenues. Renaming the Fund the Government Pension Fund–Global in 2006 was part of a broader pension reform, highlighting also the Fund’s role in facilitating government savings necessary to meet the rapid rise in public pension expenditures in the coming years. However, the Fund is not earmarked for pension expenditures.

Extending Research on Corruption to Specific Features of PFM Systems

Posted by Francois Michel

If one wanted to summarize briefly how research on corruption has evolved in recent years, one could say that it has made progress in four different areas:

• The search for determinants of corruption and its transmission mechanism to growth and the exploration of linkages between corruption and other economic—GDP per capita, capital flows, aid, income distribution, inflation, etc.—or political variables. This is often achieved through panel data analyses;
• The improvement of transparency indexes—see Daniel Kaufmann and Aart Kraay’s recent article on "Governance Indicators: Where Are We, Where Should We Be Going?";
• Efforts to leverage insights from the corruption literature into sectoral, country-specific reform plans, and that have formed the core of the World Bank’s strategy in recent years. As the Bank’s recent flagship publication on corruption makes clear, public financial management reform are instrumental in tackling corruption;
• New microeconomic models explaining how corruption can originate in auctions of procurement contracts—e.g. on allowing ex-post collusion opportunities between the bureaucrat and one bidder.

Going hybrid! A practical approach to setting government accounting standards?

Posted by Holger van Eden

In the Netherlands, but also in a number of other OECD countries, the debate on the usefulness of accrual accounting standards, both for financial reporting and budgeting, has led to a hybrid set of accounting standards being used in government. This hybrid approach has been questioned by the Dutch Supreme Audit Office, and is generally not appreciated by accounting purists. However, the hybrid approach, in which part of government works under accrual standards, and part remains under cash, may be a practical way to reap some of the benefits of accrual reporting and budgeting, while not incurring the substantial costs of implementing accrual accounting standards government-wide. Accountability and transparency at the national level may also be better served by a straightforward cash-based approach.

Bill Dorotinsky on Public Financial Management Reform -- Trends and Challenges (Video 3)

Posted by Michel Lazare

You liked Bill Dorotinsky's post of June 27 "Public Financial Management Reform -- Trends and Challenges"?

Well, you'll then love the video of this presentation delivered at the ICGFM meeting. Here is the third part of this YouTube video; parts 1 and 2 appear in other posts published today.

Bill Dorotinsky on Public Financial Management Reform -- Trends and Challenges ( Video 2)

Posted by Michel Lazare

You liked Bill Dorotinsky's post of June 27 "Public Financial Management Reform -- Trends and Challenges"?

Well, you'll then love the video of this presentation delivered at the ICGFM meeting. Here is the second part of this YouTube video; parts 1 and 3 appear in other posts published today.

Bill Dorotinsky on Public Financial Management Reform -- Trends and Challenges (Video 1)

Posted by Michel Lazare

You liked Bill Dorotinsky's post of June 27 "Public Financial Management Reform -- Trends and Challenges"?

Well, you'll then love the video of this presentation delivered at the ICGFM meeting. Here is the first part of this YouTube video; parts 2 and 3 appear in other posts published today.

Public Financial Management Reform -- Trends and Challenges

Posted by Bill Dorotinsky

On June 18, 2008, I spoke on Public Financial Management Reform: Trends at the the International Consortium on Government Financial Management (ICGFM) monthly speaker series in Washington, D.C.

I took the opportunity to share my personal views on current trends and challenges in public financial management (PFM) reform, drawing on my experience across the globe and multiple institutions. (As I noted, these are not the views of the IMF, or any other institutions with which I have been associated.)

The presentation covered three broad areas:

1. Common PFM reform recommendations, seen across all donors, consultants, etc.
2. Information on what reforms countries have been implementing in recent years
3. Challenges ahead for improving PFM

The PowerPoint can be downloaded here Download public_financial_reform_trends_icgfm_June_2008.ppt

The ICGFM Blog also posted a summary and video of the presentation on their Blog (CLICK HERE).

Banking on Accountability?

Posted by Carlos Santiso, Sector Manager, Governance (AfDB)

"Banking on Accountability? Strengthening Budget Oversight and Public Sector Auditing in Emerging Economies," by Carlos Santiso in Public Budgeting and Finance, 26(2), pp.66-100, 2006.

