Public Fund Digest · 2017. 6. 19. · Public Fund Digest Vol. 4, No. 2 ISSN: 0736-7848 Published...

The International Consortium on Governmental Financial Management

Public Fund DigestVolume IV, No. 2, 2004

International Consortium onGovernmental Financial ManagementWorking globally with governments, organizations, and individuals, the International

Consortium on Governmental Financial Management is dedicated to improving financialmanagement by providing opportunities for professional development and informationexchange.

To achieve the above mission, the Consortium’s international activities include:

1. Providing comprehensive professional development activities in the fields ofaccounting, auditing, budgeting, information systems, cash management,debt administration, and financial management;

2. Contributing to the advancement of government financial management principles and standards, and through educational events, promoting bestpractices in government financial to improve management control andaccountability to the public;

3. Disseminating and promoting to its members and to the public informationconcerning government financial management;

4. Promoting the development and application of professional standards to sup-port government financial management activities;In addressing issues, the Consortium embraces many disciplines of governmental

financial management including: accounting, auditing, budgeting, debt administra-tion, information technology, tax administration and treasury management. Theseareas provide the general frame of reference for the programs, activities and opera-tions of the Consortium.

The material published herein may be reproduced without the consent of theConsortium, which in fact encourages their reproduction, translation and distribu-tion. The views expressed in this publication do not necessarily reflect those of theeditor nor do they coincide with the positions taken by the Consortium.

The editor invites submission of articles, research papers, letters and reviews ofbooks and documents. Please submit articles to the editorial office indicated below.Also, requests for information on the Consortium should be addressed to:

The International Consortium on Governmental Financial Management444 North Capitol Street-Suite 234

Washington, DC 20001, USA

Telephone 202 624-5451 • Fax 202 624 5473

Email: [email protected]

Copies of the Public Fund Digest may be obtained by writing to the address above.The cost is US $10 for ICGFM members; US$15 for nonmembers.

Copyright 2004 by the International Consortium on Governmental Financial Management.

Public Fund Digest

Vol. 4, No. 2ISSN: 0736-7848

Published by the International Consortium on

Governmental Financial Management

Washington, D.C.August 2004

International Consortium onGovernmental Financial Management

General Information“Working globally with governments, organizations, and individuals, the

International Consortium on Governmental Financial Management is dedicated to improving financial management by providing opportunities for professional development and information exchange.”

Our mission includes three key elements. First, it highlights that, within theinternational community, the Consortium is unique—it serves as an “umbrella”bringing together diverse governmental entities, organizations (including uni-versities, firms, and other professional associations), and individuals. At thesame time, it welcomes a broad array of financial management practitioners(accountants, auditors, comptrollers, information technology specialists, treasur-ers, and others) working in all levels of government (local/municipal,state/provincial, and national). Additionally the mission statement emphasizesthe organization’s focus on activities to promote professional development andthe exchange of information.

Our programs provide activities and products to advance governmentalfinancial management principles and standards and promote their implementa-tion and application. Internationally, the Consortium (1) sponsors meetings, con-ferences, and training that bring together government financial managers fromaround the world to share information about and experiences in governmentalfinancial management, and (2) promotes best practices and professional stan-dards in governmental financial management and disseminates informationabout them to our members and the public.

The International Consortium on Governmental Financial Management provides three options for membership. 1. Sustaining Members: organizations promoting professional development,

training, research or technical assistance in financial management; willing toassume responsibility for and to actively participate in the affairs of theConsortium. Each Sustaining Member has a seat on the ICGFM’s Board ofDirectors and receives 10 copies of all ICGFM publications to be distributedwithin their organization. (Dues: $1,000)

2. Organization Members: government entities with financial managementresponsibilities, educational institutions, firms, regional and governmentalorganizations, and other professional associations. Six organization membersserve on the ICGFM’s Board of Directors and organization members receive 5copies of publications to be distributed to their members. (Dues: $250/$150*)

3. Individual Members: persons interested in, dedicated to, or working withactivities directly related to financial management and who wish to be mem-bers in their own right. Six members of the ICGFM Board of Directors will beselected from among all individual members. Each individual member willreceive a copy of all ICGFM publications. (Dues: $100/$50*)* A special discount is offered to developing countries, countries with economies in transition and

regional groups and organizations in such countries to encourage their participation. This discount isavailable to all countries other than Australia, Canada, China, Egypt, European countries (except transition economies) India, Iran, Israel, Japan, Kuwait, Libya, Mexico, New Zealand, Nigeria, Oman,Saudi Arabia, United Arab Emirates, USA, Russia, and Venezuela.

ForewordIt is always difficult to implement good financial management practices in

the public sector. This is especially true in those countries that are in transitionto a market economy or the heavily indebted poor countries. In this issue, Ihave included a couple of articles identifying the actions taken by two separatedonor agencies to assist developing countries in their efforts to improve gover-nance in the public sector. The first details the countries that are eligible forassistance by the Millennium Challenge Corporation in Fiscal Years 2004 and2005, as well as the conditions associated with that assistance. The second iden-tifies actions taken by the U.S. Agency for International Development to assistcountries throughout the world in their efforts to discourage and detect corruptpractices.

These articles are followed by two articles dealing with actions taken in spe-cific areas to implement good financial management practices. The first articleprovides an excellent overview of legislative budget oversight in the variouscountries of South America. The second identifies the actions taken inBangladesh to establish good governance practices and improve their ranking in the Corruption Perception Index.

A key component of good financial management practices is external audit-ing and we have included three articles on this area of expertise. The first articleidentifies the new structure of the International Standards on Auditing andidentifies which public sector reports might be subject to external attestation.The second provides the elements needed to establish or enhance audit legisla-tion for the Supreme Audit Institutions (SAIs). The third spells out the actionstaken in Macedonia to improve their audit practices and challenges SAIs towork more closely together as each attempts to learn from each other based on the experiences in their countries.

The last article lays out a framework for performance measurement in publicfinancial management (PFM). The primary purpose of the PFM PerformanceMeasurement Framework is to provide a standard set of high level indicatorsthat will enable the performance of country PFM systems to be regularly moni-tored, by domestic and international stakeholders. The framework was devel-oped by a working group involving staff from the World Bank, IMF and thePublic Expenditure and Financial Accountability (PEFA) Secretariat. It is still in draft form and you are encouraged to make comments.

Following this Foreword, I have included some references that you mightfind beneficial in your work. I have also included some timelines to help youidentify where you might be in your efforts to implement accrual accounting in your country. If you have difficulty understanding the timelines, I wouldencourage you to read the Hughes/Minovski article in the last issue of thePublic Fund Digest or go to the www.icgfm.org website to download the article.

As always, we invite your comments on these papers and any issue of thePublic Fund Digest as we debate the issues. Contact me at [email protected] if you would like to contribute an article or discuss a government financial management issue. Or contact us by telephone, facsimile, and on the Internet at www.icgfm.org.

Jesse W. Hughes Relmond Van DanikerPublications Editor President

7August 2004

Table of Contents8. Reference Material

9. Timelines for Transitioning to Accrual Accounting

10. The Millennium Challenge CorporationDavid Nummy

22. U.S. Agency for International DevelopmentFrederick W. Schieck

28. Reforming Fiscal Institutions and Strengthening Government Accountability: Legislative Budget Oversight in Emerging EconomiesCarlos Santiso

40. The Challenges of Good Governance: A View from BangladeshNurul Momen and Marzina Begum

50. Which Financial Reports In The Public Sector Should Be Subject To External Attestation?Jesse Hughes and Wayne Cameron

60. Promoting Government Accountability: Critical Elements in Establishing or Enhancing Audit LegislationLinda L. Weeks

68. Current Situation and Perspectives of Development for Financial Control in the Republic of MacedoniaMito Naumoski

74. Public Financial Management Performance Measurement Framework Revised Consultative Draft, February 12, 2004 [With Amendment Regarding Procurement]

100. Public Sector Committee Update 12

8 Public Fund Digest

Some Reference Material (e-mail—[email protected])

2003 book on “Reforming Government Accounting and Budgeting inEurope” edited by Klaus Luder and Rowan Jones published by FachverlagModerne Wirtschaft, Frankfurt, Germany:

3 countries (Finland, Spain, & Sweden) have completed the move to fullaccrual.

1 country (UK) has essentially completed the move to full accrual except nowhole-of-government financial statements are yet in place.

2 countries (France & Switzerland) have begun the reform process3 countries (Germany, Italy, & the Netherlands) have not yet begun the

reform process2002 summary of five African countries on Budget Transparency and

Participation in the Budget Process(www.internationalbudget.org/resources/africalaunch.htm).

Legal Transparency ParticipationSouth Africa good moderate moderateGhana moderate weak weakKenya moderate weak weakNigeria weak weak weakZambia weak weak weak

OECD/World Bank 2003 Survey of Current Budgetary Practices for 30 OECDcountries and 30 non-OECD countries (ocde.dyndns.org)

Treasury Reference Model in 2001 by Ali Hashim (World Bank) and Bill Allan(IMF), www1.worldbank.org/publicsector/pe/trmodel.htm

IMF Code of Good Practice on Fiscal Transparency(www.imf.org/external/np/fad/trans/index.htm)

GFOA (US) Best Practices in Public Budgeting with 4 principles and 12 elements (www.gfoa.org/services/nacslb/budgetmenu.htm)

UNDP Key Factors in Budget Preparation Process(magnet.undp.org/Docs/efa/CONTAC~1.htm)

World Bank Country Financial Accountability Assessment (www1.worldbank.org/publicsector/cfaa.htm)

OECD Best Practices for Budget Transparency (www.oecd.org)Information Systems for Government Fiscal Management by Ali Hashim

& Bill Allan, The World Bank, 1999The Government Finance Statistics Manual, 2001 (IMF)

(www.imf.org/external/pubs/ft/gfs/manual/index.htm)International Federation of Accountants (www.ifac.org) where International

Public Sector Accounting Standards and studies can be downloaded for free.

International Consortium of Government Financial Managers (www.icgfm.org)for case studies published in the Public Fund Digest and announcement of conferences.

9August 2004

Timelines for Transitioning to Accrual Accounting

Cash Basis

IPSAS (Part 1)

Budget/Actual

Comparative

Statement

Cash Basis

IPSAS (Part 2)

AP and

Other CL

Long Term

Debt

AR and

Other CA

Fixed

Assets

All 20

Accrual

IPSASs

Net Assets/

Equity

For Each Government Entity (Except GBEs) at Central, State, and Local Levels

IAS 7 on

Cash Flows

AP and

Other CL

Long Term

Debt

AR and

Other CA

Fixed

Assets

Equity All

IASs

All Pertinent IASs

For Each Government Business Entity (GBE)

For Consolidated Government Entities

(except GBEs)

For Consolidated Government Business

Enterprises (GBEs)

Consolidated

Cash Statement(Part 1, Cash Basis IPSAS)

ConsolidatedFinancial Statements

(IPSAS 6)

Consolidated

Statement on CashFlows (IAS 7)

Consolidated

Financial Statements(IAS 27)

For Whole-of-Government Financial Statements

Consolidated Central GovernmentConsolidated State Governments

Consolidated Local GovernmentsConsolidated GBEs

Consolidated Whole-of-Government FinancialStatements (IPSAS 6)


The Millennium Challenge CorporationRemarks by David Nummy

International Consortium on Government Financial Management20 April 2004

Lessons in DevelopmentFor the last 10 years, I have worked in the US Treasury Department’s techni-

cal assistance program responsible for managing all projects related to publicexpenditure management. Our counterparts are typically Ministries of Financein transitioning countries.

I want to relate a story that all of you at this conference will uniquely understand which I think helps to explain why the MCC is positioned to bevery successful.

The very first country I engaged with ten years ago was a relatively newcountry coming out of difficult times. One of my first meetings was with theMinister of Finance and I asked him to explain briefly how government rev-enues were managed. He explained that each morning at 9am, he called theGovernor of the Central Bank to learn how much revenue had been depositedthe day before, he conferred with his cabinet colleagues and made a decision onhow to spend yesterday’s receipts. The process started anew the next morning.That was the sum of both budget formulation and budget execution.

Needless to say, I concluded that the government could benefit from assistance and the Treasury Department began an engagement to help themimprove government finances. Over time, I learned some very valuable lessonsobserving this particular country.

Our program, along with other donors, explained the need to have an open,transparent, accountable and comprehensive budget process that providedmeaningful information to its citizens. Being overburdened by the problems ofthe day, little commitment to change was made, not out of resistance butbecause it wasn’t a priority.

This particular country has a very large and successful Diaspora, includingone individual with one of the world’s larger fortunes. This individual was par-ticularly generous toward his homeland and offered to provide a substantialamount of money to address some of the most urgent needs of its people. Heinformed the government that he would consider providing funding directlythrough government mechanisms but did not have faith that the existing finan-cial management process could appropriately track his funds and provide infor-mation about impact and results. He chose to establish a foundation but left outthe possibility of directly supporting government programs.

Almost immediately, Ministry of Finance officials laid out a program to modernize and reform their budget and financial management processes. Myfirst lesson...incentives are powerful.

In deciding what course they wanted to take in financial managementreform, they began to look at the experience of their peer countries, theythought a great deal about their own needs, the experience and strengths oftheir employees, and the pace at which it made sense for them to proceed. Theirprogram was far more effective than any which had previously been suggested.

11August 2004

My next lesson...when governments have developed their own reform course, itis frequently more successful than when imposed from outside.

Being a poor and inexperienced country, they needed technical expertise andfinancial resources. They turned to our program and to other donors and, work-ing all together, the collective assets of determination, experience, and financeresulted in rapid and meaningful change.

Today, that country has one of the best financial management informationsystems among its peers and it has made the transition in budgeting from whatI call, “what we spend money on” to “why we spend money,” instituting a pro-gram-based budget process that is carefully establishing performance indicators.Another lesson...when donors are able to work as partners with their counter-part countries, their contributions are symbiotic.

This reform has impacted every aspect of resource allocation and the overallefficiency and effectiveness of all public monies has dramatically changed, notleast of which is due to the attention being paid to results. Economic growth hastaken off and people’s lives are demonstrably better. Yet another lesson is onethat you have discussed at this conference...policy driven by the effective measurement of results has real impact on people.

Since my first encounter with this particular country, I have been involvedwith over thirty countries either in transition from one economic system toanother, various stages of development or in a post-conflict situation. The les-sons I’ve referenced have been reinforced time and again. But perhaps the mostimportant lesson of all that I’ve gained from my experience is that policies matter. No amount of technical expertise, financial resources, or good intentions will impact the lives of people suffering from poverty if they are not accompanied by the kind of public policies that promote growth and provide opportunity to every citizen.

