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November 15, 2010

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.” 

There are elements conducive to sound risk management in financial reporting: the professionalism and integrity of civil servants, the submission to the rule of law, the quality of the administrative organization, the institutional separation of functions in management of public funds, and the personal and financial responsibility of public accountants. The complexity of the process of implementing accrual accounting for a whole central government, particularly in terms of information systems modernization and opening balance sheet making, requires building an explicit strategy of progressive reliability and enrichment of financial information.

One factor for successful development of internal control is its seamless integration into routine of the services. Internal control should not be designed in a simplistic view equating to only a set of additional controls. It is primarily a set of permanent devices such as division of duties or the proper management of authorizations to access information systems. Control systems of this kind must also have the flexibility to adapt themselves to changes in the environment (organizational changes and computer systems improvements) and take into account its specific characteristics (size of the services or modes of operation).  They must also respect the principle of proportionality, or even common sense, resulting in a trade-off between the cost of implementing the device and the risk they seek to handle.

 The overall steering and management of accounting internal control are provided by the DGFiP that ensures the standardization and coordination between ministries. As such, it has developed common standards of internal accounting control, process mapping, and risk management methodology for the benefit of all departments. Departments are responsible for adopting these standards to their specific context. To this end, dedicated governance structures were formed initially at the central level and, in a second move, at the local level, by each department to ensure the operationalization of concepts. The DGFiP has also developed a risk management maturity ladder to standardize assessment of departmental practices regarding accounting internal control. This assessment focuses on four components of internal control: accounting and financial function organization, accounting and financial procedures documentation, users and accounting and financial transactions traceability, and internal control monitoring. It rates a department on a maturity scale consisting of 5 levels ranging from "unreliable" to "optimized". The testing of this scale is expected during 2010. Furthermore, internal control must be evaluated regularly by internal and external auditors.

Controlling risk requires having a means to identify and determine the measures necessary for their handling.  While the DGFiP has defined a set of indicators to feed a central government accounting quality dashboard that allows it to measure the effectiveness of the device, the ultimate indicator remains the opinion expressed by the Court of Auditors (Cour des comptes) which is in charge of central government financial statements audit. The DGFiP has also developed a risk map that describes for each accounting process the inherent and residual risks associated with it. At December 31, 2009, the mapping work has documented 66 accounting processes comprising 260 procedures including 751 tasks that are linked to 3671 inherent risks. The risk map should be adapted by each department to its specific context and be updated at least annually. On the basis of risks mapping and prioritizing, departments can define the action plan for departmental or local implementation of the measures needed to handle the identified risks. The DGFiP also manages, at the national level, the central government action plan for accounting that monitors all the actions that the administration is committed to implement to meet the qualifications expressed by the Cour des comptes in relation with central government financial statements auditing.

As a summary description of financial reporting risk-control device implemented by the French administration, the report provides little information about the central objective of an accounting and financial risk control device: to provide reasonable assurance regarding the quality of financial information. It is therefore necessary to refer to audit opinion on the financial statements of the central government for fiscal year 2009[2] for measuring progress that must still be made to enhance the reliability of central government accounts.

The Cour des comptes has certified that central government’s financial statements as of December 31, 2009 are lawful, truthful, and give a true and fair view of the financial position and holdings of the central government, subject to nine qualifications[3]. It should be noted that the second qualification relates to internal control : "Despite the progress made in 2009, the insufficient maturity of the ministerial systems for internal control and internal audit continues to prevent the persons in charge at the ministries from substantiating their assessments of the quality of the identification of accounting and financial risks and the extent to which they are controlled, for which the Cour des comptes' audits in fact show persistent deficiencies. " This cryptic wording reflects two facts: concepts and methodologies associated with internal control are better understood by departments but it is unrealistic "to expect from the only documentation of procedures an effective control of risks." The importance of the corrections made by the DGFiP following the Cour des comptes audit of the FY 2009 financial statements (in absolute value: € 10.1 billion in the income statement, € 63.9 billion in the balance sheet and € 16 billion in off-balance sheet commitments) shows the progress to be achieved in terms of risk control. Moreover, the deployment of internal control at the level of central government local services remains insufficient. Finally, few departments have the tools necessary to assess the devices they have designed, as illustrated by the persistent weakness of the internal audit function in most departments.

The report on internal accounting control of the central government reflects the fact that the expected benefits of deploying an accrual accounting system involve a rigorous management and sustainable development of all devices that can provide reasonable assurance regarding the quality and reliability of financial reporting. It illustrates the importance of the changes made to devices for controlling financial accounting risks since the preparatory work undertaken in 2004. The modernization of accounting systems is part of a trajectory of gradual enrichment and reliability of the financial statements of the French central government.

[1] The report in French 

[2] The report in English

[3] 1- Financial and accounting information systems of the Central Government ; 2- Ministerial internal control and audit systems; 3- The inventory and valuation of governmental agencies; 4- The costs and liabilities of intervention expenditures; 5- Defense Ministry assets; 6- Tax revenues; 7- Real estate holdings of the Central government; 8- The Social Security debt repayment fund (CADES); 9- Other assets and stocks of civil Ministries.

Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.


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