In a relatively recent article (“Banking on Accountability? Strengthening Budget Oversight and Public Sector Auditing in Emerging Economies” Public Budgeting and Finance, 26(2), pp.66-100, 2006), Carlos Santiso reviews multilateral development banks’ support to parliaments and external audit agencies in Latin America. The analysis reveals a learning curve in multilateral assistance to budget oversight institutions, including in the choice of strategies and the combination of instruments. It underscores the importance of the underlying political economy context for strengthening checks and balances in the management of public finances.

MDBs have traditionally centered their attention on the modernization of financial management within the executive and the bureaucracy (finance ministries, central budget offices, central banks, and tax authorities). They nevertheless realize the limitations of an exclusive focus on the executive and the need to balance executive discretion with external accountability and, as a consequence, are increasingly supporting the infrastructure of accountability within the state - those institutions outside the executive branch of government and tasked with scrutinizing government and overseeing the budget.

Welcome to the new ICGFM Blog

Posted by Bill Dorotinsky

This week, the International Consortium on Government Financial Management holds their  22nd conference in Miami, Florida. (See our December 12, 2007, blog post on the ICGFM fall Washington, D.C. Conference on IFMIS.) The focus of this year's Miami Conference is on accountability, and is entitled “Joining Forces for Responsible Leadership to Enhance Good Governance:  Citizens, Public Officials, Private Sector and the Press”.

As part of this years event, ICGFM has introduced a blog spot, with daily coverage of presentations, including access to the presentation material and YouTube video's. Well worth a visit!

Improving Government Financial Management Systems -- Lessons from a U.S. GAO Report

Posted by Bill Dorotinsky

Countries around the world are working to improve their public financial management (PFM) systems, and the U.S. is no exception. While for many countries the U.S. example may seem remote --- too unique in the authority of the Congress or too economically developed --- the similarities and lessons are more relevant than might appear at first glance. A recent GAO report, Highlights of a Forum: Improving The Federal Government's Financial Management Systems (GAO-08-447SP, April 2008), provides some fascinating insights into the state of PFM in the U.S.

A Comparative Review of Financial Control in African Countries – an IMF Technical Guidance Note

Posted By Lubin Doe and Sailendra Pattanayak

Is effective control and stewardship exercised in the use of public funds? Are public resources being used for intended purposes and in compliance with respective laws and regulations? Can private sector suppliers of goods and services have reasonable confidence in transacting with the government?

These questions have always been of considerable concern to parliamentarians, government civil servants, the public at large and other stake holders (such as foreign aid providers) in countries with weak public financial management systems. There is a close relationship between the quality of financial control during budget execution and budgetary outcome. Weak financial control in many African countries have led to unbudgeted expenditure, emergence of expenditure arrears, concealment of excess spending, non-compliance with financial regulations, and recourse to exceptional spending procedures. However, the financial control architecture varies across the countries in Africa reflecting the traditions of their former colonial powers and changes introduced over the years.

Sri Lanka: Improving Transparency and Accountability in Budget Processes

Posted by Justin Tyson

A TV report posted on YouTube in September 2007 provides a short, but interesting, introduction to debates about improving the transparency and accountability of budget-making in Sri Lanka. Topics covered by the video include: the move away from incremental annual budgets towards Activity-Based Budgeting; the need to have more in depth review of expenditure purposes and outcomes; and, the role of parliament in scrutinizing the budget process.

Is Providing Budget Support to Developing Countries Effective? -- Evaluation of DFID's Direct Budget Support by UK's National Audit Office

Posted by Michel Lazare

One of the main changes in development aid policy over the last decade was the decision made by the international community to move away from project aid in favor of direct budget support. This meant shifting away from aid financing specific projects and disbursed outside of the beneficiary country's public financial management (PFM) system (e.g., money deposited on projects' accounts in the commercial banks) to favor generally unearmarked aid funds directly disbursed using the beneficiary country's  PFM system (e.g., direct budget support deposited on the treasury's account at the central bank).

Evaluation of the efficiency and effectiveness of this new aid policy is a key issue for the international community. Just a few weeks before the upcoming Fourth High Level Forum on Aid Effectivemess to be held in Accra (Ghana), the UK's National Audit Office (NAO) has published, on February 8, 2008, a report evaluating DFID's (the UK's development agency) performance in providing budget support. This report titled: "Department for International Development -- Providing Support to Developing Countries", concludes in a nuanced way:

"Evidence on whether budget support has yielded better value for money than other forms of aid is not conclusive. While budget support has some advantages compared to other forms of aid, it also carries significant risks which need to be better managed."

A Primer on Accrual and Cash Deficits--Understanding Similarities and Differences--the US Case (GAO Report)

Posted by Michel Lazare

In December 2006, the United States Government Accountability Office published a report on "Understanding Similarities and Differences between Accrual and Cash Deficits": Download gao07117sp_accrual_and_cash_deficits.pdf.

