Posted by Mark Silins
In the Caribbean, and in many English-speaking countries for that matter, the State Treasury is called the Accountant General’s Department (AGD). In this post I will explore what the main tasks and functions of the AGD should be, and what minimum functionality should be expected from them.
The AGD is, one could say, the engine room that supports effective public financial management, or at least it should be. Ensuring the completeness of all financial information in the accounting system each day ensures that key financial reports are available to support timely decision making. The AGD is also the processing centre for expenditures and receipts. Its systems should support the proper classification of all financial stocks and flows of government and provide reports on these for all different stakeholders, including parliamanent.
How well does the Caribbean compare?
An examination of a range of recent PEFA assessments across the Caribbean indicates that there is definitely room for improvement in budget execution, accounting and fiscal reporting in the region. Issues identified include:
An absence of timely bank reconciliation;
- Weaknesses in chart of accounts design;
- Inconsistent accounting practices;
- Failure to produce timely monthly budget execution reports;
- Large delays in submission of audited financial statements (the audit of financial statements is the responsibility of the Auditor General, so in part delays may be caused there);
- High dependency on inefficient methods of payment including cash and cheques;
- Delays in the recording of financial flows in the General Ledger, including revenues, debt and public sector investment (generally externally financed) cashflows;
- Fragmented banking arrangements;
- Low capacity to manage and forecast cashflows; and
- Redundant manual processes.
Having worked in the region for the past few years it is clear that many AGD’s need to strengthen their capacities and redefine their business processes. Many AGD’s have not yet fully reaped the benefits of the automated systems that have been installed and are retaining out-of-date manual practices. Suggesting overall reforms often surpasses countries’ capacity to change. Change processes have to be implemented while the ongoing business of government continues as well. This is difficult for any treasury organization, but the more so in Caribbean were tasks often depend on just a handful of key personnel.
For this reason I often advise AGD’s to concentrate (sequentially) on four key reforms which I describe below:
1. Day end Processing
Many of the upstream problems in the AGD, such as incomplete financial information and delays in timely reporting, are a direct result of the day’s work not being completed. The latter should include the processing of all payments and receipts and bringing to account all external flows that impact on the accounts via journal vouchers. Every transaction that is not processed on the day will create a discrepancy between the bank and ledger, and misstate the financial position in the ledger. Often delays are occurring in processing as a result of sub-optimal business processes.
Five countries in the region have recently developed automated bank reconciliation processes. The approach in each case is simple. Using data matching techniques, all transactions that appear in both the bank statement and the ledger are eliminated, thus focusing the reconciliation on those transactions that appear in one but not in the other.
Dominica recently reviewed its revenue collection process in the AGD. Now, as revenues are received they are entered directly into the account system, ensuring timely recording and eliminating the costly involvement of three officials for the process. A recent review of business processes in the AGD in one country, found numerous manual processes including physical registers, which duplicate the information in the accounting system. In most cases, the parallel processes could just cease, eliminating major redundant workloads.
2. Month-end processing and closing
Many countries do not close the accounts at the end of each month, despite this procedure being the normal precursor to producing the accounts at the end of the month. Not closing the accounts each month impacts on a countries capacity to report consistently and is also a major contributor to delays in producing the annual financial statements. Reconciling the accounts monthly makes end-of-year accounting a smoother process.
Barbados ensures that it runs a month-end process enabling it to produce fiscal reports that can be matched to the accounting system. Not surprisingly, Barbados routinely meets its statutory obligations in relation to timely annual financial statements.
Every bank account and financial process outside the accounting system impacts on the capacity of the AGD to produce timely consolidated financial information. The objective should be to process all financial transactions through the IFMIS system rather than bringing them to account by journal voucher after the event. This eliminates duplicate manual processes, and ensures that the internal controls available in modern systems reduces fiduciary risks.
The first response to objections to closing bank accounts outside the treasury single account should not be why to include this in the TSA and the IFMIS but why not? In a number of countries such as Belize, the IADB now requires their projects to be managed in the country IFMIS, and are measuring their own performance in this area. Perhaps other development partners can take a leaf our of IADB’s book.
Some development partners argue that consolidation of funds will increase the fiduciary risks in relation to their funds. However, it is not clear that the creation of a separate bank account eliminates such risks and segregation or earmarking of funds can occur through proper design of the chart of accounts and the controls available in most IFMIS . In any event, even if a DP insists on “quarantining” funds in a separate bank account, why operate the account outside of the IFMIS?
It is certain that external arrangements of this nature increase fiduciary risk and delay consolidated reporting through the fragmentation of government accounting. It also fails to meet the stated objective of all DPs to use country systems in accordance with the Paris Declaration.
4. Chart of Accounts Redesign
Ensuring that the Chart of Accounts (CoA) supports the key financial reports is critical. The accounting system should support both reporting of the fiscal balance, and the production of a standard cashflow statement as a minimum. Using the IMF’s Government Financial Statistics Manual 2001 as a benchmark is a sensible way to ensure that both outputs are reporting formats supported by the CoAs structure.
CoAs redesign work in three countries has resulted in realignment of the object codes to GFS 2001. The reform work also highlighted some incorrect accounting practices for attention. Each country can now produce a fiscal balance report, cashflow statement and also a report in accordance with GFS 2001 directly from the CoAs.
To summarize, improving the PEFA scores of Caribbean countries in the treasury area is doable. The list of four key reforms is not that complicated and should be achievable by all CARICOM members. Can we challenge the AGD’s in the member countries to have achieved these four reforms over the next three years?