The Millennium Challenge CorporationWhen I had the opportunity to become a part of the Millennium Challenge

Corporation, I knew immediately that it was an organization I wanted to bepart of because the MCC is built around some fundamental principles includingincentives, country driven development programs, working as a partner, beingaccountable for results, and, most importantly, the idea that policies matter.

The MCC was proposed by the President two years ago coincident with theSummit on Financing for Development held in Monterrey, Mexico, and enactedinto law in January of this year. I would like to briefly explain how these coreprinciples permeate all aspects of the MCC’s design and operations.

IncentivesOne of the brilliant aspects of the law creating the MCC is that it mandates

that a country’s eligibility to benefit from the MCC is determined by theiractions and the impact of their policies. The President and Congress have insu-lated the MCC from being impacted by the political imperatives of the day.

In our first year, only countries that can borrow from the InternationalDevelopment Association (IDA) with per capita incomes of $1415 are candidates to participate. That results in a list of 75 countries. Twelve of thoseare prohibited by other provisions of law from receiving US assistance, leaving63 “candidate countries.”

These 63 countries will be measured against their peers using sixteen indica-tors taken from independent sources. These indicators have been chosen tomeasure a country’s performance in three important areas: Governing Justly,Investing in People, and Encouraging Economic Freedom. The details of theseindicators and more detail about everything I mention today can be found atour web site, MCC.GOV. Governing Justly1. Civil Liberties (Freedom House)2. Political Rights (Freedom House)3. Voice and Accountability (World Bank Institute)4. Government Effectiveness (World Bank Institute)5. Rule of Law (World Bank Institute)6. Control of Corruption (World Bank Institute)Investing in People7. Public Expenditure on Health (National Governments)8. Immunization (World Health Organization WHO)9. Total Public Expenditure on Primary Education (National Governments)10. Primary Completion Rate (World Bank and UNESCO)Encouraging Economic Freedom11. Country Credit Rating (Institutional Investor Magazine)12. Inflation (Multiple)13. Fiscal Policy (National Governments)14. Days to Start a Business (World Bank)15. Trade Policy (Heritage Foundation)16. Regulatory Quality Rating (World Bank Institute)

Our Board of Directors will then make a final selection of those countries thatare eligible to request MCC assistance. The primary factors in their considera-tion will be whether countries:• Rank above the median on half of the indicators in each three categories;• Rank above the median on the corruption index, one of the indicators in the

category of ruling justly; and, • Whether a country has an inflation rate of less than 20 percent.

These considerations will be the predominant factor but the Board may con-sider data gaps, lags, trends, or other weaknesses in the indicators. Additionally,the Board may deem ineligible a country that performs substantially below itspeers on any indicator and has not taken appropriate steps to address the shortcoming.

Key aspects of this selection process are that it rewards countries who havebeen following sound policies and that it provides a powerful incentive to can-didate countries to enact policies that will change their ranking. The first groupof eligible countries will be selected at a Board meeting taking place next week.We have already gotten indications that candidate countries are examining howthey rank among their peers and discussing what policy changes they can maketo improve them.


13August 2004

To further increase the incentive provided by MCC assistance, we expect thatthe MCC will be one of the most substantial donors in those countries withwhom we eventually conclude an agreement. In addition, our assistance com-mitments will be multi-year in nature. We expect them to cover a period of threeto five years in duration.

Our appropriated funding for this fiscal year is $1 billion. The request in theFY 2005 budget is $2.5 billion and is projected to be $5 billion in FY 2006. Thiswill represent in increase of 50 percent in US development assistance. In short,an MCC partnership will be substantial, real, and will have a significant impactin the recipient country.

Country Driven ProgramsOnce countries are selected by the Board, it does not mean that they will

automatically receive MCC assistance. These countries will be invited to make acomprehensive proposal outlining a program to be funded or partially fundedby the MCC.

The MCC will expect the country itself to have developed the key elementsof its proposal, the core element being their determination of the primary obsta-cles blocking economic growth and poverty reduction.

The MCC will expect a compact proposal to have been developed using aconsultative process, which includes citizens and civil society, to develop itsCompact program and will expect it to include measurement benchmarks thatcan be used to evaluate progress.

A Philosophy of PartnershipIf negotiated to a successful conclusion, the MCC will sign an agreement

with an eligible country called a Compact, much like a partnership agreement.One of the primary principles of our organizational culture will be to refrainfrom identifying problems or imposing solutions but, rather, to work togetherwith countries in making our relationships successful.

It is our mandate and our intent to work in partnership with other US, multi-lateral, and bilateral donors. While an independent Federal corporation, ourBoard of Directors is chaired by the Secretary of State and includes the Secretaryof the Treasury, the US Trade Representative, and the Administrator of USAID.Their presence will assure that we are reflecting the most important policy priorities of partner agencies in the US Government within the MCC context.

Measurable Results In the next few days, we will post on our web site a set of Compact Proposal

Guidelines to inform eligible countries on the elements that we will look for intheir proposals. As mentioned above, the most important elements will be anidentification of the obstacles to economic growth and poverty reduction, goalsand outcomes they believe will overcome those obstacles, and indicators thatwill serve as a benchmark and a measure of progress in achieving Compactgoals.

I believe one of the unique aspects of MCC is that assistance discussions willinitially be centered on measurable outcomes, a strategy to change economicgrowth and poverty reduction, and, only later on specific projects and imple-mentation. If you have a chance to read the guidelines, when posted, I think


you’ll find a business-like approach to a partnership agreement that reflects allthe principles that I’ve outlined.

One key element of interest to you, will be a fiscal accountability plan for theCompact program which we will evaluate using all the MCC principles I touchon today including accountability, results, and transparency. We will also look atfactors such as whether vendors can be paid in a timely fashion. As we’velearned in our own government, when we can’t pay our bills on time, we hurtthe private sector. In many of these countries, the government is one of thelargest customers in the economy and they set a standard for good businesspractices.

Policies MatterAs I’ve already mentioned, the MCC is founded on the belief that policy

change is the most important ingredient of development. Our mandate and ouractions will be guided by that belief. We will and should be measured on ourown success by our ability to motivate governments to adopt the kind of poli-cies that we know result in positive change in people’s lives. While those poli-cies are many and diverse, we characterize them in three broad categories: gov-erning justly, investing in people, and encouraging economic freedom.

SummaryI find it a great privilege to be able to be part of this new approach to assis-

tance. When I was asked why I was interested in working for the MCC, Iresponded that, first, it had a mission that I could believe in and that it embod-ied all the lessons I had learned working for ten years with governments want-ing to improve their countries and the lives of their citizens.

Paul Applegarth, the nominee to be our CEO, has put it quite succinctly andto the point, “the MCC is an effort to be something new and different andgood.” I want to thank the ICGFM for giving me the opportunity to be heretoday and introduce you to the MCC.

Millennium Challenge CorporationReducing Poverty Through GrowthPRESS RELEASE (May 6, 2004)The Millennium Challenge Corporation Names MCA Eligible Countries

Washington, DC—Today, the Board of Directors of the Millennium ChallengeCorporation (MCC) selected the 16 countries eligible to apply for MillenniumChallenge Account (MCA) assistance in FY04. MCC, a newly created govern-ment corporation designed to work with some of the poorest countries in theworld, is based on the principle that aid is most effective when it reinforcessound political, economic, and social policies that promote economic growth.

“This is a historic day for the Millennium Challenge Corporation,” saidSecretary of State, Cohn L. Powell, Chair of the MCC Board. “The President’svision has come to pass, and today’s decision by the Board of Directors is amajor step in implementing the vision of the MCC.”

The selected countries include: Armenia, Benin, Bolivia, Cape Verde, Georgia,Ghana, Honduras, Lesotho, Madagascar, Mali, Mongolia, Mozambique,

15August 2004

Nicaragua, Senegal, Sri Lanka and Vanuatu. In making its determinations, theBoard considered both the past and current policy performance of the candidatecountries in the areas of governing justly, investing in their own people and promoting economic freedom. The Board also considered trends that indicatedpolicy improvement or slippage.

“Our mission—encouraging and rewarding good policies that produce sustainable economic growth—holds profound implications for freedom andsecurity across the globe,” MCC CEO Paul Applegarth said today. “Today’sdecision demonstrates the clear commitment of the U.S. to reducing povertyand human suffering.”

The Board also approved a “Threshold Country” program, which will bedirected toward a limited number of candidate countries that have not met therequirements for MCA eligibility but demonstrate a significant commitment tomeeting the requirements for eligibility. The Threshold Country program willprovide an added incentive to countries that are committed to reform, and willbe used to assist such countries in making further progress towards becomingeligible for MCA assistance in future years. MCC expects to work closely withUSAID in this effort.

The United States is committed to the MCC as an innovative approach todelivering foreign aid. Congress has appropriated $1 billion for the MCC forthis fiscal year, and President Bush has requested $2.5 billion for FY05.

Abstract of Remarks by President George W. Bush at CeremonyCelebrating Countries Selected for the Millennium ChallengeAccount (May 10, 2004)

Two years ago, I announced a new and hopeful approach in America’s aid todeveloping nations. Under this approach, America has pledged to increasedevelopment assistance by 50 percent over three years. To make sure that gov-ernments make the right choices for their people, we link new aid to clear stan-dards of economic, political, and social reform. We invited governments indeveloping nations to meet those standards so that they may truly serve theirpeople.

America formed the Millennium Challenge Corporation to oversee this newprogram. Last week, the first group of Millennium Challenge Account nationswas selected. I congratulate representatives with us today from Armenia, Benin,Bolivia, Cape Verde, Georgia, Ghana, Honduras, Lesotho, Madagascar, Mali,Mongolia, Mozambique, Nicaragua, Senegal, Sri Lanka, and Vanuatu. You havechosen the path of reform, and your people and your nations are better off as aresult of the decisions your governments have made.

I want to thank the Secretary of State (Colin Powell) for leading this effort.He is the chairman of the board of the new corporation. I appreciate other boardmembers who are with us-- Secretary John Snow, the Secretary of the Treasury;Ambassador Bob Zoellick, the United States Trade Representative; AndrewNatsios, the Administrator of the US Agency for International Development;and Paul Applegarth, who is the CEO of the Millennium ChallengeCorporation.

I want to welcome the ambassadors and representatives from the 16Millennium Challenge Account nations. We are glad you’re here.Congratulations.


In many nations, poverty remains chronic and desperate. Half the world’speople still live on less than $2 a day. This divide between wealth and poverty,between opportunity and misery, is far more than a challenge to our compas-sion. Persistent poverty and oppression can spread despair across an entirenation, and they can turn nations of great potential into the recruiting groundsof terrorists. The powerful combination of trade and open markets and goodgovernment is history’s proven method to defeat poverty on a large scale, tovastly improve health and education, to build a modern infrastructure whilesafeguarding the environment, and to spread the habits of liberty and enter-prise.

The Millennium Challenge Account encourages all nations to embrace politi-cal and economic reform. The United States has pledged to increase its coredevelopment assistance by half, adding $5 billion annually by 2006. To be eligi-ble for this new money, nations must root out corruption, respect human rights,and adhere to the rule of law. They must invest in their people by improvingtheir health care systems and their schools. They must unleash the energy andcreativity necessary for economic growth by opening up their markets, remov-ing barriers to entrepreneurship, and reducing excessive bureaucracy and regu-lation.

The 16 nations represented here today have done all this and more. Each hasworked hard to be here today, and their efforts are already yielding results. Forexample, Madagascar is aggressively fighting corruption. The Ministry ofJustice has suspended a dozen magistrates on suspicion of corrupt activity. Thegovernment is also implementing an ambitious program of judicial reform.Senegal, Africa’s longest-standing democracy, has also enacted new anti-corrup-tion laws, and is implementing new measures to fight money laundering.Honduras has made the improvement of education and health services a toppriority. Its immunization rate of 96 percent is among the highest of all eligiblecountries.

The new government of Georgia has doubled its investment in health careand raised teacher salaries by two-thirds. Mozambique has curbed governmentspending and lowered tariffs. These, and other reforms, have resulted in dou-ble-digit growth rates over the last decade. Since launching its program of eco-nomic reform in 2002, Sri Lanka has reduced its budget deficit by a third, andcut inflation by half. Other nations represented here can point with pride tosimilar examples of progress.

Yet funding is not guaranteed for any selected country. To be awarded agrant, nations must develop proposals explaining how they will further addressthe needs of their people, and increase economic growth—proposals that setclear goals and measurable benchmarks.

The countries selected today represent a small fraction of those struggling toemerge from poverty and establish reform. I urge all nations of the world to fol-low the progressive standards of governing justly, investing in people andencouraging economic freedom.

Reform can bring more aid from America, and it will also bring more invest-ment and more trade, lessening the need for aid over time. Reform will berepaid many times over in the relief of poverty, and rising national wealth andstability for their countries.

The 16 chosen in this round are showing the way, are showing what is possi-ble, are serving as a bright light in the developing world. You have taken thefirst courageous steps toward greater independence and greater wealth, andgreater hopes for the people you serve.

17August 2004

I want to thank you all for being here. I congratulate you on your work. Andmay God bless your countries and the people in the countries. Thank you forcoming.

Report on Countries That Are Candidates for MillenniumChallenge Account Eligibility in FY 2005 and Countries ThatWould Be Candidates but for Legal Prohibitions.

SUMMARY: Section 608(d) of the Millennium Challenge Act of 2003 requiresthe Millennium Challenge Corporation to publish a report that identifies coun-tries that are “candidate countries” for Millennium Challenge Account assis-tance during FY 2005. The report is set forth in full below.

Report: This report to Congress is provided in accordance with section 608(a)of the Millennium Challenge Act of 2003, codified at 22 U.S.C. 7701 and 7707(a)(the “Act”). The Act authorizes the provision of Millennium Challenge Account(“MCA”) assistance to countries that enter into compacts with the United Statesto support policies and programs that advance the prospects of such countriesachieving lasting economic growth and poverty reduction. The Act requires theMillennium Challenge Corporation to take a number of steps in determining thecountries that, based on their demonstrated commitment to just and democraticgovernance, economic freedom and investing in their people, will be eligible forMCA assistance during Fiscal Year 2005. These steps include the submission ofreports to the congressional committees specified in the Act and the publicationof notices in the Federal Register that identify:1. The countries that are “candidate countries” for MCA assistance during Fiscal

Year 2005 based on their per-capita income levels and their eligibility toreceive assistance under U.S. law and countries that would be candidatecountries but for legal prohibitions on assistance (section 608(a) of the Act);

2. The criteria and methodology that the Board of Directors of the MillenniumChallenge Corporation (the “Board”) will use to measure and evaluate therelative policy performance of the candidate countries consistent with therequirements of section 607 of the Act in order to select “eligible countries”from among the “candidate countries” (section 608(b) of the Act); and

3. The list of countries determined by the Board to be “eligible countries” forFiscal Year 2005, including which of the eligible countries the Board will seekto enter into MCA compacts (section 608(d) of the Act).This notice is the first of the three required notices listed above.