This report constitutes a good introduction to the differences about these two notions of fiscal balance. In addition, it explains in a clear way how some of the categories of expenditures are accounted for in cash and in accrual terms. It is also candid about the weaknesses in some of the data reported in accrual terms and the need for a "plug" (i.e., unaccounted for differnces) to fully reconcile the two deficit numbers.

David Walker (GAO): Long-Term Fiscal outlook--Action is Needed to Avoid the Possibility of a Serious Economic Disruption in the Future

Posted by Michel Lazare

Further to our January 29, 2008 post on "David Walker (GAO head): The USA is Living beyond its Means -- Difference between Accrual and Cash," here is below the summary of David Walker's testimony before the Committee on the Budget of the U.S. Senate: "Long-Term Fiscal Outlook--Action is Needed to Avoid the Possibility of a Serious Economic Disruption in the Future."

(link to the full text of David Walker's testimony: Download gao08411t_longterm_fiscal_outlook.pdf )."

David Walker (GAO head): The USA is Living beyond its Means -- Difference between Accrual and Cash

Posted by Michel Lazare

The YouTube video below is a presentation on long-term fiscal issues in the US made by David M. Walker, the US Comptroller General and head of the U.S. Government Accountability Office (GAO). 

France improving its medium-term budget framework

Posted by Ian Lienert

Many developed and developing countries are struggling to implement or improve their medium term expenditure frameworks (MTEFs) to elaborate on a government’s sectoral spending objectives. In April 2007, l’Inspection Générale des Finances (IGF), a high-level government body under the Ministers of Economy/Finance and of Budget/Accounts, published a report (in French) analyzing France’s a medium-term budget framework (MTBF), making recommendations for strengthening the framework.

Eyes wide shut? Understanding the politics of government auditing

He who lives outside the budget lives in error.
            Carlos Fuentes, La Silla del Águila, 2003.

Posted by Carlos Santiso (AfDB)

In the second generation PFM reform, strengthening transparency and accountability in public finances is a defining challenge for emerging economies seeking to foster fiscal responsibility and curb corruption. There is thus renewed interest in those oversight agencies tasked with scrutinizing public spending and enforcing horizontal accountability within the state.

Recent research by Carlos Santiso, titled Eyes Wide Shut? The Politics of Autonomous Audit Agencies in Emerging Economies, explores the external oversight of public finances. It models and measures the effectiveness of autonomous audit agencies, developing an index to evaluate their performance, and assesses their reform over time. It examines the institutional trajectory of the AAAs of Argentina, Brazil and Chile, which illustrate the three models for organizing the external audit function in modern states and three distinct trajectories of reform (or lack thereof).

A Principal-Agent Theory Approach to Public Expenditure Management Systems in Developing Countries - IMF Working Paper

Posted by Luc Leruth

A well-functioning public expenditure management (PEM) system is considered a critical pillar of government efficiency by most practitioners, who place it at par with a low-distortion tax system and an efficient tax administration. It is therefore unfortunate that economic research has shown so little interest in the design of PEM systems, especially on the theoretical side. A recent IMF Working Paper entitled "A Principal-Agent Theory Approach to Public Expenditure Management Systems in Developing Countries" by Elisabeth Paul and myself discusses Public Expenditure Management (PEM) systems in developing countries using an analytical framework based on principal-agent theory.

Ongoing Developments in Performance and Accountability - seminar with the Auditor-General of Australia

Australian A-G meets with Bank and Fund staff

Posted by Jim Brumby, World Bank

The Auditor-General of Australia, Mr. Ian McPhee, discussed wide ranging issues related to public sector performance and accountability at a joint Bank-Fund seminar held at the World Bank on December 11, 2007. Mr. McPhee drew attention to the importance of openness and transparency, not only in the work of the executive but also in the execution of the work of the Australian National Audit Office (ANAO).

France's National Audit Office ("Cour des Comptes"): 200 years and counting!

Posted by Michel Lazare and Dominique Bouley

On November 5, 2007, the French National Audit Office (La Cour des Comptes) celebrates its 200th anniversary with a re-enactment of its 1807 inaugural session. The current Cour des Comptes was created by Emperor Napoleon I (in a September 16, 1807 law).

Its historical roots are even much older: a royal ordinance in 1256 prescribed that mayors in Normandy had to report their financial accounts to a royal commission once a year; and an institution called chambre des comptes was created in 1303.