Public Financial Management Reform For a world of strong economies Ross Campbell Director Public Sector, ICAEW

About Me ICAEW Chartered Accountant for over 20 years 15 years of commercial experience in Banking & Corporate Finance 10 years of Public Sector experience – Chief Accountant at UK Ministry of Finance & Ministry of Defence – Director at National Audit Office Currently Director for the Public Sector at ICAEW, with a mandate to develop the Institute’s presence and footprint in the public sector. Developed the ICAEW-PWC IPSAS Certificate Created the ‘Better Government Series’ and ‘Building Blocks’ toolkits. © ICAEW 2017

Public Financial Management Reform Context – why does it matter? The importance of building trust What does good practice look like? The challenges Is better financial reporting the answer? The to-do list… A role for the accountancy profession

Context: why does it matter? For a strong economy the role of Government is vital: On average governments spend approx. 50% of global GDP Governments set the rules and frameworks for national economies Tax policies influence how the private sector behaves The behaviour of government and government officials, for example with respect to corruption, enforcing the rule of law, etc…. …shapes the public’s perception and willingness to pay taxes… …and the confidence of investors in the economy Without public trust there is no strong economy The accountancy profession is ultimately about creating trust in numbers The techniques developed by professional accountants can benefit government Professional accountants can make all the difference Reform of the Management of the Public Finances s all about building trust…

How effective public financial management builds trust

How are we doing on Trust? Transparency International’s Corruption Perception Index - 2017 Suggests that there are some issues about trust in a few places…

Context: Professional accountancy skills build trust Accountancy skills are needed to build trust in the numbers: To uphold the social contract To deliver on the legitimate expectations of citizens Taxation that is fair and… Ensure effective Public Financial Management Is spent on legitimate public expenditure High quality public services Tackle Fraud & Corruption Ensure public money is spent for the public good Create the right climate for investment An economy that is sustainable in the long run Provide confidence to investors Promote stability and growth

What does best practice look like? ICAEW work has included looking at everything from culture, organisation, skills, information, accountability, sustainability and public trust in government. © ICAEW 2018

The indicators of good practice From our work ICAEW has identified some consistent characteristics of well managed systems of public financial management: Transparency leading to… …Accountability for public money… …leading to continuous improvement This needs accurate records of Assets and Liabilities High degree of professionalism in government staff Strong financial management systems & processes Good understanding of cause and effect relationships Accurate forecasting of the cost of delivering policies All of these need a strong government finance profession…

Improving Public Financial Management Best practice: Results and Findings Different countries have approached public financial management in many different ways: No one-size fits all History matters Financial management culture is very important The role played by the Finance Ministry is also important The strength of public audit institutions are another important factor Some countries have achieved economic success and strong accountability without adopting accruals accounting Not all countries that have adopted accruals accounting have made dramatic improvements in financial management In all cases successful countries have a strong accountancy profession!

Improving Public Financial Management Conditions for best practice Initial findings from our work indicates a correlation between strong economic performance and: High levels of Transparency & Accountability (most important!) Clear separation of roles and responsibilities Strength of the financial management culture Basic accountancy disciplines Financial professionals embedded at senior levels Strong & effective oversight (Internal controls, legislature & SAI) Follow-up and effective action with meaningful consequences The role played by Finance Ministries both in setting frameworks and expectations of professional standards is vital.

Improving Public Financial Management Accountability & Culture Our findings indicate that accountability is the most important factor in improved financial management Legislation can help set remits and responsibilities… Better financial reporting can give improved understanding… …but on their own, neither are enough , especially if not adhered to Accountability can only be effective when the practice matches the theory “The cultural side, the financial discipline, is one important element because you can have very advanced instruments of financial management, but if there is not a culture of austerity and discipline, then they won’t help” Discipline comes from having professionals working to professional standards

Improving Public Financial Management Some of the challenges to doing it….

The challenges facing countries

Effective Public Financial Management Some of the challenges Low levels of effective accountability and oversight Not possible to ‘follow the money’ Lack of visible consequences for fraud and corruption Insufficient skills and standards Standards are not enforced Professional skills hard to attract and retain Policy makers either don’t understand or are not interested Insufficient information Limited information on whether outcomes were achieved Little understanding of cause and effect relationships No or little follow up on whether money was spent as expected Budget systems can encourage unwanted behaviours Annual budgets can encourage over-purchasing (use it or lose it) Short term costs avoided at the expense of long term liabilities Under-estimating and entryism

Improving Public Financial Management The challenges – sound bites Blurred or unclear roles & responsibilities “…individuals teams and departments can overlap, creating confusion and additional bureaucracy… reducing our capability” Over complex internal controls or legislative approach “We have too many rules, I think we have to ask ourselves how the information is used” Ineffective scrutiny by legislators “…they argue in favour or against the budget, but once the budget is voted, really nobody cares about how the money is spent…”

Improving PFM: is better financial reporting the answer? Good public financial management needs complete, accurate and timely numbers, consistently presented – but… …to build trust comes from professional standards and disciplines Following the money Trend analysis & analytical review Cause & effect relationships Oversight & feedback to drive improvement …in a cultural environment where those financial management disciplines are valued and supported Tone from the top – Policy makers & Finance Ministry Strong independent institutions to ensure accountability Being seen to act and taking real action to tackle corruption and fraud

Benefits of accruals accounting

Improving Public Financial Management The to-do’ list: Globally we have still to fully embedded modern financial management disciplines in the thinking of policy makers: Challenge of creating an ‘financial management culture’ Educating policy makers is important Lack of follow up and consequences Even where the information exists – its only just starting to be used Financial systems are often still not well joined up Keeping a cadre of skilled finance staff needs on-going effort Need to think carefully about recruitment & retention Professionalism is the destination Talent management and development is the route

Improving Public Financial Management A role for the accountancy profession? Skilled finance professionals really matter – but for more than just the accounting – used effectively they can: Improve overall financial management discipline Communicate complexity to policy makers in simple terms Support organisational design to improve accountability and tackle fraud Help to set the culture & tone of the organisation Fight corruption through ethical standards & behaviours

Improving Public Financial Management What is ICAEW doing? Building Public Sector financial management capability Thought leadership and learning products (i.e. IPSAS Certificate) Support to Finance Ministries, SAIs and other public bodies Capacity Building team working with national PAOs to build professional capabilities across Africa Over 24 successful projects in 10 African countries to build capacity since 2007 Leading the development of the profession through Chartered Accountants Worldwide www.charteredaccountantsworldwide.com a family of 11 Chartered Bodies worldwide, including Zambia & South Africa represents 1.6 million members and students Supports, develops & promotes the vital role Chartered Accountants play in the development of a strong global economy