Candidate Countries for FY 2005The Act requires the identification of all countries that are candidates for

MCA assistance in FY 2005 and the identification of all countries that would becandidate countries but for legal prohibitions on assistance. Section 606(a) of theAct provides that, during FY 2005, countries shall be candidates for the MCA ifthey:1. Have a per capita income equal to or less than the historical ceiling of the

International Development Association for the fiscal year involved (or $1465for FY 2005); and

2. Are not subject to legal provisions that prohibit them from receiving UnitedStates economic assistance under part I of the Foreign Assistance Act of 1961,as amended.


Pursuant to section 606(c) of the Act, the Board of Directors of theMillennium Challenge Corporation has identified the following countries ascandidate countries under the Act for FY 2005. In so doing, the Board has antici-pated that prohibitions against assistance that applied to countries during FY2004 will again apply during FY 2005, even though the Foreign Operations,Export Financing and Related Appropriations Act for FY 2005 has not yet beenenacted and certain findings under other statutes have not yet been made. Asnoted below, the Millennium Challenge Corporation will provide any requiredupdates on subsequent changes in applicable legislation or other circumstancesthat would affect the status of countries as candidate countries for FY 2005.

1Iraq is identified as a candidate country on a provisional basis. Iraq is sub-ject to section 620(t) of the Foreign Assistance Act of 1961, as amended, whichprohibits assistance to countries with which the United States severed diplomat-ic relations, unless diplomatic relations have been resumed and an agreementfor the furnishing of assistance has subsequently been entered into. While theUnited States has resumed diplomatic relations with Iraq, an assistance agree-ment, which would satisfy section 620(t), has not yet been completed. If such an agreement has not been entered into by the date on which the MCC Boarddetermines eligible countries pursuant to section 607 of the Act, Iraq will not betreated as a candidate country as of that date.

1. Afghanistan2. Angola3. Armenia4. Azerbaijan5. Bangladesh6. Benin7. Bhutan8. Bolivia9. Burkina Faso10. Cameroon11. Chad12. China13. Comoros14. Congo, Dem. Rep15. Congo, Rep.

(Brazzaville)16. Djibouti17. Egypt, Arab Rep. of18. Equatorial Guinea19. Eritrea20. Ethiopia21. Gambia22. Georgia23. Ghana

24. Guinea25. Guyana26. Haiti27. Honduras28. India29. Indonesia30. Iraq1

31. Kenya32. Kiribati33. Kyrgyz Republic34. Lao PDR35. Lesotho36. Madagascar37. Malawi38. Mali39. Mauritania40. Moldova41. Mongolia42. Morocco43. Mozambique44. Nepal45. Nicaragua46. Niger47. Nigeria

48. Pakistan49. Papua New Guinea50. Paraguay51. Philippines52. Rwanda53. Sao Tome and

Principe54. Senegal55. Sierra Leone56. Solomon Islands57. Sri Lanka58. Swaziland59. Tajikistan60. Tanzania61. Timor-East62. Togo63. Turkmenistan64. Tuvalu65. Uganda66. Ukraine67. Vanuatu68. Vietnam69. Yemen, Rep.70. Zambia

19August 2004

Albania, Bosnia and Herzegovina, Cape Verde, and Tonga were candidatecountries for FY 2004 but are not candidate countries for FY 2005, due toincreases in their levels of per capita income above the historical ceiling of theInternational Development Association. In addition, Serbia & Montenegro,which would have been a candidate country for FY 2004 but for legal prohibi-tions that apply to Serbia, is not a candidate country for FY 2005 due to anincrease in its per capita income above the International DevelopmentAssociation historical ceiling.Countries That Would Be Candidate Countries but for Statutory ProvisionsThat Prohibit Assistance

Countries that would be considered candidate countries during FY 2005 butare subject to legal provisions which prohibit them from receiving U.S. econom-ic assistance under part I of the Foreign Assistance Act of 1961, as amended (the“Foreign Assistance Act”) are listed below. As noted above, this list is based onlegal prohibitions against economic assistance that apply during FY 2004 thatare anticipated to apply again during FY 2005.1. Burma. Section 570 of the FY 1997 Foreign Operations Act prohibits assistance

to the government with certain narrow exceptions. In addition, Burma hasbeen identified as a major drug-transit or major illicit drug producing coun-try for 2004 (Presidential Determination No. 2003-38, dated 9/15/03) anddesignated as having “failed demonstrably” to adhere to its international obligations and take the measures required by section 89(a)(1) of the ForeignAssistance Act, thus making Burma ineligible for assistance. Burma is listedas a Tier III country under the Trafficking Victims Protection Act for not com-plying with minimum standards for eliminating trafficking and not makingsignificant efforts to comply (Presidential Determination No. 2003-35,9/9/03).

2. Burundi is subject to section 508 of the Foreign Operations, Export Financing,and Related Programs Appropriations Act, 2004 (“FY 2004 AppropriationsAct”), which prohibits assistance to the government of a country whose dulyelected head of government has been deposed by a military coup.

3. Cambodia is subject to section 561(b) of the FY 2004 Appropriations Act,which prohibits assistance to the central government of Cambodia, except in specified circumstances.

4. Central African Republic is subject to section 508 of the FY 2004Appropriations Act.

5. Cote d’Ivoire is subject section 508 of the FY 2004 Appropriations Act.6. Cuba. Section 507 of the FY 2004 Appropriations Act prohibits direct assis-

tance to Cuba. The Cuban Liberty and Democratic Solidarity Act of 1996,Pub. L. 104-114 requires the President to take all necessary steps to ensurethat no funds or other assistance is provided to the Cuban government.

7. Guinea-Bissau is subject to section 508 of the FY 2004 Appropriations Act.8. Liberia is subject to section 620(q) of the Foreign Assistance Act and section

512 of the FY 2004 Appropriations Act, both of which prohibit assistanceunder part I of the Foreign Assistance Act based on past due indebtedness tothe United States.

9. Somalia is subject to section 620(q) of the Foreign Assistance Act and section512 of the FY 2004 Appropriations Act.


10. Sudan is subject to: section 620(q) of the Foreign Assistance Act and section 512 of the FY 2004 Appropriations Act. Sudan also is subject to section 508 ofthe FY 2004 Appropriations Act and section 620A of the Foreign AssistanceAct.

11. Syrian Arab Republic. Section 507 of the FY 2004 Appropriations Act pro-hibits direct assistance to Syria.

12. Uzbekistan is subject to section 568 of the FY 2004 Appropriations Act,which requires that funds appropriated for assistance to the centralGovernment of Uzbekistan may be made available only if the Secretary ofState determines and reports to the Congress that the government is makingsubstantial and continuing progress in meeting its commitments under aframework agreement with the United States.

13. Zimbabwe is subject to section 620(q) of the Foreign Assistance Act and section 512 of the FY 2004 Appropriations Act.Countries identified above as candidate countries, as well as countries that

would be considered candidate countries but for the applicability of legal provi-sions that prohibit U.S. economic assistance, may be the subject of future statu-tory restrictions or determinations, or changed country circumstances, thataffect their legal eligibility for assistance under part I of the Foreign AssistanceAct during FY 2005. The Millennium Challenge Corporation will include anyrequired updates on such statutory eligibility that affect countries’ identificationas candidate countries for FY 2005, at such time as it publishes the noticesrequired by sections 608(b) and 608(d) of the Act or at other appropriate times.Any such updates with regard to the legal eligibility or ineligibility of particularcountries identified in this report will not affect the date on which the Board ofDirectors is authorized to determine eligible countries from among candidatecountries which, in accordance with section 608(a) of the Act, shall be no soonerthan 90 days from the date of publication of this notice.

21August 2004


U.S. Agency for InternationalDevelopment

Remarks by Mr. Frederick W. SchieckDeputy Administrator

The International Consortium on Governmental Financial ManagementMiami, FloridaApril 20, 2004

I am pleased to have the opportunity to return to Miami to meet with youtoday. I appreciate Mr. Van Daniker’s invitation. Two years ago I had the pleas-ure of discussing with many of you the United States Agency for InternationalDevelopment’s (USAID’s) role in financial management. Today I want to sharewith you our views on the challenge to development presented by corruptionand what we can do to address this serious problem. I want also to give a spe-cial thanks to two Inspector Generals, member of the ICGFM Board, with who Ihave had the pleasure to work—Everett Mosley the IG of USAID, and BillTaylor recently retired from the Inter American Development Bank where Iworked for 10 years.

This is a country that has been seized periodically by reform movements.Sometimes they have ushered in wholesale changes of policy that have trans-formed how we view the subject at hand. One such instance began in 1977when Congress passed the Foreign Corrupt Practices Act. This piece of legisla-tion prohibited certain business practices of US companies, most notably, theoffering of bribes to foreign government officials. It was widely characterized insome quarters at the time as ill-conceived and quite possibly counterproductive.Critics said that US companies would be placed in a competitive disadvantagewith foreign firms. In fact, while the US was seeking to stop the practice ofbribery of foreign governments, other countries continued to allow their firmsto count such payments as tax deductible expense.

The criticism did not stop there. There was concern that law would put intoplay certain negative incentives whose ultimate effect might even be to makecorruption worse. Given the competitive environment multinationals operate in,it was thought that the law would encourage less scrupulous companies toadopt more elaborate schemes to hide the outlawed practices. The law seemedto be just another example of a naïve attempt to reform common behavior, if nothuman nature itself. Like the earlier experience in the U.S. when the productionof alcohol was prohibited, the critics predicted that the Act would run upagainst experience and eventually be repealed.

As it turned out, the Foreign Corrupt Practices Act was not another failedattempt at reform—it was not a passing thought. It marked a fundamentalchange in thinking about the subject of corruption and set off a growing recog-nition of the problem. The existence of the ICGFM and our meeting here todayis part of a movement that began back then. What is now a global allianceagainst corruption would have been dismissed as a mere “tilting at windmills”a little more than a generation ago. I believe that where we stand today couldnot even have been imagined back then.

It’s not that “corruption” was not discussed in the past. But then it wasreviewed mostly as a local issue which often had a political focus. Charges and

23August 2004

counter-charges of corruption have always been a part of political campaigns,then as they are now.

Corruption in the developing world was assumed to be a “given,” a “fact oflife.” This was, more often than not, the attitude of businessmen. Policy-makershad a different perspective. During the Cold War, strategic considerations oftenoverrode any concerns we might have had with certain allies and their prac-tices. Academics, on their part, tended to view corruption as a “cultural” phe-nomenon, an outgrowth of informal, traditional societies operating within thestructures of formal, modern political systems that were inherited from a colo-nial past. According to this theory, corruption stemmed from the dislocationsthat these societies suffered under imperialist rule. These academics tended tomake corruption almost a taboo topic—a politically “incorrect” subject, if youwill—while other circles either accepted or ignored it.

All this has changed. Corruption is far from a taboo subject. It is now on theagenda of national, regional, and multinational policymaking bodies. It is theconcern of citizens and groups inside and outside societies that are most affected. It is being confronted openly by businesses, civil society organizations,academia, think tanks, and the media.

In this regard, I would like to note that the anti-corruption provisions of theU.S. Foreign Corrupt Practices Act eventually inspired conventions broadlyadopted by the Organization for Economic Cooperation and Development(OECD), the Organization of America States (OAS), and the United Nations.Multilateral organizations such as the World Bank and the Inter-AmericanDevelopment Bank also recognize the importance of the provisions. In thisregard, we second the World Bank in its support of the Extractive IndustriesTransparency Initiative (EITI), which recognizes the high stakes at play aroundthe world, for both developed and developing countries, in helping to free oil,gas, and mining industries from control by corrupt elites. The efforts of theWorld Bank and various regional development banks are to be commended fortackling the issue. Moreover, corruption will be prominently featured in theJune summit of the G8 at Sea Head, Georgia and we can anticipate further initiatives on this score.

Bilateral agencies consider the issue of corruption as central to developmentas well. As many of you know, the United States has established the MillenniumChallenge Corporation. Since the enactment of the law, President Bush reiterat-ed strongly that “good governance is an essential condition of development. Sothe Millennium Challenge Account will reward nations that root out corrup-tion….” Therefore, a country’s position on corruption will be viewed as a majorfactor in determining eligibility for funding. In addition, the program will iden-tify countries that have demonstrated an abiding commitment to democraticgovernance and market oriented economic policies and that can benefit fromsupport in furthering such endeavors. This initiative is one of the most vision-ary development initiatives in a long while. It will provide the impetus forrecipient countries to accelerate economic growth to the point where they cangraduate from the group of countries requiring concessional assistance. Sincethe passing of the law, the MCA is already impacting on counties that may nar-rowly miss eligibility. It is encouraging those countries to stimulating reformefforts that will qualify them in later rounds.

We in USAID consider the issue of fighting corruption central to our develop-ment mission. Administrator Natsios has commissioned an agency-wide anti-corruption strategy which will incorporate anti-corruption elements into allappropriate facets of agency operations. We have supported Transparency


International, one of the world’s premiere anti-corruption organizations, almostfrom its inception, and we fund a host of other NGO’s engaged in the commonfight. The USG supported the Kimberly Process to end the trafficking in “blooddiamonds.” USAID’s field Offices are engaged in legitimizing this industry sothat the revenues derived from it can serve long-term development objectives.We are proud of our quarter century association with the InternationalConsortium on Governmental Financial Management and the workshops itsponsors. Lastly, we continue to support the America’s Accountability and Anti-Corruption Project, which some of you in the audience are actively involved in.

This increased interest in tackling corruption can be explained by a numberof factors. The end of the Cold War brought an end to ideologically driven for-eign assistance. In the new era, trade is increasingly seen as key to launchingcountries on the path of development but that this can be undermined by cor-ruption and rent-seeking government officials. With the globalization of tradeand capital markets, businesses have faced ever tougher competition and havebecome more reluctant to tolerate the risk and expense associated with the ingenuine practices of the past. At the other end of the trade process, countrieswith high levels of corruption find themselves unable to attract the outsideinvestment their economies so desperately need.

Political changes also enter the equation. The so-called “third wave” ofdemocracy has brought to increasing numbers of the world’s citizens the powerof the vote and the enjoyment of civil liberties, such as freedom of speech andthe right to assemble. Popular pressure has prompted leaders and oppositionfigures to confront corruption and show a strong anti-corruption commitment.

Though the financial costs of corruption cannot be precisely measured, itssignificance, by all estimates, is major. How can we put a price tag on the cor-rupt desires of a Charles Taylor of Liberia and the devastation he brought to hiscountry? It is equally difficult to calculate the cumulative effects of petty corrup-tion, the money that is slipped out of sight to a custom officer, bureaucrat, trafficofficer, magistrate, or policeman.

