Assessing Financial Management and Control on entity level Instrument developed by the National Academy of Finance and Economics (NAFE), Ministry of Finance, the Netherlands PEMPAL, Skopje, April2019

Previous PEMPAL meeting: The National Academy of Finance and Economics of the Dutch ministry of Finance developed a draft guide for guidance on assessing FMC and the steps after that; The developed guide describes: ‘steps to take towards a proper assessment; Instruments for conducting FMC-assessments; Follow-up steps after assessment: action plan. Since then: - Updates and changes made based on experiences in practice

What we learned in the practice Assessment tools should focus on the key issues; Assessment tool should be efficient, swift, practical and understandable; Assessment tool should deliver insight in area’s where targeted actions make sense are realistic; Working with internal working groups should be well guided by experts.

Assessing tools are available but…. Often their scope is very broad, covering the total spectrum of IC: COSO-elements, COSO-principles  not swift, not efficient, not always pinpointing the key-issues; Some lead to so called ‘maturity level classifications: it is questionable if maturity levels give enough information about underlying problems; Self assessments (without guided expertise) might give blurred picture of reality; Clear assessment criteria are often lacking; CHU’s often focused on gathering statistical data, compliance orientated, ticking boxes.

Characteristics of the NAFE-assessment guidance tool: Limited in scope than total spectrum of IC: it focusses on key fundamental elements of Financial Management and Financial Control only: total around 50 key-criteria to assess; Criteria are based on: (partly) COSO, Three lines of Defense and the management-/Deming-cycle (plan, do, check act) as well as best practice environments and existing tools (e.g. PEFA); Assessment criteria have been plotted in an ‘assessment matrix’ which forms the basis for instruments like questionnaires, document analyses, interviews etc.; Key focus is on the managerial activities (and FMC-related responsibilities and accountability requirements) and the budget process.

Structure of assessment criteria General requirements: conditional aspects which make or break a sound functioning FMC- environment; specific assessment criteria for each element of the Deming Cycle. These criteria are related to functional requirements of first and second line functions in best practice FMC-environments; Emphasis on two main PDCA-cycles: the budget cycle and the managerial function (1st and 2nd line) Throughout this structure the focus is on: Integration (e.g. planning, budgeting and accounting); Participation (e.g. involvement first line functions in planning and budgeting); Coordination (e.g. coordinating activities in the second line or activities within budget programs); Communication (e.g. flow of managerial information, accounting systems).

General Conditional Criteria Category of criteria Criteria are aimed at   A: General Conditional Criteria Accountability structure (mandates, authorities, delegation in relation to (budget)programs, key tasks and organizational structure); Senior management responsibilities; Risk management; Roles/responsibilities related to financial control (and F-management); Specifically for the Budget cycle: Delegated budget; Integration of budget cycle with operational process and accountability requirements; PBB- and MTBP-proof budget systems.

Criteria related to planning Category of criteria Criteria are aimed at   B: Criteria related to planning Alignment strategic objectives with operational objectives and –plans (cascade); Balanced participation in planning process (1st-line, 2nd-line, and senior management); Quality of planning ‘products’ (e.g. objectives); Setting of KPI’s (also for fin control); Business processes and related key-risks. Specifically for the Budget cycle: Involvement first line in budget planning process; Connectivity of budget planning with objectives and KPI’s; Activity based budgeting, relation with performance-(planning).

Criteria related to execution Category of criteria Criteria are aimed at   C: Criteria related to execution Execution of tasks, responsibilities in line with planning; Adequate administrative systems (accounting systems on performance and financial administration, integration/connectivity); Segregation of duties; Specifically for the Budget cycle: Budget execution process (and its monitoring); Information sharing on budget execution 1stline and 2ndline Ongoing control on financial transactions; Financial administrative process: roles, responsibilities and authorizations; Control on excess spending beyond approved ceilings.

Criteria related to control/monitoring Category of criteria Criteria are aimed at   D: Criteria related to control/monitoring Planning in relation to controle: how is that organized; Control and monitoring on adequateness of controls in the first line processes; Relevant, timely and adequate information for senior management; Role first and second line in control and monitoring; Role internal audit; Horizontal control coordination (e.g. audit committee, 2nd line functions etc.); Specifically for the Budget cycle: Consolidated and integrated reporting: performance, budget information, KPI’s; Review/evaluation of expenditure programs; Reports on revenue/expenditure.

Criteria related to responsive actions Category of criteria Criteria are aimed at   E: Criteria related to responsive actions Linkage of decision making process to managerial information; Adaptive/flexible possibilities to react on necessary changes; Re-prioritization; Adapting KPI’s, objectives; Follow-up of audit recommendations. Specifically for the Budget cycle: Use of historical data/financial information in upcoming budget cycle(s).

Practical use of the developed tool: Internal working group: needs to be well instructed and guided by experts (workshops/training); General questionnaire based on the criteria can give input for a second stage deeper review; Deeper review by interviewing relevant internal functions and stakeholders: three lines; Working group composes report; Support and involvement of internal audit is needed and essential; Action plan based on findings; Assessing several entities gives insight in general status of FMC in a country.