PFM, Governance and Financial Accountability

8/13/2019 PFM, Governance and Financial Accountability

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Governance, Accountability and

Public Financial ManagementCentre for Good Governance


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What is governance?

What is Public Financial Management?

How are the two related?

Why are sound PFM systems important?


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Principles of good governance Participation

Rule of Law

Effectiveness and Efficiency

Accountability

Transparency

Responsiveness

Equity Inclusiveness


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Core Features of Good PFM practice Legal and institutional framework Budget formulation Budget execution

Accounting Monitoring and reporting Asset management Debt management Contingent liabilities Internal Controls External auditing Legislative scrutiny Public access to information on public finance


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Public Financial Management

is abou t effect ive stewardship of

publ ic resou rces fo r eff ic ient p rovis ionof services


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Public Financial Management

What are the benchmarks?

What is the diagnosis?

What reforms are required?


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PFM : Legal Framework - Benchmarks

Codes, Rules, Manuals, etc.

Are prepared the first time with due care and are

reviewed from time to time and updated periodicallythrough an established procedure;

Clearly establish accountability framework over the

institutions and individuals; and

Are accessible to all staff working in / supervising PFMfunction both in terms of their physical availability and

more importantly their availability in a language and

format that is easily understood.


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PFM - Legal FrameworkConstitution of India

Determines budgeting, accounting, auditing arrangements

Government Business Rules and Secretariat Instructions

Assigns PFM responsibilities to Finance DepartmentBudget Manual

Treasury Code

Financial Rules

Accounts Code Volumes 1 to 3


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PFM : Legal Framework - Diagnosis Legal framework as laid down in the Constitution

An all India framework

Key controls well defined at DDO level, but there isscope for improving accountability at the level of HoD,

CO and CCO


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PFM : Legal Framework - Reforms Codes require to be revised / modernized

Procedure manuals need to be developed for

individual departments


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PFM - Institutional Framework

BenchmarksIt is expected that

a) the responsibility for PFM rests unambiguously at onepoint in the organization say, in the Finance

Department andb) the roles of different players are clearly defined and

understood


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Political Executive / Minister

Departments of Government / Principal SecretaryFinance Department

Heads of Department

District Officer

Director Treasuries

District Treasury

D D O STO

AccountantGeneral

Legislative Committees


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Heads of Department

District Officer

Director Treasuries

District Treasury

D D O STO

AccountantGeneral


Budget

Formulation,Debt,ContingentLiabilities,

InternalOversight

BudgetExecution,

AssetCustody,

Monitoring&

Reporting

ExternalAudit

Legislative

Oversight

Accounting


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PFM Institutional & Legal Framework



Heads of Department

District Officer

Director Treasuries

District Treasury

D D O STO

AccountantGeneral


Budget

Manual

AccountCodes

FinancialRules

TreasuryCode


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PFM - Institutional FrameworkDiagnosis

Poor PFM Capacity

CEO CFO /DirectorFinance

SecretaryFinancialAdvisor

ChiefController

of Accounts


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DDO

Controlling Officer

Chief Controlling Officer

Treasury

Accountant General Finance Department

Bank

State HQ

RBI

Hard Copy

of account

Hard Copyof account

HardCopies

SoftCopy

CivilAccount

Data

R3

R1

R2

R4

Data Entry

Data Entry


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PFM: Budget Formulation - Diagnosis

Revenue forecasting is unscientific

Receipts from GoI are uncertain

Seventy percent of plan budget is dictated by GoI and

80 percent of the non-plan by committed costs Fixed commitments (salaries, pensions and debt

servicing) limit flexibility in formulating budget

Lack of medium term perspective


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PFM: Budget Formulation - Reforms

Prepare medium term expenditure framework (MTEF)and policy and budget linkage for importantdepartments

Prioritizing on-going projects and emphasizing assetmaintenance

Disclose Tax expenditures

Bring in multi-year budgets

Outcome budgeting


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PFM: Budget Execution - Benchmarks

A high correlation between budget and actualexpenditure achieved through predictability inexpenditure allocation

Ensure funds are spent on authorized and intended

purposes Transparent and clear process for within year

expenditure changes Departmental controls over approval and recording of

transactions submitted for payment Clear processes for moneys granted or advanced to

be promptly and accurately recorded, vouched andrecovered by departments; and

Control commitments and arrears.


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PFM: Budget Execution - Diagnosis

Savings due to delays in release of funds (CSS and

budget release orders)

Excess expenditures are generally well controlled but

the supplementary estimates are taken invariably postfacto

Diversion of funds is a concern

Controls in Treasury system adequate; those in respect

of AC/DC bills, PD accounts, UC, etc. needimprovement


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PFM: Budget Execution - Reforms

Reforms in budget execution are linked tocomputerization of budgetary transfers andaccounts


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PFM: Accounting - Benchmarks

Robust accounting system reduces FR by enablingfinancial monitoring and reporting

Clearly defined accounting concepts, policies andprocedures.

Accounting policies support the needs of the user of theaccounts

Timely rendering, compilation and production ofaccounts

Systems and Controls support relevant and reliableaccounting

Complete and reliable accounting for funds held outsidethe Consolidated Fund


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PFM: Accounting - Reforms

Computerization of Accounting Function ingovernment has been fragmented. There is aneed for a ERP solution for Government

Accounting There is need to switchover to modified accrual

based accounting system which would entailrevisingaccounting classification


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PFM: Monitoring and Reporting - Benchmarks

Timely, relevant and reliable monitoring ofbudget execution enables line departments,finance department and other stake holders to

exercise financial control and undertakecorrective action as necessary; and

Timely, relevant understandable andcomparable financial reporting enables prompt

scrutiny at the year end and highlighting theextent to which funds were used for theintended and authorized purposes.