We see corruption as the serious development challenge it is. It can infect allthe institutions of democratic governance and its formal processes. Corruptionin elections and legislative bodies reduces accountability and short-circuits rep-resentative government. Judicial corruption suspends the rule of law andundermines the institution uniquely positioned to fight the problem. Corruptionin public administration skews the provision of public services from intendedbeneficiaries to the well-connected and influential. It erodes the institutionalcapacity of government as formal proceedings are ignored, resources siphonedoff, and officials hired and promoted without regard to competency or perform-ance. Indeed, the recent gains in democracy are threatened where these govern-ments do not bring corruption under effective control.

Corruption also generates considerable economic distortions and inefficien-cies that affect both the public and private sector. In the public sector, it typicallydiverts investment from education and projects that hold most developmentpromise into capital projects that favor bribes and kickbacks. It lowers compli-ance with regulations. This all too often results in poor quality infrastructure,unsafe and poor construction, as well as environmental damage. In the short-term, this puts additional budgetary pressures on the government, while thelong-term effect reduces economic growth. The private sector has to deal withincreased cost of bribes and extortion, the management costs of negotiating withcorrupt officials, and operating in an atmosphere pervaded by risk and fear ofcrossing influential figures, not to mention criminal prosecution.

25August 2004

Responding to the development challenges posed by corruption requires anunderstanding of its causes. From an institutional perspective, corruption ariseswhen public authorities have wide discretion, little accountability, and perverseincentives. This means that the more activities public authorities control or reg-ulate, the greater the opportunities for corruption. Furthermore, the lower theprobability of detection, the greater the probability that corruption will takeplace. In addition, the incentives for pursuing self-serving ends lowers therewards for the honest discharge of duties.

This institutional perspective suggests countering corruption through the following:1. Reducing the role of government in economic activities; 2. Strengthening transparency, oversight, and sanctions; and3. Redesigning terms of public employment to improve incentives and increase

professionalism.To limit official authority and its control over the economy, enlightened pri-

vatization schemes should be pursued, accompanied by adequate measures oftransparency and legal frameworks that guard against merely converting publicmonopolies to private ones. State authority can be limited by eliminating tariffs,exchange rate restrictions, price controls, and permit requirements that encour-age bribery. Encouraging competitive procurement practices as well as competi-tion in the provision of public services also has a substantial impact.

Accountability can be enhanced by open budget process and decentraliza-tion, through freedom of information legislation and financial disclosurerequirements. It is here where organizations like ICGFM are particularly rele-vant. Measures to modernize and professionalize financial management systemsare key to our anti-corruption efforts. This includes the design of financial soft-ware, installation of hardware, and the training of professionalized accountingand auditing staffs. Additionally, hot lines and whistle blowing protections canbe extended to witnesses of corrupt practices. Credible sanctions must be estab-lished through reform of penal codes and by fortifying the independence ofjudicial bodies. We must work to protect the integrity of elections so that we caneffectively remove bad actors when warranted. Offices with a clear anti-corrup-tion mandate can be established.

We can work to promote ethical behavior in public service by tightening jobrequirements, establishing anti-nepotism regulations, and developing codes ofethics. Ways must be sought to improve compensation systems in order toattract and retain more qualified personnel. This might be financed through theelimination of “ghost workers,” redundant staff, and predatory officials in waysthat frees resources while improving morale and professionalism. The experi-ence of Ghana is a good example in that this Government reformed its criticallyimportant department of revenue through such methods.

We can also work to change general attitudes toward corruption, mobilizingthe political will to combat corruption by monitoring public relations campaignsand workshops, support civic advocacy organizations such as TransparencyInternational (TI) and expand its national chapters, train journalists in the skillsof investigative reporting, and bring bilateral and international pressure on themore serious offenders. I would just like to note that USAID has worked withmany countries to establish “investor roadmaps”—surveys that lay out, step bystep, permit by permit, everything an investor has to do to start a new business.This has proven to be not only a useful tool in the battle against corruption, butone increasingly used by donor agencies in broader reform efforts to empower


economically marginalized populations and improve a country’s business climate.

I want to emphasize that the inventory of potential responses is large andvaried, and covers reforms directed at government institutions as well as societyat large. But the mix of incentives, the relative emphasis placed on them, andthe sequence in which they should be pursued, will vary from time to time andfrom country to country.

In the time remaining, I would like to highlight some of USAID’s anti-corruption efforts in very different parts of the world.

USAID/Colombia is finishing the first phase of a $6.8 million anti-corruptionactivity aimed at increasing transparency and accountability at both the nationaland municipal levels. The project has brought internal control mechanisms,based on international standards, to 21 local governments and 3 of Columbia’smajor cities. Implementation manuals have been published and distributed tolocal and national entities. Over 2,000 local and national level controllers havebeen trained in the new accounting regulations. In addition, public ethics codeshave been developed and adopted, with the necessary follow-on training.USAID has worked with a broad array of civil society organizations to enhancepublic participation in decision-making and monitoring projects. Over 100 smallgrants have been made to citizen groups for this purpose.

USAID helped the Republic of Georgia launch a new administrative law thatbrings greater transparency and accountability to government operations, aswell as delineating citizens’ rights as to information and the conduct of admin-istrative proceedings. Georgia’s law requires government actions to be publicand government information to be freely available. It has been instrumental inthe rise of a more independent and vigorous press and has been called by aleading Georgian jurist as “the single most important Georgian law, after the1995 constitution.”

In Bangladesh, USAID has helped establish a local chapter of TransparencyInternational. It has been engaged in widespread reporting and watchdog activ-ities as well as general consciousness-raising within the country. SchoolManagement Committees also have been established—in some of the mostunderserved regions of the country—to monitor low-level corruption in theeducation sector. Illegal sub-contracting of teaching, unauthorized leave, andillegal payments demanded by teachers or other exploitative practices are alltoo common. Mother’s Groups have been formed and issue what is their own“report card” on the functioning of their children’s schools.

I don’t for a moment want to suggest that corruption is just a concern of thedeveloping world. In our own Agency, vulnerabilities have greatly increased inthe past two years as we have undertaken major new programs in HIV/AIDSand, of course, in Iraq and Afghanistan.

USAID funding for HIV/AIDS has increased from $139 million in FY 1999 to more than $700 million in FY 2003. This year, USAID will also be managing a portion of the President’s Emergency Plan for AIDS Relief, which is projectedto rise to $15 billion. The Office of the Inspector General is working to makesure that oversight mechanisms are in place, the costs charged are reasonable in amount, and that the costs incurred are justified.

We are managing ten contracts in Iraq, valued at over $2.2 billion. OurInspector General’s office there is conducting performance audits and hasissued 22 concurrent financial audit reports. “Concurrent” means that we aren’twaiting until the end of the year to do the audit but rather we are beginning the

27August 2004

audit just as the project or activity being audited gets under way, with the audi-tors maintaining a presence throughout the year at the work sites and in theoffice of the grantees and contractor.

The same approach is being used in Afghanistan through a contract with apublic auditing firm supervised by the Inspector General. The Office is alsospending considerable audit resources reviewing our $500 million infrastructureprogram, including the Kabul/Kandahar Road.

The USAID Inspector General has also been selected as auditor for theMillennium Challenge Account. I should point out here that Agency manage-ment and the Inspector General’s office collaborate on establishing yearly objec-tives and standards for success that we can achieve together. Among these isour common endeavor to help improve management so that we can get the bestvalue for our tax dollar in the service of the people in the developing world.

Let me end with the observation that no country has ever been free totallyfree from corruption; however it is a goal that we can all share in trying toachieve it together.

Thank you.


Reforming Fiscal Institutions andStrengthening Government

Accountability: Legislative BudgetOversight in Emerging Economies

CARLOS SANTISO Carlos Santiso is a governance adviser to the United Kingdom Department for

International Development in Lima, Peru, and a political economist at theJohns Hopkins University School of Advanced International Studies in

Washington DC, United States. Email: [email protected]

I. Legislatures and the budget process in presidential systems Reforming budgetary institutions is a critical task for emerging economies.

Designing feasible fiscal reforms and achieving sustainable impact on fiscal per-formance require adequately understanding the political economy of the budgetprocess. The role of legislatures in budget policymaking is a key dimension ofthe governance of the budget. Legislatures authorise the executive to raise rev-enue and manage public expenditures, exercise oversight and ensure accounta-bility. They help ensure government accountability in the management publicfinances, by approving budget allocations, overseeing budget execution andcontrolling budget performance.

Enhancing legislative scrutiny of the budget and oversight of its execution isincreasingly considered as a means to strengthen government accountabilityand curb corruption (OECD 2001). In many developing countries, however, therole of parliaments in budgeting is subdued and often dysfunctional, partly as aresult of executive predominance, but also because of legislatures’ own deficien-cies. The greatest challenge remains to strengthen democratic accountabilitywhile ensuring fiscal discipline. This study briefly reviews recent trends in therole and performance of parliaments in the budget process in Latin Americanemerging economies.

II. Legislative budgeting and government accountability Legislative budgetary institutions, such as standing committees, legislative

budget offices and general audit offices, have largely been neglected in the firststage of economic reform and financial administration modernization. Theynevertheless perform critical accountability functions (Morgenstern and Nacif2002; Mainwaring and Welna 2003). Legislatures constitute central agencies ofstate self-restraint and external accountability in public finance management.They help enforcing the accountability cycle of public budgeting: ex anteaccountability, ensuring that budget allocations adequately reflect policy priori-ties; concurrent accountability, overseeing the execution of the budget by the exec-utive; and ex post accountability, holding government to account for performanceand results. In practice, however, legislatures have often failed to adequatelyand responsibly perform their accountability functions. What then explains this disjuncture between the potential contribution of legislatures to publicbudgeting and their actual role?

29August 2004

There is great controversy as to what the most appropriate role of parlia-ments ought to be in public budgeting. The prevailing economic orthodoxyposits that excessive legislative prerogatives in public budgeting tend to lead tofiscal disequilibria, greater budget deficits and public debt; overspending andunder-taxation are likely results (Stein 1998; Alesina 1999). It thus warns againstthe dysfunctional fiscal effects of unrestrained legislative budgetary powers andconsequently favors the insulation of economic policymaking within the execu-tive branch. These problems can be minimized by assigning control over thebudget to agents with incentives to internalize the costs of the programs thestate finances. Consequently, it is argued, ’hierarchical’ budget systems that ’concentrate power in the finance minister, vis-à-vis other ministers, and in theexecutive vis-à-vis congress’ (Stein 1998:3) tend to provide stronger proceduralincentives for promoting economic prudence. Such views, which have influ-enced economic policies in Latin America in the 1990s, counsel giving greaterindependence to the institutions of economic governance, in particular centralbanks, tax authorities and regulatory agencies. The 2000 Law of FiscalResponsibility adopted in Brazil constitutes a more recent attempt at establishing numerical and procedural budget constraints.

Nonetheless, there are important risks associated with hierarchical budgetaryarrangements. They tend to allow for excessive executive discretion in publicbudgeting, especially in presidential systems of government. Often, uncon-strained executives misuse their constitutional authority and delegated powers,left largely unchecked by amenable parliaments. Unfettered executive discre-tion, reflected in particular in the extensive and early use of executive decrees tore-allocate budget appropriations, hampers external scrutiny and hinders exter-nal accountability in governmental financial management. Henceforth, beyondweakening the mechanisms of democratic accountability in public finance,unconstrained executive discretion has often permitted corruption and statecapture.

Finding the most adequate balance between executive and legislative prerog-atives in budget policymaking is a critical challenge for emerging economiesstruggling to consolidate their democratic institutions. Ultimately, the gover-nance of the budget reflects a delicate balance between executive power andlegislative oversight. A key challenge of the governance of the budget in emerging economies thus resides in the ability of institutional arrangements to adequately combine democratic accountability and fiscal prudence.

III. Legislatures and budget policymaking Strengthening legislative budget oversight is required to re-equilibrate

executive-legislative relations in public finance management, especially in presidential systems of government characterized by weakly institutionalizedmechanisms of accountability. Legislative budgeting can be defined by thescope of budget authority and the effectiveness of budget oversight. The legalframework for legislative budgeting only partly explains the actual performanceof legislatures in the budget process.

In Latin America as elsewhere, there exists an important gap between the formal powers and actual role of parliament in public budgeting. Legislative budg-eting is a recent development in the history of Latin American legislatures: thefirst budget formally approved by the Argentinean legislature was that of 1990.The contribution of legislatures to budget oversight remains inhibited by struc-tural factors related both to the internal organization of parliamentary work andthe broader external context of executive-legislative relations.


The challenges of legislative budgeting are twofold: those related to thecapacities of legislatures and the organization of parliamentary work, and thoserelated to their incentives to exercise their budgetary powers effectively andresponsibly. These two sets of factors interact in different ways along the differ-ent stages of the budget cycle. • A first set of factors are internal to the legislature itself, related to deficiencies

in the structures, processes and procedures of legislative budgeting, asdefined by constitutional rules, legislative norms and parliament’s internalrules. They essentially relate to organization, resources and capacity.

• A second set of factors are external to the legislature, linked to the formal andinformal rules shaping executive-legislative relations, the presidential natureof the political system, the over-reliance of executive decree authority,skewed electoral incentives, and a fragmented political party system.

IV. Legislative budget authority: legal frameworkFour sets of variables are particularly determinant to assess the effective

contribution of parliament to budget policymaking and oversight: whether parliament is legally empowered to intervene in budgeting, whether it is endowedwith the required technical capacities, whether it possesses the necessary politicalwill, and whether the governance environment is conducive. Legislative budgetary powers are different in successive phases of the budget cycle, i.e. formulation, adoption, execution, and control.

Legislative budgetary powers, contained in the constitution, the organic budgetlaw and parliaments’ internal rules, are severely limited by the prerogatives ofthe executive. Constitutional provisions endow Latin American presidents withuncommon powers in public budgeting, both in absolute and relative terms,although important variations between countries. Assessing the budgetary pow-ers of the executive in 23 presidential systems, Mathew Shugart and StephanHaggard (2001) find that in seven of them presidents enjoy exclusive powerover spending legislation and the legislature confronts severe constraints onemending presidential proposals.

The executive has a predominant role in the drafting and formulation of thebudget. The executive has the exclusive right to initiate the budget process,draft and propose the budget bill. The central budget offices of the finance min-istries are responsible for coordinating the budget drafting process within theexecutive and overseeing its execution by spending agencies. Once approved bythe government, the budget proposal is submitted for consideration and reviewto the legislature, which as a set period of time allocated for that task.

