PFM domains & sequencing of reforms Module 2.2 Expenditure & accounting cycle 1

Day 2: Sub-systems of PFM and prioritsing reforms Module 2.1. Expenditure Classification, budget Preparation and the MTEF Module 2.2. Expenditure and accounting cycle Module 2.3. Program/Performance budget Module 2.4. External control, legislative and regulatory framework and IT (information technology)issues 2

Module 2.2. Objectives This module examines key points about the budget execution cycle Management procedures of the expenditure cycle Personnel, procurement Financial monitoring and accountancy Internal audit Aims at identifying the “basics” Brief examination of a few issues that go beyond the basics, including accrual accounting 3

 Expenditure cycle  Payroll management and procurement  Financial monitoring  Accounting bases Module 2.2. Outline 4

The stages of the expenditure cycle Here are a number of stages in making payment appropriations available The role of the Ministry of Finance and sectorial ministries in the management and control of cycles is very different from the Anglophone to the francophone system o Some differences will lead to define different measures within reforms 5

French speaking countries: « les contrôles ex- ante du ministère des finances » 6

Two different approachs: Anglophone countries 7

The expenditure cycle: points to consider Making payment appropriations may take time, especially for regional service or local administrations Anglophone systems: little monitoring of commitments Francophone systems: burdensome, duplication of controls 8

Payment systems: points to consider Francophones & some Anglophones : Single Treasury Account (STA): cash centralisation - desirable for sound treasury management Different modes Francophone: pre-eminent role of Treasury in control & establishment of payment priorities Anglophones without STA : hundreds or thousands of Government bank accounts, poor cash control Becoming less common 9

Appropriations & Treasury management: key points Annuality: Are delays authorised? Are there additional periods? Virement within same code or programme (within scope authorised by Parliament): respective powers of the MoF, sectorial ministries central services, etc. So cash plans exist? And/or rationing (”budgetary regulation"; cash budgeting) over the year ? Is this predictable? Budget revisions: How? How many per year? 10

Guaranteeing foundations Take measures to make budget execution effective Make sure funds and credits are available, improve predictability Rationalise controls within the executive by accounting for specific aspects of budgetary system Francophone countries: rationalise control within the MoF, ensure transparency of Treasury Anglophone countries: follow commitments, audit internal controls, strengthen Treasury Post-conflict countries: put in place a centralised payment monitoring and management system 11

Upgraded PEFA indicators: budget execution PI-19. Revenue administration PI-20. Accounting for revenue PI-21. Predictability of in-year resource allocation PI-22. Expenditure arrears PI-23. Payroll controls PI-24. Procurement PI-25. Internal controls on non-salary expenditure PI-26. Internal audit 12

PI-19. Revenue administration This indicator relates to entities that administer central government revenues (e.g. tax administration, customs administration, & social security contribution administration). It also covers agencies administering revenues from other significant sources such as natural resources extraction. These may include public enterprises that operate as regulators & holding companies for government interests: if so information will be required from entities outside government sector. The indicator assesses procedures used to collect & monitor central government revenues. It has four dimensions & uses M2 (AV) method Rights and obligations for revenue measures Revenue risk management Revenue audit and investigation Revenue arrears monitoring 13

PI-20: Accounting for revenue This indicator assesses procedures for recording & reporting revenue collections, consolidating revenues collected, & reconciling tax revenue accounts. It covers both tax & nontax revenues collected by central government. This indicator contains three dimensions and uses M1 (WL) Information on revenue collections Transfer of revenue collections Revenue accounts reconciliation 14

PI-21. Predictability of in-year resource allocation This indicator assesses extent to which central MoF is able to forecast cash commitments & requirements & to provide reliable information on the availability of funds to budgetary units for service delivery. It contains 4 dimensions & uses M2 (AV) method Consolidation of cash balances Cash forecasting and monitoring Information on commitment ceilings Significance of in-year budget adjustments 15

PI-22. Expenditure arrears* This indicator measures extent to which there is a stock of arrears, & extent to which a systemic problem in this regard is being addressed & brought under control. It contains two dimensions & uses M1 (WL) method Stock of expenditure arrears Expenditure arrears monitoring 16

PI-25. Internal controls on non-salary exp This indicator measures effectiveness of general internal controls for non-salary expenditures. (Specific expenditure controls on salaries are considered in PI-23). The indicator contains three dimensions & uses M2 (AV) method Segregation of duties Effectiveness of expenditure commitment controls Compliance with payment rules & procedures 17

PI-26. Internal audit This indicator assesses the standards & procedures applied in internal audit. It contains 4 dimensions and uses M1 (WL) method Coverage of internal audit Nature of audits and standards applied Implementation of internal audits & reporting Response to internal audits 18