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PFM: Monitoring and Reporting - Diagnosis

Format of reports not useful, nor user-friendly

No correlation between expenditure and physicalperformance

Year end Financial Statements also lack user-friendly

formats


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Dist. Medical & Health Officer

CFW

PRIMARY HEALTH CENTRES

DOMH&FW

GOAPGOI

DHS

DistrictEmploye

es'MasterData

Dist.Treasury

BankEmployee

a/cs

Monthly eventstatement

Payroll

UtilityBills

Salaries and otherbudget allocationstransferred By EFS


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PFM: Asset Management

Poor control over assets leads to their theft and misuse

Asset management in government is weak

No reporting on assets (cash basis of accounting)

Maintenance of stock and asset registers is poor

Physical verification ranges from weak to non-existent

Investments not valued at lower of cost or market price


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PFM: Debt Management

Debt management is critical to developing realisticbudgets

Major portion of debt is to GoI as Plan expenditure is

financed by borrowings from GoI GoAP has set out a medium term fiscal framework

aims stabilize debt at around 31 percent of GSDP

Debt to be applied for capex

Transparency in debt reporting improved with inclusionof off-budget borrowings into the budget and accounts


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PFM: Contingent Liabilities Contingent liabilities pose significant fiduciary risk

Guarantees are the most important of contingent liability(Guarantee Redemption Fund)

Pensions are the other major non-debt liability (pay-as-you-go and actuarial)

Disclosure of contingent liability

Assurances and comfort letters in respect of contractualservices of PSUs not provided for


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PFM: Internal Controls Effective internal controls are a prerequisite for

containing fiduciary risk

Computerization poses new challenges in internalcontrols

Understanding and appreciation of internal controls lowamong many field level staff

Attitude of higher officials towards internal controlscould be more positive

Effectiveness of internal audit can be improved


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PFM: External Audit and Legislative Scrutiny

CAG audit should include physical verification of assets,increasing risk based audit

CAG opinion on accounts should extend to opinion on

accounts and PFM Responsiveness to audit should improve

Timeliness of PAC scrutiny


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Diagnostic Studies


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Fiduciary Risk Assessment

Fiduciary risk is defined as the risk thatfunds:

Are not used for the intended purpose;

Do not achieve value for money; and/or

Are not properly accounted for.


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Methodology DFID Guidance Note8 good practice Parameters

Prescribed with 15 related bench Marks For assessment of PFM system and Non treasury

systems. Field Visits to different districts with wide spread and

reach. Controls Testing Questionnaire based Interviews, stake holder work

shops Key document desk review


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DFIDs good practice principles and relatedbenchmarks

GPP: A clear set of rules governs the budgetprocess

BM.1.A budget law specifying fiscal management

responsibilities is in operation BM.2. Accounting policies and account codes

classifications are published and applied.


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GPP.2. The budget is comprehensive

BM.3. All general government activities are included inthe budget

BM.4. Extra budgetary expenditure is not material


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GPP.3.The budget supports pro-poor strategies

BM.5.Budget allocations are broadly consistent with anymedium term expenditure plans for the sector or for

overall budget


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GPP.4.The budget is reliable guide to actual

expenditure

BM.6.Budget outturn shows a high level of consistency

with the budget


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GPP.6.Government carries out procurement in line with

principles of value for money and transparency

BM.9.Appropriate use of competitive tendering rules

and decision making is recorded and auditable

BM.10.Effective action taken to identify and eliminatecorruption


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GPP.7.Reporting of expenditure is timely and accurate

BM.11.Reconciliation of fiscal and bank records iscarried out on a routine basis

BM.12.Audited annual accounts are submitted toparliament/legislature within the statutory period.


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Rating Snapshot

Overall assessment indicates medium risk

Department is ready to take up reforms

and Proactive to suggestions.

Sector strategy draft is finalized Financial Capacity Building for department staff is

being developed

NRHM/ State mission / District mission would help to

improve situation. PFM reform initiatives to start from Finance Dept.

for line departments.


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Key Observations

Ineffective Departmental structure - over centralized,unaccountable, managed through vertical programmeswithout horizontal communication among sub depts.

No strategic perspective in fiscal planning, expenditurepolicy making, budgeting, expenditure policy review, etc.

Proliferation of Societies and autonomous bodies withmultiple accounting mechanisms

Complex, Convoluted, Fragmented, Multiple districtadministrative structure

Revamping necessary with proper role clarity in view oftransfer of public services to local bodies.


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Key Observations- Procurement

Standardize Procurement Operations

Prepare Procurement Manual

Upgrade Inventory Management system with focus on

drug indenting planning. Demand Forecasting Mechanism needed

Develop dedicated core staff cadre for procurement

Incorporate international best practices

Set-up dynamic market intelligence E-Procurement to be standardized


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Corruption Prone Processes

Incentive Payments

Local Emergency Drug Purchases

Non-Maintenance of Patient / drug issue registers Irregular Distribution of Free Drugs.

Need to Speed Up Enforcement Process


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Risk Mitigation Ensure financial management capacity building in

department as well as parastatals.

Improve budgeting and performance framework.

Exclusive Financial Advisor for the Dept to assistHead of the Department and to act as nodal officerfor PFM reform

Develop Internal Audit wing at Head Quarters as wellas sub department level.

Increase comprehensiveness and transparency offinancial reporting for all central sectorschemes.


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To reduce speed money, develop Citizen Charterswith clear definition of services

Employ RTI Act as a tool to enhance citizenscapacity to fight corruption

Internal Vigilance System to be made fully functional

Introduce whistle blower protection legislation

Risk Mitigation


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PFM, Governance and Financial Accountability

Documents