Legislative amendment powers vary between presidential regimes. In five of theten cases included in Table 1, the legislature is not allowed to create or increasepublic spending, except as it pertains to its own budget. If the budget is notapproved by the set deadline, the current budget remains in effect in only fourcases (Argentina, Costa Rica, Uruguay and Venezuela). In five other cases(Bolivia, Chile, Colombia, Ecuador, Peru), the executive’s proposal automatical-ly becomes law, usually by legislative decree. These clauses give the executiveextraordinary leverage over the legislature, as legislative inaction does not pre-clude the executive proposal from being adopted. They neutralize legislativeobstruction and significantly diminish the leverage of legislatures in the budgetbargaining process, as legislatures have no veto power over the executive’sbudget proposal. While they help avoid deadlock over the budget, these

31August 2004

provisions create a set of incentives that is not conducive to effective scrutinyand oversight.

Legislative oversight of budget execution Constitutions give parliaments animportant in the scrutiny of budget re-allocation, the oversight of budget execu-tion, and the review of public accounts. In practice, however, legislative over-sight of budget execution is still embryonic in most Latin American countries.Legislatures exercise only a limited monitoring of the government’s compliancewith budget rules and procedures. Largely unable to monitor compliance withthe approved budget, the legislature is even less able to monitor the perform-ance of public expenditure management and enforce results-based budgeting.Nevertheless, parliaments possess a potentially powerful instrument to controlbudget execution and enforce ex post accountability: the annual certification ofpublic accounts. The parliament’s public accounts committee informs its opin-ion with the audited report on public accounts prepared by the general auditoffice. The plenary subsequently considers the committee’s opinion and decideswhether to discharge government. The general audit office is generally an advisory body to parliament, such as in Argentina, an autonomous state agency, such as in Chile, or an independent institution with quasi-judicial powers, such as in Brazil. The quality of institutional linkages between publicaccounts committees and general audit offices is thus a key determinant toeffective legislative budget oversight.

Accountability is also constrained by the time, timing and sequencing of leg-islative scrutiny. As Table 2 shows, there is great variation in the time legislatureshave to review the budget, ranging from 30 days in Mexico to up to 120 days inHonduras. Furthermore, there are important time lags and inconsistencies thatadversely affect the accountability cycle of the budget process. For example, thereview of public accounts and the evaluation of the auditor general’s reportoften take place at a time that does not always allow them to adequately feed-back into the budget process.

V. Legislative budget oversight: actual performanceRecent research on budget transparency in Latin America has revealed the gap

between the quality of the legal framework for public budgeting and adherenceto it (IBP 2003.) According to the survey data reproduced in Tables 3 and 4, whilethe quality of the legal framework for public budgeting in Argentina, Brazil,Chile, Mexico and Peru is generally sound, perceptions of budget transparencyare poor, especially in Peru. Legislative oversight and external auditing are par-ticularly deficient. Several structural factors explain such shortcomings: • Budget rigidity and inertia tends to limits the scope for exercising legislative

budget powers. In Brazil, 90 percent of the budget is considered rigid, as aresult of constitutionally mandated expenditures, earmarking of tax revenuesand mandatory expenditures. Hence, the type of public spending on whichparliament could potentially have the greatest influence, capital expenditure,represents only a small fraction of public expenditures, albeit of strategicimportance for building ad hoc political coalitions, as in the case of Braziliansystem for executing budget appropriations (OECD 2003).

• The gap between the approved and executed budgets further hinders legislativeoversight. Optimistic assumptions on revenues, weak execution capacity ofsector ministries and ad hoc changes in appropriations partly explain this gap. The resulting instability of budgetary institutions and fiscal ruleshampers the consolidation of credible budget processes with predictable procedures and enduring structures.


Internal factors Legislative budget institutions Deficient internal structures and procedures

weaken the ability of parliaments to effectively and responsibly exercise theirbudgetary prerogatives. Three legislative budget institutions are particularlyimportant.

Legislative standing committees Legislative committees in consolidating democ-racies are generally weak and unstable and the organization of committee worklacks the kind of institutionalization that would allow specialized committees toeffectively contribute to the budgetary process. The division of responsibilitiesbetween the different committees dealing with different facets of public finance(taxation, budgeting, oversight and control) remains unconsolidated. Theseshortcomings are particularly detrimental to budgetary work, given its increas-ing complexity. Furthermore, the internal composition of committees is propor-tional to that of parliament and chaired by the legislative majority, which setstheir agendas and work-plans. This arrangement tends to lessen the incentivesfor legislative oversight of government, as parliaments tend to be dominated bythe same party as government (Messick 2002). In parliamentary systems, publicaccounts committees are often chaired by the opposition. Reforms are graduallybeing introduced, such as in Chile in 2003 where the Special Joint BudgetCommittee has been made a permanent legislative committee.

Legislative advisory capacity is largely inadequate to allow legislatures to effectively engage in the budget process. The political advisers of the legislatorssitting in the budget and public accounts committees carry out most of the advisory work. In fact, parliamentary committees, as such are seldom assignedpermanent technical advisers. As a result, technical input in the budget reviewprocess lacks the sufficient technical substantiation required for impartial evalu-ation. The absence of a tenure-track civil service career for parliamentary staff isaccentuated by the weaknesses of civil service careers in the public sector.Parliaments can only rely on the limited research and advisory services that areavailable to them through incipient legislative research offices and ill-equippedparliamentary libraries. Such resources exist or have been recently established inBrazil, Chile, Colombia and Peru.

Technical budget capacity is also insufficient for effective legislative budgetoversight. Budget and public accounts committees rely almost exclusively onthe information that government agencies provide, which significantly con-strains their ability to carry out independent budget reviews and adequatelyoversee budget execution. While financial constrains partly explain the lack ofbudget research capacity, there exist political reasons explaining why parlia-ments have generally not purposefully sought to build their capacities. Timelyaccess to budget information is strategic in the sense that the opposition has thegreatest incentives for independent budget analysis. This is gradually changing,however, as the contribution of legislative budget offices is increasinglyacknowledged. Although not as powerful as the US Congressional BudgetOffice, incipient legislative budget offices are emerging, such as in Venezuelasince 1997 or Mexico since 1998. It is indeed noticeable that a main impedimentto legislative budgeting often resides in its incapacity to engage with the budgetprocess, rather than the restraints put on its budgetary powers. Technical capac-ities are thus important considerations to take into account when assessing theeffective role of legislatures in budget oversight.

33August 2004

External factorsLegislative oversight and external auditing General audit offices provide

critical information and advisory services to parliaments, directly or indirectly,in the exercise of their accountability functions. The availability of timely andreliable information on budget performance, generally provided by generalaudit offices, is key to the effectiveness of legislative oversight. Improving thefunctional linkages between public accounts committees and general auditoffices is critical to anchor accountability in public finance and budget manage-ment (McGee 2002; SIGMA 2002). In turn, securing the political independence of general audit offices, which have been significantly undermined by executiveinterference and political meddling, is critical to guarantee effective externalauditing of government finances (INTOSAI 2001.) Issues such as criteria guid-ing the nomination and removal of auditor generals and the length of their termin office, as well as the procedures regulating recruitment, promotion and dis-missal of professional staff are critical determinants of the effective independ-ence of general audit offices. Predictable financial resources are also a necessary,yet not sufficient for institutionalizing supreme audit institutions and insulatingthem from political meddling. Most Latin American countries are indeed seek-ing to strengthen their external auditing functions, with the support of interna-tional financial institutions (Santiso 2004). Important reforms have been intro-duced in recent years. In Mexico, a general audit office, the Auditoría Superior dela Federación, was established as an advisory body to the lower chamber of par-liament in 1999 to assist parliament in the oversight of federal public finances.In 2000, parliament approved law on external accountability.

Economic governance and budgetary decision-making Beyond the constrainsimposed by the current institutional framework for legislative budgeting, thepresidential nature of political systems, coupled with an over-reliance on execu-tive decrees, has been particularly detrimental to the strengthening of the insti-tutions of government accountability in public budgeting. The use of executivedecrees in public budgeting is impressive both in absolute and relative terms incountries such as Argentina, Brazil or Peru. In practice, parliament exercises lit-tle oversight on presidential decrees. The frequent and early recourse to execu-tive decrees to re-allocate budget appropriations not only undermines the leg-islative oversight, but also weakens the credibility of the budget as an instru-ment of economic governance and strategic planning.

Political governance and legislative budgeting Legislative behavior and execu-tive-legislative relations in public budgeting are necessarily intermediated bypolitical parties and electoral rules. Stein et al. (1998) have indeed uncovered astatistically significant relationship between electoral systems and fiscal per-formance. Electoral systems characterized by a large degree of proportionality(i.e. large district magnitude) and political fragmentation (i.e. number of effec-tive parties represented in parliament) tend to have larger governments, largerdeficits and a more pro-cyclical response to the business cycle. Furthermore, the fragmentation and volatility of political party systems throughout LatinAmerica has been detrimental to the effective exercise of legislative budgetoversight, significantly shortening the time horizons of individual legislators.Parties lack the sort of internal coherence, cohesion and discipline that wouldallow them to act purposefully and consistently within parliament. Moreover,when the ruling party or coalition holds a disciplined majority position in par-liament, as it is often the case in Latin America, there exists a possibility of con-trol dilution: in such circumstances, presidential systems tend to have inopera-tive systems for enforcing government accountability (Messick 2002; Manningand Stapenhurst 2002).


VI. The politics of public budgetingThe analysis of legislative budgeting in Latin America illustrates the con-

straints to and conditions for enhancing the contribution of parliaments tobudget oversight in presidential systems of government. The political economyof the budget process reveals that political and technical aspects interact indetermining the effectiveness of legislative budget oversight. Ultimately, theeffectiveness of the mechanisms of horizontal accountability depends on theeffectiveness of the mechanisms of vertical accountability. The new patterns ofdivided government and executive-legislative relations emerging throughoutLatin America are having a significant impact on economic governance andpublic budgeting. Legislatures are gradually re-asserting their budgetary powers, partly as a result of the emergence of more active parliamentary oppositions.

Parliaments do possess important budgetary powers. However, they seldomuse them effectively or responsibly. While capacity constraints partly explainwhy parliaments do not exercise their budgetary powers effectively, governanceconstraints explain why they sometimes do not exercise them responsibly.Parliament’s ability to establish their credibility as institutions of economic gov-ernance is thus contingent both on the strengthening their technical and adviso-ry capacities to perform their budget functions, and the existence of an enablinggovernance environment that allows them to be exercised effectively andresponsibly. The question of strategy then becomes whether legislative capacityshould be build first, or should it emerge as a result of increased legislativeactivism.

Sound public finance management and accountability requires finding anadequate balance between executive and legislative prerogatives in the differentphases of the budget: While executive dominance in public expenditure man-agement is more likely to ensure fiscal prudence, legislative oversight is criticalto provide effective checks and balances and enforce accountability in the for-mulation, execution and control of the budget. Ultimately, the governance of thebudget reflects a delicate balance between executive power and legislative over-sight. The key challenge of legislative budgeting in Latin American presidentialsystems is to retain the advantages of strong executive authority required toensure fiscal discipline while providing the institutional checks and balancesthat guarantee effective accountability. Strengthening the institutions of legisla-tive budget oversight and the agencies of public finance integrity is undoubted-ly a structural challenge for Latin American emerging economies. It is neverthe-less a critical one.

The views and opinions expressed in this essay are solely those of its author and should not beinterpreted as reflecting those of the aforementioned organizations. This study draws on: CarlosSantiso (2004) ’Legislatures and Budget Oversight in Latin America: Strengthening Public FinanceAccountability in Emerging Economies,’ OECD Journal on Budgeting (forthcoming).

Further ReadingAlesina, Alberto, Ricardo Hausmann, Rudolf Hommes and Ernesto Stein

(1999) Budget Institutions and Fiscal Performance in Latin America (Washington:IADB OCE Working Paper 394.)

International Budget Project (IBP) (2003) Index of Budget Transparency in FiveLatin American Countries: Argentina, Brazil, Chile, Mexico and Peru (WashingtonDC: IBP).

35August 2004

International Organization of Supreme Audit Institutions (INTOSAI) (2001)Independence of Supreme Audit Institutions: Final Task Force Report (Vienna: INTO-SAI General Secretariat.)

Krafchik, Warren, and Joachim Wehner (1998) ’The Role of Parliament in theBudget Process,’ South African Journal of Economics 66(4):512-541.

Mainwaring, Scott, and Christopher Welna, eds. (2003) DemocraticAccountability in Latin America (Oxford: Oxford University Press.)

Manning, Nick, and Rick Stapenhurst (2002) Strengthening Oversight byLegislatures (Washington DC: World Bank PREM Note 74.)

McGee, David (2002) The Overseers: Public Accounts Committees and PublicSpending (London: Pluto Press and Commonwealth Parliamentary Association.)

Messick, Richard (2002) Strengthening Legislatures: Implications from IndustrialCountries (Washington, DC: World Bank, PREM Note 63.)

Morgenstern, Scott, and Benito Nacif, eds. (2002) Legislative Politics in LatinAmerica (Cambridge: Cambridge University Press.)

OECD (2003) Budgeting in Brazil (Paris: OECD Working Party of SeniorBudget Officials GOV/PUMA/SBO(2003)10).

OECD (2001) Budget: Towards a New Role for the Legislature (Paris: OECD.)Santiso, Carlos (2004) ’Lending to Credibility: The Inter-American

Development Bank and Budget Oversight Institutions in Latin America,’ CEPALReview.

Schick, Allen (2002) ’Can National Legislatures Regain an Effective Voice inBudget Policy,’ OECD Journal on Budgeting 1(3):15-42.

SIGMA (2002) Relations Between Supreme Audit Institutions andParliamentary Committees (Paris: OECD SIGMA Paper 33,CCNM/GOV/SIGMA(2002)1.)

Stein, Ernesto, Erneto Talvi and Alejandro Grisanti (1998) InstitutionalArrangements and Fiscal Performance: The Latin American Experience (Washington:IADB OCE Working Paper 367.)

Wildavsky, Aaron (1992) “Political Implications of Budget Reform: ARetrospective,” Public Administration Review 52:594-599 ______________ (1964)The Politics of the Budgetary Process (Boston: Little, Brown.)


TABLE 1: Constitutional Restrictions on Legislative BudgetAuthority in Latin AmericaCountry Argentina Bolivia Brazil Chile Columbia Costa RicaYear of constitution 1994 1967 1988 1980 1991 1949(amendment) 1994 1999 1989 1997 1997Only the President Yes Yes Yes Yes Yes Yescan propose the Article Article Article Article Article Articlebudget 100.6 147 61(1)II 64 364 178

(b)Congress cannot No No Yes Yes Yes Noincrease the budget with with Articlefor any item or loop- loop- 351create new hole holebudgetary Article Articlecategories 166 64If no new budget is Yes No No No No Yespassed, current Implicit Implicitbudget remains ineffect

ORPresident’s No Yes No Yes Yes Noproposal takes Article Article Articleeffect 147 64 348

Country Equador Peru Uruguay VenezuelaYear of constitution 1998 1993 1997 1999(amendment)Only the President Yes Yes Yes Yescan propose the Article Article Article Articlebudget 258 78 215 313Congress cannot No Yes Yes Noincrease the budget Article Articlefor any item or 79 215create newbudgetarycategoriesIf no new budget is No No Yes Yespassed, current Implicit Article 313budget remains ineffect

ORPresident’s Yes Yes No Noproposal takes Article Articleeffect 258 80

Source: Adapted from World Bank (2001) Peru: Institutional and GovernanceReview (Washington, DC: World Bank, Report No.22637-PE): 36.

