1. Financial Management – a brief overview Portfolio Committee on DoD Briefing 19 October 2005 RP Mosaka/ C Botes Parliamentary Service Unit Office of the Auditor-General

2. INDEX 1.Definition 2.Tools for Financial Management in the public sector 2.1 Controlling the business 2.2 Internal control systems 2.3 Control environment 2.4 Specific control measures 3.Financial Management Performance vs Service Delivery 4.Financial Management Capability Model

3. 1.DEFINITION Section 188 of the Constitution requires an audit and a report on the accounts, financial statements and financial management of all national state departments and administrations …… Why is Financial Management important? FM = Good Governance = Good Process + Good Outcomes Some key definitions of financial management in the public sector context:

4. a)Process by which management exercise control of its resources in order to fulfil its objectives and report accurately b)Essentially the manner in which “management” initially controls and then manages it’s business, and therefore it can be said to be the assessment of the performance of management, and in turn holding management accountable. DEFINITION (Continued)

5. 2. Tools for Financial Management 2.1Controlling the business Key questions: a)To what extent is management controlling its business effectively? b)To what extent is management providing efficient, economic and effective delivery on its mandate?

6. Controlling the Business is therefore a management obligation – inter-alia by means of the following steps: a)Identifying the legal requirements of the organisation (public sector organisations can only act according to/in terms of their legal mandate) b)Identifying the key risks, both internal and external Controlling the business (Continued)

7. c)Management then needs to translate the laws and incorporate risks control into its organisation operations through the establishment of strategies and setting of objectives d)These strategies and objectives are translated into policies, procedures and processes that can be put into operation by the organisation e)The organisation’s personnel and systems then perform functions that are directed and guided by the policies and procedures. This is often referred to as the internal control structure Controlling the business (Continued)

8. 2.2Therefore internal control systems are: All policies, procedures and processes adopted to assist in achieving management’s objectives All legislatives and directives pertinent to the organisations All frameworks that ensures conduct of business in an orderly and efficient manner Internal control systems

9. Internal control systems (continued..) Internal control include: a)Implementation, maintenance and adherence to management policies b)safeguarding assets c)fraud detection and prevention d)accuracy of accounting records and reliable reports

10. Control Environment 2.3Elements and characteristics of control environment Includes overall attitude and actions of management regarding controls (VIP) Guided by laws and regulations e.g. founding legislation, the PFMA, Treasury regulations adherence… etc. Ministerial and other directives

11. Control Environment (Continued) Organisational structure should be established and provide for skilled/trained personnel Training courses and ongoing assessments to be done as it affects capacity and competence of personnel affects specific control measures Individual job descriptions should be in place for effective role clarification

12. Control Environment (Continued) Performance contracts for employees to facilitate periodic performance appraisals Budgeting and planning for use of resources Accurate, reports, e.g. from accounting processes and systems such as BAS, Logis Internal audit and an audit committee – key to well- structured and working control environment

13. Control Environment (Continued) Segregation of duties to be established by management Key duties: a)Authorising/approving of transactions b)Recording of transactions c)Custody over the related assets d)Reviewing of transactions

14. 2.4Specific management control measures Internal control mechanisms such as: a)Proper authorisation b)Restricted access to resources c)Independent checks/reviews d)Enforcing/monitoring of controls by management

15. 3.Financial Management and Service Delivery Ultimate test is to determine whether policies, procedures and processes produce the desired results Financial management objective should relate to performance of management (VIP) One may use financial management processes to question the effectiveness and efficiency of organisational performance – and service delivery

16. 4.Financial Management Capability Model Maturity levels based on Canadian model, and Auditees will be evaluated on maturity levels 1 to 6 Level 1: START UP No proper control framework Level 2: DEVELOPMENT Develop a proper internal control framework and financial accounting processes

17. Financial Management Capability Model (continued) Level 3: CONTROL Focus on compliance and control Level 4: INFORMATION Focus on measuring how resources are used. Have reliable and sufficient financial information

18. Financial Management Capability Model (continued) Level 5: MANAGED Focus on balancing efficient and economical use of resources with quality/effectiveness of results achieved Level 6: OPTIMISING LEVEL Focus on continuous improvement and learning These levels will primarily be audited and reported via performance audits

19. Initially on levels 1-3 – about financial management control Levels 4-6 – about financial management performance Financial Management Capability Model (continued)