Public Internal Financial Control (PIFC) Promoted by European Commission in Eastern Europe Principles Manager responsibility Independent internal audit Central Harmonization Unit – CHU Organisation Internal audit systems include risk identification & are under manager’s responsibility Independent internal audit of managers, & inspections are put in place by MoF MoF is in charge of coordination & unification of PIFC system 19

PEFA Report: 4.2 Effectiveness of ICF Additional section in report, based on evidence collected to score PIs, to comment on effectiveness of the Internal Control Framework, covering: Control environment Risk assessment Control activities Information & communication Monitoring 20

 Expenditure cycle  Payroll management and procurement  Financial monitoring  Accounting bases Module 2.2. Outline 21

Personnel management & Payroll Very centralised in francophone countries, variable situation in other countries But, weaknesses exist in all systems “ghosts”, personnel data files inconsistent with payroll Periodical census, often unsatisfactory results 22

PI-23. Payroll controls This indicator is concerned only with payroll for public servants : how it is managed, how changes are handled, & how consistency with personnel records management is achieved. Wages for casual labor & discretionary allowances that do not form part of payroll system are included in PI-25. This indicator contains 4 dimensions & uses the M1 (WL) Integration of payroll & personnel records Management of payroll changes Internal control of payroll Payroll audit 23

Procurement – Key points Transparency from bidding stage to contract award Guarantee competition: adequate legislative & regulatory framework Avoid corruption: Rules to avoid corruption: Separation of authority, rotation of positions Appeal procedures Audit of the procurement process Adequate infrastructure Adequate organisational dispositions 24

PI-24. Procurement This indicator examines key aspects of procurement management. It focuses on transparency of arrangements, emphasis on open & competitive procedures, monitoring of procurement results, & access to appeal & redress arrangements. It contains 4 dimensions & uses M2 (AV) method Procurement monitoring Procurement methods Public access to procurement information Procurement complaints management 25

 Expenditure cycle  Payroll management and procurement  Financial monitoring  Accounting bases Module 2.2. Outline 26

Occurrence and deadlines: basics Internally financed expenditure: monthly, Maximum period <1 month Quarterly or semi-annual basis, depending on the project aids End-of-year accounts: maximum period of 5 months for final accounts, and only 2 months for provisional accounts 27

Reliability How to tell? Check comparison procedures, between banks, Treasury & authorising officers Check issues related to arrears 28

Coverage Budget, of course But the foundations should encompass almost all of the central government Coverage 29

 Expenditure cycle  Payroll management and procurement  Financial monitoring  Accounting bases Module 2.2. Outline 30

Accounting Ex-post evaluation, monitoring, audit, feedback useful for preparation In African Francophone countries, public accounting developed in traditional way: related to national accounting, training of public accountants in Treasury schools, assistance from French Treasury accountants (UDEAC: 1974 works to develop corporate accounting!) In Anglophone countries, accounting was relatively simple, but over last few years, influence of NPM has induced a greater emphasise on costs, statements, etc. 31

Accounting methods Cash-based accounting Keeps track of expenses when paid for, implementation of revenue when registered (i.e. when cash moves) Accruals-based accounting Used in commercial world Keeps track of events when they occur: assets, liabilities, net assets/net position, outputs & expenses (including depreciation, inventory shocks, etc.) 32

Accounting methods Depends on the country: variants between the extremes Cash-based Accounting Accruals- based accounting, (commercial accounting) Modified cash basis Modified accrual basis 33

Towards accruals-based accounting? Many accruals-based accounting projects exist (e.g. WAEMU) However, requires significant effort  UK: White paper published in 1995; first "accrual” accounts published in 2002  France: project for accrual accounting initiated in 1996; first publication in 2007 Risks of creative accounting Will the financial statements be more transparent for the Parliament? 34

Two important points to keep in mind Liabilities accounts (not including pension rights) Accruals-based accounting of public debt is commonly used (in annex systems) Recording expenditures as soon as this debt is confirmed (liquidation) Financial assets accounts E.g., loans to companies Methods sometimes designated as “modified accrual accounting” 35

The basics The accounting system must enable the basics in terms of budget preparation, control, reporting, & publication as per country regulations: this requires: Adequate budgetary classification (cf. module 1.2) Registration of expenditure at both commitment & payment stages Debt recording Reports on arrears & other liabilities Comprehensive coverage of accounting system Reports on financial assets Asset register at least for those physical assets liable to misappropriation or waste 36

Beyond basics General accounting Anglophone & Francophone Implementation of a modified accrual system encompassing liabilities & financial assets (NB Anglophone: double-entry book-keeping) Transition countries Unification of accrual-based accounting of line Ministries with cash-based accounting of Treasury Estimates for possible liabilities Then, accruals-based accounting for service agencies 37

Key message Budgetary procedures must guarantee that discipline budget is maintained & that the expenditure circuit is smooth: reforms must account for both these requirements Audit & security procedures are essential to personnel data files management Comprehensive financial monitoring of expenditure is a necessary condition for a reliable PFM system 38