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TABLE 2: Time for Budget Review in Latin AmericaCountry Parliamentary Budget approval Number

structure authority of days allocatedfor reviewingbudget proposal

Argentina Bicameral Both chambers n.a.Bolivia Bicameral Both chambers 60Brazil Bicameral Both chambers 100Colombia Bicameral Both chambers 90Chile Bicameral Both chambers 60Paraguay Bicameral Both chambers 90Dominican Bicameral Both chambers Max 90RepublicUruguay Bicameral Both chambers 90Venezuela Bicameral Both chambers n.a.Mexico Bicameral Chamber of Deputies 30Costa Rica Unicameral Legislative Assembly 90Ecuador Unicameral National Congress 90El Salvador Unicameral Legislative Assembly 90Guatemala Unicameral Congress of the Republic 120Honduras Unicameral National Congress 105-120Nicaragua Unicameral National Assembly n.a.Panama Unicameral Legislative Assembly 90Peru Unicameral Congress of the Republic 90Source: Gutiérrez, Gerónomo, Alonso Lujambio and Diego Valadés (2001) Elproceso presupuestario y las relaciones entre los órganos del poder (México: Institutode Investigaciones Jurídicas): Chapter III.

TABLE 3: Budget Transparency in Latin America (Aggregate Index)Country Assessment of Perceptions Average Index

Legal Framework Index (un-weighted)Out of 1000 1 to 10 1 to 10 1 to 10points

Argentina 700 7.0 5.1 6.1Brazil 636 6.4 5.1 5.8Chile 733 7.3 5.9 6.6Mexico 507 5.1 5.0 5.1Peru 598 6.0 3.7 4.9Source: IBP 2003:5. Notes: The legal framework score is on a scale of 0 to 1000. The index of perceptions is an average on a scale of 1 to 10, of not transparent totransparent.


TABLE 4: Budget Transparency in Latin America (DisaggregateIndex)Phases of the budget Average score of 1 to 5

Most transparent Least transparentFormulation Chile Mexico Argentina Peru BrazilAverage 3.36 2.67 2.57 2.47 2.47Approval Chile Argentina Brazil Mexico PeruAverage 2.80 2.79 2.63 2.44 2.39Execution Chile Argentina Brazil Peru MexicoAverage 3.16 2.71 2.40 2.38 2.36Oversight and auditing Chile Brazil Mexico Argentina PeruAverage 3.07 2.31 2.27 2.19 1.89EconomicInformation Chile Argentina Brazil Mexico PeruAverage 3.53 3.15 3.15 2.75 2.66Source: Based on IBP 2003:3.

39August 2004


The Challenges of Good Governance: A View from Bangladesh

Md. Nurul MomenLecturer, Department of Public Administration,

University of Rajshahi, Rajshahi-6205, BangladeshE-mail: [email protected]

andMst. Marzina Begum

M.Phil Researcher, Institute of Environmental ScienceUniversity of Rajshahi, Rajshahi-6205, Bangladesh

E-mail: [email protected]

AbstractThis article focuses on challenges, experiences and strategies for good gover-

nance in Bangladesh. It explores what capacities states need to develop to meetthe demands and how to strengthen governance institutions, including electoralmanagement bodies, parliaments and judicial systems in Bangladesh.

IntroductionGood Governance is important for countries at all stages of development.

Bangladesh has recently gone through major changes that are conducive to thedevelopment of transparent, accountable governance. These changes were asfollows: well organized and transparent general elections held in October, 2001with the highest ever turn out of voters; emergence of an independent role forthe Election Commission; adequate access of all candidates to the media duringthe election campaign; and the decision by the present government to activatethe parliamentary committees and to broadcast part of the proceedings of theparliament to promote accountability (G. Shabbir Cheema: 1996).

Despite the above achievement, Bangladesh continues to face major problemsin governance for sustainable growth and equity. There is no tier of elected localgovernment above the union parishad, which were abolished a few years ago.The present procedures and processes through which the members of the parlia-ment work hinder their effective role in ensuring the accountability of the exec-utive branch. These include non-functioning committees and inadequate facili-ties for MPs, as well as lack of adequate opportunities for MPs to review anddiscuss policy issues and options in a rational manner instead of in an environ-ment of political polarization. Systems of financial accountability need to bereformed.

Other immediate issues of governance that require a government responseinclude the need to enhance the capacity and independence of the Judicial sys-tem, to improve access to the media, to eradicate corruption, and to develop acoherent policy formulation process. These would enable the involvement of allsegments of the society leading to consensus building on major issues of nation-al concern.

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Conceptual FrameworkGood governance is participatory, transparent and accountable. It is also

effective and efficient. It promotes the rule of law and equal justice under thelaw. Good governance ensures that political, social and economic priorities arebased on broad consensus in society and the voices of the poorest and most vul-nerable are heard in decision-making. We can take it for granted that sustain-able human development will not be realized without it.

To be sure, we must not forget that Bangladesh accomplished a great deal inthe past few decades, against all odds and ordeals. There have been strikingreductions in fertility and infant morality rates. Gone are the days of routinefamines, with the rise in agricultural productivity and more efficient food pro-duction. Gone too are the days of massive causalities to cyclones and floods.More girls are educated, and a great deal more children are enrolled in primaryschools. More children are immunized, and diseases such as polio are banishedfrom the land. We even see a steady pace of economic growth and a downwardtrend in poverty. The poor people of Bangladesh have surely benefited fromthese gains.

Good governance means all taxes due are collected and deposited to thetreasury. It means the same amount of Taka (name of Bangladesh currency) goesmuch further in financing development projects because public procurement istransparent and efficient. It means all public spending are accounted for asintended, and audited currently.

Good governance requires an efficient executive, a functioning legislature, anindependent Judiciary and the effective separation and balance of powers; allconstituent elements of a democratic regime. Consequently, Good governance isnot sustainable without effective democratic institutions. This article explains,as simply as possible, what “Good governance” in Bangladesh means.

Data SourcesThe paper is based on secondary information that includes recent publica-

tions, Journals, books, research reports and other documents. The key elementsof good governance as defined by UNDP are listed below:

Participation: All men and women should have a voice in decision-makingeither directly or through legitimate intermediate institutions that representtheir interests. Such broad participation is built on freedom of association andspeech, as will as capacities to participate constructively.

Rule of Law: Legal frameworks should be fair and enforced impartially, par-ticularly the laws on human rights.

Transparency: Transparency is built on the free flow of information.Processes, institutions and information are directly accessible to those concernedwith them, and enough information is provided to understand and monitorthem.

Responsiveness: Good governance requires that institutions and processes tryto serve all stakeholders within a reasonable timeframe.

Consensus orientation: There are several actors and as many viewpoints in agiven society. Good governance requires mediation of the different interests insociety to reach a broad consensus in society on what is in the best interest ofthe whole community and how this can be achieved.


Equity: All men and women have opportunities to improve or maintain theirwell-being.

Effectiveness and efficiency: Good governance means that processes andinstitutions produce results that meet the needs of society while making the bestuse of resources at their disposal.

Strategic Vision: Leaders and the public have a broad and long-term perspec-tive on good governance and human development, along with a sense of whatis needed for such development. There is also an understanding of the histori-cal, cultural and social complexities in which that perspective is grounded.(UNDP, 1997)

Political, Social and Economic Dimensions of Governance in Bangladesh

Democracy as an institution is new and still fragile in Bangladesh. Over thelast three decades since her independence, Bangladesh has witnessed severalpolitical hiccups including assassination of two presidents, two army coups andtwo major political movements that caused the downfall of political regimes.Bangladesh has had three general elections during the past decade, all of whichwere believed to have been generally free and fair. Yet democracy seems to befloundering.

Parliamentary SystemAn effective parliamentary system is a vital element for improving good gov-

ernance. Parliament is the key institution in the national system of accountabili-ty. As an elected body, it is the organization that empowers the Government andgrants it legitimacy. Parliament scrutinizes the activities of the executive branchand holds it accountable to the citizens of the country.

However, in Bangladesh experience of parliamentary government has beenfar from satisfactory. The first four parliaments proved to be largely ineffectivedue to a prolonged boycott by the main opposition parties; the sixth parliamentmerits a mention in the Guinness Book of Records for its unexpectedly shortexistence. The eighth parliament is now in session. Both the people ofBangladesh and the donor community, which are working to improve goodgovernance in Bangladesh, have high expectations that the current parliamentwill be more effective. The need for the parliament to perform its role as speci-fied in the constitution is recognized. However the performance of MPs isaffected by several factors: The interruption of the democratic process duringthe past two decades (1971-1990), non-functioning committees of the parlia-ment, lack of support facilities and services for MPs, and an environment ofpolitical polarization. As a result, critical issues of public policy are not ade-quately discussed and the executive branch continues to make major policydecisions without adequate input from the opposition.

A major achievement of parliament has been to activate its committee struc-ture. The Government has announced that the parliamentary committees willnot be chaired by ministers as has been the case in the past. A private membercan be the chairman of such a committee, known as the select Committee andthe relevant departmental minister only sits as a member. In addition, a primeminister’s hour to answer questions has been introduced. The Government hasasked for UNDP Support and donors are happy for UNDP to take a lead in pro-viding support to the parliament.

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Democratization ProcessGood Governance is the heart of democratization process. Democratization

has been a rewarding experience for us in Bangladesh. Bangladesh governmenthas made serious and sincere efforts to strengthen democratic institutions andpromote good governance institutions and promote good governance. Theyhave, in this, always had peoples support. We have put in place the non-partycaretaker government, unique in the world, which assumes the responsibilitiesfor holding parliamentary elections on completion of normal tenure of an elect-ed government. Already successive three changeovers took place under thissystem. The present government led by Prime Minister Begum Khaleda Zia wasvoted into office through such an election in October 2001. The election was acelebration of Bangladesh’s democratic values.

CorruptionIn Bangladesh corruption has existed a long time. This parasitic problem has

grown distinctly since the independence of Bangladesh. The government cor-ruption has been ignited in every echelon (either public or private sector).Corruption has long deteriorated Bangladesh society and caused political tur-moil. According to a survey (2003) developed by Transparency International,Bangladesh ranks among the most corrupted nation in the world in theCorruption Perception Index. Good governance can lessen, if not eliminate, allforms of corruption and corrupt practices. There is little debate concerning thenegative impact of corruption in Bangladesh. The factors that allow corruptionto take place include: weakness in public financial management; low salariesand lack of incentive structures in the civil service; complex regulatory rulesand procedures; weak public procurement systems; limits to judicial independ-ence; closed-door practices in policy development, legislative drafting, and pub-lic decision-making; and a culture of secrecy in public administration. The gov-ernment has made progress in some areas including enactment of an AntiCorruption Commission (ACC) ACT.

Freedom of Expression and SpeechBangladesh constitution speaks of participatory process and accountability of

government’s actions and transparency of decision-making. Freedom of mediais guaranteed. But Bangladesh has experienced severe discourtesy to freedom ofexpression and especially to the print media. No newspaper was banned; yetgovernment continued to exercise control through distribution and sales quotasof newsprint and government advertisements to newspapers and periodicals.The Bangladesh newspapers are enjoying freedom of press; newsprint quotasand distribution of advertisements apparently controls the freedom of expres-sion of the print media.

Human Rights and SecurityGood governance requires human rights: freedom from discrimination and

violence, equal opportunity, due process, freedom of expression and organiza-tion, and transparent, accountable government. Fundamental rights are guaran-teed by the constitution of Bangladesh. Human rights is a much neglected issuein Bangladesh since the country started its journey in 1971.Violation of humanrights was practiced by the rulers of this country in the past and present and we


can surely forecast that this situation will remain unchanged if something is notdone about it in the future.

For decades, successive governments in Bangladesh have failed to curb seri-ous human rights violations arising from the use of legislation and widespreadpractices in the law-enforcement and justice systems that violate internationalhuman rights standards.

Hence the government should urgently address factors that contribute tohuman rights violations, such as a national human rights commission, to inves-tigate human rights violations. Civil society in Bangladesh would welcome thecreation of such a body with appropriate power to investigate, and forwardtheir information to the prosecutors so that they undertake prosecution ofoffenders. Such a body should, in collaboration with the Bangladesh law com-mission, review all laws that allow for impunity.

Law and Order, Safety and Security of the CitizensWhat the people of Bangladesh aspire for is nothing but the slightest ray of

hope regarding normal life. But an increasing darkness is still falling all over theland. Gun battles, murders and acid throwing, robbery, oppression of women,issuing of fatwa (religious edict), blackmail, campus violence etc, have becomeeveryday incidents and people have little hope of their ending soon.

Torture remained widespread. At least 13 detainees died in police custody.Police used unnecessary or disproportionate force against demonstrators, injur-ing hundreds of people, some critically. Over 130 people were sentenced todeath. Two men were executed. Harassment of human rights defenders contin-ued. Rape and other violence against women were widely reported (AmnestyInternational report, 2004). Police torture is increasing day by day people arecontinually being battered by the police and law enforcing agents. The police’srole in maintaining people’s security is very disheartening. The people’s saviorshave become a reason for terror in the minds of the people. The jail situation inthe country is beyond description. Laws and regulations are violated often. Thejail codes and regulation of the eighteenth century are still in practice. Althoughan independent state has emerged, its jail code and regulations have notchanged. Therefore, human rights are frequently violated.

Rule of LawOne of the aspiration of our people, and the major goals of our constitution,

is to secure “a society in which the rule of law, fundamental human rights andfreedom, equality and justice-political, economic and social will be secured forall citizens.” By upholding the rule of law judiciary protects the rights of indi-viduals to live, work and enjoy without fear or favor. The promotion of goodgovernance through judiciary depends on its independence to a great extent.The people of Bangladesh think that the rule of law is just not in practice inBangladesh. Civil society is highlighting in particular its concerns with regard totwo specific laws that facilitate endemic human rights violations in Bangladesh:the Special Powers Act (SPA) which allows arbitrary detention for long periodsof time without charge, and Section 54 of the Code of Criminal Procedure whichfacilitates torture in police or army custody.

Calls for the repeal of the SPA has come from the Bangladesh legal communi-ty and human rights organizations. It has also come from political parties butonly when they are in opposition. When in government, they have defended theuse of the SPA and maintained it.

