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June 24, 2011

Can Internal Control of Public Finances Eliminate the Risk of Any Loss?

Posted by Mohamed Moindze

The proper control of public finances is essential to improve fiscal governance.  The aim is to ensure that public funds are used in conformity with parliamentary authority, applicable laws and regulations and with due regard to efficiency and effectiveness.  Such control may be internal, when it is undertaken by officials internal to the administration, or external, when it is undertaken by an organization which is operationally separate and independent of the administration.  This later body should review the whole of the administration and verify whether financial management conforms to the legal requirements and is appropriate.

It is becoming clearer and clearer that many Francophone African states do not adequately control their public expenditure.  This allows an increase in payment arrears and the loss of budgetary credibility, but also waste and irregular use of public resources.  Assessments of systems of public financial management in these states using the PEFA methodology indicate an alarming situation.  Most of these countries score only a C or D on a four-point scale from A to D, where A is the best score.  In addition, the assessments indicate insufficient systems of control or controls that are regularly violated. 

This is due to many different reasons, some of which may be technical, but also by political or administrative environments which are not favourable. This paper considers the modernization of budgetary control in Francophone African countries.  It is composed of six sections.  It begins by examining the concept of internal control which is defined in different ways (Section 1), it then goes on to consider the fundamental traditional elements of internal control (Section 2).  The paper then considers the inadequacies of such traditional controls (Section 3) and the principal motivations which encourage its modernization (Section 4). This is based on the experience of France and two other Francophone countries (Morocco and Madagascar).  The paper provides some advice on the modernization of internal control to reinforce essential controls and abandon those that are redundant or unnecessary and to improve the flow of the circuit of expenditure whilst taking into account the specific needs and technical capacities of each country (Section 5).  This final section emphasizes the necessity of reinforcing post-payment controls to reduce losses and waste through greater professionalism of budgetary officials, better budgetary supervision, and improved coordination of the various activities of the internal and external auditors.  The paper concludes that it is unrealistic to want to put in place a system of internal control that will eliminate any risk of loss. Such an objective would be misguided, as the benefits that may arise are not justified.   It is better to assess the expected benefits of such a system compared with its possible costs.

Download Modernisation du contrôle interne

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An interesting study and conclusions. I enjoyed reading the presentation of the contents and issue.

It may be true that the internal controls alone may not be the cure for preventing risks and risk management in public finance.However, the provision, assessment and review of internal controls may serve good purpose of risk reduction and providing signals to the senior management for the need to look into the areas under risk. Of course, the impact of an overall functional system will be depending on the commitment and intent of the management to recognize the usage of the internal controls. The effective internal audit and audit function should bolster the review and role of internal control in preventing the risk of any losses in the country systems of PFM.

At the end of the day internal control is essentially a management function and its efficacy will depend on the management and leadership.

There is some interesting material in this PDF thank you. It's of particular note given the current Global debt crisis.

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