45August 2004

Independence of JudiciaryThe constitution of Bangladesh in its original form devised a scheme of a

completely independent Judiciary. Good governance depends on good and effi-cient judiciary. To attain that, the nation must make due investments in the judi-ciary. “A sound and independent judiciary is the sine qua non of a healthy soci-ety” (Halim, 1998). But it should be mentioned that the independent characterof judiciary has been upheld and a bill is underway in the parliament to ensureits full independence.

Openness and Availability of InformationThe free flow of information is crucial for accountability. Transparency is

built on the free flow of information. In Bangladesh the press is enjoying ade-quate freedom with the establishment of parliamentary democracy. We havealso anti-hopping law under the official secrecy Act 1935; a bureaucrat may con-ceal any sort of information. Unfortunately in Bangladesh a large number ofactivities remain outside public scrutiny. However, secrecy not only reduces theefficiency and quality of decision making, it also compromises democracy.

A Road to Good GovernanceIn contemporary Bangladesh anyone who criticizes the government or

indeed the opposition is branded as a political and, even personal, enemy. Thisuninterrupted tradition of official hostility to criticism has, however, been of lit-tle service to the government since it has proved to be seriously detrimental togood governance in Bangladesh. Successive governments have convinced them-selves that those who criticize any failings of policy or aspect of governance arehostiles, even enemies and probably in collusion with their political opponents.The concept of this objective criticism thus appears to have become unaccept-able within the prevailing culture and those criticized are always inclined topose a question. What is the intent? This question implies that the critic is moti-vated by some private agenda; searching for career advancement, patronage orpublicity; is in league with one’s political opponents; or is trying to underminesome particular person for personal and/or political reasons. Everyone knowsthat to create a congenial environment an all-out concerted effort of both thegovernment and the opposition parties is a must.

In Bangladesh, it is designed to conceal information rather than share it. Thislack of transparency in governance does not limit itself to official dealings withthe public but is even more prevalent within the government. Years of conceal-ing information has meant that mechanisms of information gathering, storageand retrieval have fallen into disuse so that any effort to access informationdevolves into a major administrative exercise. In the absence of any system ofbottom-up reporting from the field and top-down supervision, systems ofaccountability within a ministry remain virtually non-existent. As a result, thereis no basis on which to hold anyone accountable if anything goes wrong withinany part of the government. Our crisis of governance is thus inherent in the sys-tem of non-accountable administration. Such a milieu of information blackoutand lack of accountability is aggravated by the fact that ministers and secre-taries rarely visit the field to elicit first hand information. Rare field visits tendto degenerate into ceremonial exercises carefully managed to conceal damaginginformation that reflects poorly on the local or project officials. Such


management of information is, in many cases, designed to conceal serious ineffi-ciencies as well as corrupt practices of people along the administrative chain.

Within such an administrative culture of concealment, if a government is gen-uinely committed to good governance, any person who brings to light particularwrongdoings within the government is doing them an enormous favor. Suchcritics may help to reveal information, which has been kept concealed from thepolicy makers either by motivated intent or more often because the system is,itself, designed to conceal such information.

If however, Ministers really want to improve the quality of governance with-in their domain they should move to view their critics as their allies in the pur-suit of good governance. To this end every minister should employ a full timespecial assistant whose job would be to go through the newspapers, includingthose in conspicuous opposition to the government, and to keep track of semi-nars where papers are presented with a view to take note of comments of thelimitation of governance in particular areas. Obviously some of these criticismswill be uninformed, misinformed, weakly argued and even downright tenden-tious, often with political motive. But even such criticisms may carry a kernel oftruth worth retrieving.

Even patently motivated and malicious criticism, originating from knownpolitical enemies, should not be dismissed since such criticisms need not alwaysbe incorrect. More to the point, even criticism can serve to alert a government toissues that are agitating the minds of their opponents since such issues couldescalate into a political mobilization against the government. Such issues needto be confronted at an early stage where it is presented as an argument onpaper, either through remedial governance or by political debate.

Such efforts, including criticism of official actions, should be encouraged andeven rewarded. Ministers should invite their academic critics to share theirinformation and analysis with them so as to test the validity of their facts andthe logic of their criticism. In such an environment a government widens itsknowledge base, often beneficially, because it obtains information not at its dis-posal and may even derive useful ideas about corrective action. Even where nosuch positive outcomes emerges from such exchanges, a government whichexposes itself to public debate, generates confidence in its openness and buildsan image of being receptive to outside ideas. Each minister should thus holdperiodic exchanges with a cross section of their critics rather than to limit them-selves to token exchanges with their political friends and personal admirers. Allthese observations should apply particularly to the highest office of the PrimeMinister and also the leader of the opposition.

Looking at the behavior of Bangladesh politicians, it seems that they considerthe country as just a piece of land. They forget that all their activities are beingreported in the world media and people are watching. They have constantlyfailed to understand that the question of survival in politics does not depend onpatronizing criminals. The fundamental aim of politics is to serve the people,not to victimize them. It is time for our leaders to break out of this protectivecircle and throw open their windows to the world by exposing themselves toindependent opinion, including encounters with their harshest critics. Out lead-ers should publicly face such critics and challenge them either by a superior-truth or assimilate their criticisms by putting it to positive use in improving thequality of governance. Acknowledging error is no sign of weakness but a meas-ure of political strength and maturity.

Such a self-exposure to criticism by our leaders, thus, presumes that they rec-ognize that their critics could also be their friends and play a politically benefi-

47August 2004

cial role in our system of governance. It is only in such an open environment ofreceptivity to criticism that good governance and political statesmanship inBangladesh may be expected to flourish.

Concluding RemarksWe would like to conclude by recognizing that improving governance is

challenging because there are powerful vested interests which benefit from thestatus quo and resist change. Courageous political leadership and vigilant citi-zens who demand change are essential. Good governance initiatives need torecognize the importance of a conducive political economy and domestic own-ership to sustainable reforms.Bangladesh achieved nothing because of politicalinstability. The people of Bangladesh, nevertheless, shows a remarkableresilience in the face of adversity, often live on hopes. No wonder that a suc-cessful transition to a democratic government on the threshold of third decadeof the nation’s existence in 1991. In this situation the spirit of the concept ofgood governance is essential for Bangladesh.Good governance is a fragile plantthat will need sustained nourishing. It will require a fundamental change inmentality and social expectations that will change only gradually.

References1. ADB (1995), Governance: Sound Development Management, Asian

Development Bank 2. ADB (1998), Governance in Asia: From Crisis to Opportunity, Asian

Development Bank 3. Aminuzzaman, Salauddin (1993) “Institutional Process and Practices of

Administrative Accountability: Role of Jatiya Sangshad (Parliament) inBangladesh” south Asian Studies Vol.10, No.1, 1993

4. Aminzzaman, Salahuddin, (2000) BUILD CAPACITY, Diagnostic Survey,CARE Bangladesh 2000.

5. Aminuzzaman, Salahuddin and Baldershein. H; Jamil, 1 (2001), “ElectoralParticipation in Bangladesh: Explaining Regional variations,” Commonwealthand Comparative Politics, Vol. 39, No.1, 2001

6. Kamal, Ahmed (2000) Governance-south Asian Perspective, Dhaka: UPL7. Kamal, Ahmed (2000) Democracy and poverty: a missing link? AAB Paper,

May 20008. Landell-Mills, Pierre and Ismail Serageldin, 1992. ’Governance and the

External Factor’ in Summers and Shah (1992:303-20)9. Islam, Mahmudul, Constitutional Law of Bangladesh, BILIA, 199510. Hasanuzzaman, Al Masud, “Parliamentary Committee System in

Bangladesh,” in Regional Studies, Vol. XII, No. 1 Winter 1994-64, pp.31-3911. The Public Administration Reform Commission, Dhaka 199812. www.aedsb.org/RS-critic.htm13. Hye, Hasnat A. 1998.Concept paper, International seminar on Good

governance, Ministry of local government, rural development and cooperatives.

14. World Bank (1996). Government that Works: Reforming the Public Sector.


15. Dubey, Muchkund (1998).”Good governance and economic development”paper presented at a seminar on “Bangladesh Beyond 2000” organized by theAmerican chamber of commerce in Bangladesh.

16. Amnesty International report, 2004.17. The Bangladesh Today, Saturday, May 15, 2005, p, 5.18. The Daily Star, Dhaka, Saturday, May 22, 2004, p, 5.19. Siddiqui, Kamal, Local Government in South Asia: A comparative study,

University press limited Dhaka, Bangladesh 1992.20. Sobhan,Rehman (1993), Rethinking the role of the state in development: Asian

perspectives, University press limited, Dhaka.21. Sobhan, Rehman, Bangladesh: Problems of Governance. (Dhaka: UPL, 1993).22. International Federation of Accountants, Public Sector Committee: Governance

in the Public Sector: A Governing Body Perspective (New York: IFAC, August2001).

49August 2004


Which Financial Reports in thePublic Sector Should be Subject to

External AttestationBy: Dr. Jesse Hughes, CPA, CIA, CGFM

Professor Emeritus of AccountingOld Dominion University

Norfolk, VA [email protected]

andWayne Cameron, FCPA, FCA, FIPPA

Auditor-GeneralVictorian Auditor-General’s Office

Melbourne Victoria [email protected]

IntroductionThe International Auditing and Assurance Standards Board (IAASB)

has been established by the International Federation of Accountants(IFAC) as the authoritative body to develop international standards onquality control, auditing, assurance, and related services.1 Included with-in the Preface referenced in the footnote below, is the structure of theIAASB’s technical pronouncements.2 An adaptation of this structure isreflected in Appendix A.

In the application of the international standards for assurance engage-ments, by and large no distinction is made between the private and pub-lic sector. “Public sector” refers to national governments, regional (state,provincial, territorial) governments, local (city, town) governments andrelated governmental entities (agencies, boards, commissions and enter-prises). In circumstances where specific basic principles, essential proce-dures or guidance contained in an ISA are not applicable in a public sector environment, or when additional guidance is appropriate in suchan environment the Public Sector Committee (PSC) of IFAC so states in a Public Sector Perspective (PSP) at the end of the International Standardon Auditing (ISA), the International Standard on Review Engagements(ISRE), or the International Standard on Assurance Engagements (ISAE).When no PSP is added, the ISA, ISRE, or ISAE is to be applied as writtento engagements in the public sector.

The distinction between the private and public sector relative toaccounting standards is that International Accounting Standards (IASs)3

only apply to the private sector. To fill the void in the public sector, thePSC has been established as the authoritative body to developInternational Public Sector Accounting Standards (IPSASs). The core set of accrual IPSASs are drawn primarily from the IASs with the IASs

51August 2004

revised by the PSC, where appropriate, for application to the public sector.4

Additional IPSASs are presently being developed that go beyond those IASspublished for the private sector. An example is the Cash Basis IPSAS that iseffective for annual financial statements covering periods beginning on or afterJanuary 1, 2004.5

This paper briefly reviews accounting standards applicable to the public sector throughout the world. In addition, the types of public sector financialreports (including budgetary reports) are discussed. Further, guidelines are suggested for application of the ISAs, ISREs, and ISAEs approved by the IAASBto the general purpose financial reports prepared by the public sector in accor-dance with the IASs and IPSASs. In addition, other public sector financialreports (i.e., budget and statistical reports) not presently required by the IPSASs are considered in the paper.

Public Sector Financial ReportsThe public sector is comprised of a wide range of different entities that apply

the IASs and the IPSASs. It is important to distinguish between GovernmentBusiness Enterprises (GBEs) and other public sector entities since IPSASs do not apply to GBEs as stated below:

“GBEs are required to comply with IASs issued by the International AccountingStandards Committee. The Public Sector Committee’s Guideline No. 1 ’FinancialReporting by Government Business Enterprises’ notes that IASs are relevant to allbusiness enterprises, regardless of whether they are in the private or public sector.Accordingly, Guideline No. 1 recommends that GBEs should present financial state-ments that conform, in all material respects, to IASs.”6

A GBE has the following characteristics: has power to contract in their ownname, is assigned financial and operational authority to carry on a business, cansell goods or services to other entities at a profit or full cost recovery, is notreliant on continuing government funding to be a going concern, and is con-trolled by a public sector entity.

The International Accounting Standards Committee referenced earlier hasbeen renamed the International Accounting Standards Board and the IASs havebeen renamed the International Financial Reporting Standards (IFRSs). In accor-dance with the IFRSs, all GBEs (and all private sector entities) would issue thefollowing financial statements using the accrual basis of accounting: BalanceSheet, Income Statement, Statement of Changes in Equity, and Statement ofCash Flows8 as well as a summary of significant accounting policies and relatednotes.

Many public sector entities (other than GBEs) throughout the world will usea cash basis of accounting to account for government operations at all levels ofgovernment since the cash information is more readily available (and somewould argue, more readily understandable). Further, it is simple to implementand costs are low due to the lower level of accounting skills required.Consequently, as mentioned earlier, the PSC has issued a Cash Basis IPSAS thatrequires a Statement of Cash Receipts and Payments. In addition, the CashBasis IPSAS encourages entities using the cash basis of accounting to discloseadditional information pertaining to assets, liabilities and comparisons to budgets in the notes to the required statement.

Some public sector entities have implemented the accrual basis of accountingfor application to government operations or are in the process of implementingthe accrual basis. These entities would apply the accrual IPSASs (1 through 20).


IPSAS 1 stipulates the following financial statements: Statement of FinancialPosition, Statement of Financial Performance, Statement of Changes in NetAssets/Equity, and Cash Flow Statement as well as a summary of significantaccounting policies and related notes.

In addition to the IPSAS approved by the PSC, the International MonetaryFund (IMF) has published the Government Finance Statistics Manual (GFSM)9

that identifies statements required for statistical reporting purposes. These sta-tistical statements also require reporting on the accrual basis and are as follows:Balance Sheet, Statement of Government Operations, Statement of Sourcesand Uses of Cash, and Statement of Other Economic Flows. Although thereare some key differences between the IPSASs (e.g. historical cost is encouragedas the benchmark treatment) and the GFSM (e.g. current cost is required), thePSC has a project underway to eliminate these differences to the maximumextent possible.

In addition to the general purpose financial reports required by the IPSASsand the statistical statements required by the IMF, most governments will issuebudget reports at the beginning of the fiscal period. Many would consider thesebudget reports as the most important financial statements issued by govern-ments since they are usually published and frequently commented upon in themass media. In many cases, these budget reports are on a cash basis of account-ing and would include the legally adopted, annual or biennial budgets andthe three- to five-year prospective budgetary reports. (Some governments doprepare accrual budgets—but in almost all cases these budgets are prepared ona GFS, i.e. statistical, basis). These budget reports are referred to as ex-antebudget reports and are published for transparency purposes to inform the electorate about the financial plans and policies for government operations.Although these budget reports are not required by the IPSASs or the IMF,preparation and publication is highly recommended by the IMF and the WorldBank since they have been provided to Parliament to support AppropriationBills.10

In addition to the ex-ante budget reports, most governments will preparebudget to actual comparative statements at the end of the accounting period.These are referred to as ex-post budget reports to inform the electorate aboutthe degree of adherence to the budget for accountability purposes. Althoughthis comparative report is not required, preparation and publication is encour-aged by the PSC11, as well as the IMF and the World Bank referenced earlier. Ifthe budget is on one basis (i.e. cash) and accounting is on another basis (i.e.accrual), a reconciling statement is sometimes prepared to identify the differ-ences between the two systems. Budget reports usually only cover the GeneralGovernment sector whereas accrual ex-post accounting statements comprise theconsolidated whole-of-government accounting statements. One might havethought comparison between the two reports would have been made easierbecause the latter document will include segment information enabling compar-isons to be made back to the budget papers; however, comparative analysis isfrequently made difficult with the budget being prepared on a GFS (statistical)basis and the segmental data derived from GAAP.

Assurance EngagementsTo implement the structure of technical pronouncements, the IAASB has

established an International Framework for Assurance Engagements. Criticaldefinitions from that framework are included below:12

53August 2004

Assurance engagement—an engagement in which a practitioner expresses aconclusion designed to enhance the degree of confidence of the intended usersother than the responsible party about the outcome of the evaluation or meas-urement of a subject matter against criteria (p. 4). The elements of an assuranceengagement are as follows: a three party relationship involving a practitioner, aresponsible party, and intended users; appropriate subject matter; suitable crite-ria (may include International Financial Reporting Standards or InternationalPublic Sector Accounting Standards-p. 12); sufficient appropriate evidence; anda written assurance report in the form appropriate to a reasonable assuranceengagement or a limited assurance engagement (p. 8).

Reasonable assurance—reduction in risk to an acceptably low level in thecircumstances of the engagement as the basis for a positive form of expressionof the practitioner’s conclusion (p. 5). For reasonable assurance engagementsregarding historical financial information, these engagements are called audits(Footnote 2, p. 3).

Limited assurance—reduction in risk to a level that is acceptable in the cir-cumstances of the engagement, but where that risk is greater than a reasonableassurance engagement, as the basis for a negative form of expression of thepractitioner’s conclusion (p. 5). For limited assurance engagements regardinghistorical financial information, these engagements are called reviews(Footnote 2, p. 3).

In a reasonable assurance engagement (including an audit of historical finan-cial information), the auditor must accumulate enough evidence to be in a posi-tion to express a conclusion in the positive form. An example of the positiveform follows: “In our opinion the financial statements are fairly stated, in allmaterial respects, based on (the criteria used)”. Gathering sufficient appropriateevidence is part of an iterative, systematic process that involves obtaining anunderstanding of internal control and determining the degree of compliancewith laws and regulations as well as evaluating the sufficiency and appropriate-ness of the evidence. Procedures used would include inspections, observations,confirmations, analytical procedures and inquiries. Where applicable, substan-tive procedures would be used to obtain corroborating information fromsources independent of the responsible party. In addition, for most subject mat-ters, tests of the operating effectiveness of internal controls would be performedwhere relied on. For instance, if you can prove a number (e.g. interest) analyti-cally, one wouldn’t test internal controls in that area. The same is often the casefor Payroll.

In a limited assurance engagement (including a review of historical financialinformation), the auditor must accumulate enough evidence to be in a positionto express a conclusion in the negative form. An example of the negative formfollows: “Based on our work described in this report, nothing has come to ourattention that causes us to believe that the financial statements are not fairlystated, in all material respects, based on (the criteria used).” Sufficient appropri-ate evidence for reviews of financial statements is obtained primarily throughanalytical procedures and inquiries.

An unqualified conclusion is not appropriate for either type of assuranceengagement if there is a material limitation on the scope of the auditor’s workor if a material error is revealed. In these instances, a qualified or adverse opinion would be more appropriate or a disclaimer of an opinion might be warranted.


As identified in the Structure of the IAASB’s Technical Pronouncements (seeAppendix A), the international framework for assurance engagements compris-es the following: (1)Audits and reviews of historical financial information; and (2)Assurance engagements other than audits or reviews of historical financial

information. ISAs 200-799 will apply to audits and be compiled from currentISAs 210-799. ISREs 2000-2699 will apply to international standards forreview engagements and be compiled from current ISA 910. A project isunderway to more clearly define the coverage in Special Purpose AuditEngagements (ISA 800). ISA 800 discusses the following reports:13

1. Reports on Financial Statements Prepared in Accordance with a Comprehensive Basis of Accounting other than International Accounting Standards or National Standards. (The cash receipts and disbursements basis of accounting as well as the financial reporting provisions of a government regulatory agency are identified as examples for these financial statements);

2. Reports on a Component of Financial Statements;3. Reports on Compliance with Contractual Agreements; and4. Reports on Summarized Financial Statements.The Structure further specifies Assurance Engagements on Subject Matters

Other than Historical Financial Information. An international standard has beenissued to apply to such assurance reports dated on or after January 1, 2005.14

One aspect of these assurance engagements pertains to the examination ofprospective financial information as spelled out in ISAE 3400.15 When reportingon the reasonableness of management’s assumptions, the auditor provides onlya limited level of assurance with a conclusion in the negative form. However,when in the auditor’s judgment, an appropriate level of satisfaction has beenobtained, the auditor is not precluded from expressing a conclusion in the posi-tive form regarding the assumptions.16

Applicability of Assurance Engagements to Public SectorFinancial ReportsYear End Historical Financial Information:

GBEs. IPSAS 1 clearly specifies that GBEs are to follow the IASs.Consequently, the audit expectations for GBEs would be the same as those forthe private sector. That is, the annual financial statements published by theGBEs would be expected to be subject to an audit with a positive form of con-clusion expressed by the auditor. If interim financial statements are issued, areview (or audit in some jurisdictions) would be performed by the auditor.

Public Entities using the Accrual IPSASs. General purpose financial state-ments issued by all levels of government using the accrual IPSASs (1-20) wouldbe subject to the full range of ISAs 200-720. That is, an audit would be per-formed and an audit report with a positive form of conclusion would be issuedby the auditor.

Public Entities using the Cash Basis IPSAS. Most governments throughoutthe world currently prepare their financial reports on the cash or near cashbasis. Although the current ISA 800 identifies the “cash receipts and disburse-ments basis of accounting” as other than a comprehensive basis specified byIASs, the Cash Basis IPSAS identifies these statements as general purpose

55August 2004

financial statements. Thus, financial reports by governments using the CashBasis IPSAS would be subject to audit as a regular audit engagement under ISA200-799 with reasonable assurance expressed by the auditor.

GFS Manual 2001. Although these reports are not considered general pur-pose financial statements, data is extracted from the general purpose financialstatements prepared by the accounting system and reformatted into the statisti-cal report format desired by the IMF and the United Nations. Yet, these reportsare not presently subject to external attestation. These reports could be consid-ered special purpose reports subject to the ISAs. As such, any examinationwould include forecast data, non-financial data, and non-complying financialstatements. If such attestation is requested, it should be considered a specialpurpose audit engagement (ISA 800) with a positive conclusion expressed bythe auditor. Particular care will be required in preparing an audit report toensure that the auditor is not appearing to confirm that both the GAAP basedfinancial statements and the GFS based financial statements represent fairly thegeneral purpose financial statements of the entity. However, a review could beperformed under ISRE 2400 if a higher level of risk is acceptable. In that case, anegative conclusion would be expressed by the auditor.

Comparative Budget to Actual Financial Statement. For accountability pur-poses, many governments prepare comparative budget to actual financial state-ments at the end of the fiscal period. Even though these statements are often notsubject to external attestation, the actual data will be audited as part of the gen-eral purpose financial statement audit since the auditor is required to ensurefinancial data elsewhere in the report is not inconsistent with the audited num-bers. If external attestation is desired, these statements should be subject toaudit as a special purpose audit engagement (ISA 800) with reasonable assur-ance provided by the auditor. However, a review could apply under ISRE 2400if substantive tests are not to be performed due to cost constraints. In that case,a negative conclusion would be expressed by the auditor.

At least one country (United States17) specifies that budgetary comparativeinformation be presented in schedules as part of required supplemental infor-mation. Or, if desired, this information could be presented in a budgetary com-parison statement as part of the basic financial statements. This comparativeinformation is also required in New Zealand and desired in Australia. Whenexternal attestation is desired, schedules would be subject to a review whilestatements would be subject to an audit. The budget data may not be audited,but the actual data is audited as part of the regular audit of the general purposefinancial statements. That leaves at large the question of consistency of account-ing policies (i.e. measurement between budget and actual).Assurance Engagements on Subject Matters Other Than Historical Financial Information:

Prospective financial information will be based on many assumptions aboutfuture conditions and events that may or may not occur. The quality of theinformation will be dependent largely on the appropriateness of these assump-tions. At least one country (New Zealand18) suggests that an independent thirdparty should review these assumptions as a valuable aid to reduce internal bias,and to provide an additional perspective on the validity of the assumptions.Further, in the State of Victoria in Australia, the Supreme Auditor is required toexamine the compilation of the ex-ante Estimated Financial Statements pub-lished by the government, the reasonableness of the assumptions applied, and the consistency of the application of those assumptions with the budgetinformation.


Legally Approved Budgets. For transparency purposes, governments areencouraged to publish their legally approved budgets (generally, one year fore-casts). Yet, these budgets are not subject to external attestation. If such attesta-tion is requested by the legislative body to assure that the assumptions are rea-sonable and the presentation is fair/accurate, these budget reports should besubject to a review under current ISAE 3400 with limited assurance provided bythe auditor.

Projected Financial Statements or Schedules. Governments are encouragedto provide budgetary projections (generally for 3-5 years) as a component of theMedium Term Fiscal Framework or other projected financial requirements. Yet,these reports are not presently subject to external attestation. If such attestationis requested, these statements should be subject to a review under ISAE 3400with limited assurance provided by the auditor.

A breakout, by type of report, on these conclusions is provided below:

Nature of EngagementRegular Special Review CurrentAudit Purpose International

Audit StandardsGovernment XX ISA 200-799Business EnterprisesGovernment Operations:Accrual IPSAS XX ISA 200-799Cash IPSAS XX ISA 200-799Budget to Actual XX Or XX ISA 800 orComparative ISRE 2400StatementGovernment XX Or XX ISA 800 orFinance Statistics ISRE 2400Manual 2001Legally Approved XX ISAE 3400BudgetProjected Budget XX ISAE 3400

ConclusionMany financial reports are prepared and published by public entities. Yet,

only selected year-end historical reports are subject to external attestation. It issometimes unclear which level of assurance that an auditor is expected to applyfor financial reports that are not considered general purpose financial state-ments. This paper has examined the existing ISAs, ISREs, and ISAEs. It has sug-gested which public sector financial reports should be subject to external attesta-tion and the level of assurance that should be provided. The table below sum-marizes the conclusions:

57August 2004

Framework for Assurance Engagements and Related Services In the Public Sector

Assurance Engagement Related ServicesNature of Historical Financial Other Than Agreed-upon CompilationService Information Historical Procedures

(includes year-end) FinancialIPSAS and IMF Informationreports) (includes ex-ante

budget reports

Level of Reasonable or Reasonable or No assurance No assuranceAssurance limited, but not limited, but notProvided by absolute, assurance absolute, assurancethe Auditor

Report Positive Positive Factual IdentificationProvided or negative or negative findings of of information

assurances on assurances on procedures compiledassertion(s) assertion(s)

As an independent body, the Supreme Audit Institution or other independentaudit body in each country is responsible for the audit or review of public sectorfinancial reports at the appropriate tier of government. The organization thatrepresents the Supreme Audit Offices is the International Organization ofSupreme Audit Institutions (INTOSAI). The Ministry of Finance (or equivalent)in each country is generally responsible for the preparation and publication ofapplicable public sector financial reports. The organization that represents theMinistries of Finance is the International Consortium of Government FinancialManagers (ICGFM).19

The application of the guidelines identified in this paper to the Structure ofIAASB’s Technical Pronouncements is identified in Appendix B. Although theseare not authoritative guidelines, they hopefully will provide a basis for debateand research to ensure that reliable and verifiable information is provided to thepublic in the form of governmental financial reports.

AcronymsThe highly technical nature of this article requires extensive use of acronyms.

Those used are summarized here for ease in reading the article.Generally Accepted Accounting Principles (GAAP)Government Business Enterprise (GBE)Government Finance Statistics (GFS)Government Finance Statistics Manual (GFSM)International Accounting Standard (IAS)International Accounting Standards Board (IASB)International Auditing and Assurance Standards Board (IAASB)International Federation of Accountants (IFAC)International Financial Reporting Standard (IFRS)International Consortium of Government Financial Managers (ICGFM)International Monetary Fund (IMF)


International Organization of Supreme Audit Institutions (INTOSAI)International Public Sector Accounting Standard (IPSAS)International Standard on Assurance Engagement (ISAE)International Standard on Auditing (ISA)International Standard on Quality Control (ISQC)International Standard on Review Engagement (ISRE)International Standard on Related Services (ISRS)Public Sector Committee (PSC)Public Sector Perspective (PSP)

End Notes1. Preface to the International Standards on Quality Control, Auditing, Assurance

and Related Services (IFAC, July 2003).2. Ibid, p. 12. Although related services (primarily agreed-upon procedures

and compilations) are included in the structure, they are not addressed in thispaper since no external attestation is provided in the auditor’s report.

3. Issued by the International Accounting Standards Board.4. Handbook of International Public Sector Accounting Standards (IFAC, 2003

Edition).5. Financial Reporting Under the Cash Basis of Accounting, Cash Basis IPSAS

(IFAC, January 2003).6. Op. cit., Pg. 29, IPSAS 1-Presentation of Financial Statements.7. Ibid, p. 32.8. IAS 1-Presentation of Financial Statements, Handbook of International

Accounting Standards (IASB, 2003 Edition).9. Government Finance Statistics Manual (IMF, 2001).10. Public Expenditure Management Handbook (The World Bank, 1998) and the

Code of Good Practices on Fiscal Transparency (IMF, 2003).11. Para. 22, IPSAS 1 (IFAC, May 2000) and Para. 2.1.36, Cash Basis IPSAS

(IFAC, January 2003).12. International Framework for Assurance Engagements (IFAC, December 2003).13. Pp. 551-566, ISA 800, The Auditor’s Report on Special Purpose Audit

Engagements (IFAC Handbook of International Auditing, Assurance, and EthicsPronouncements; 2004 Edition).

14. International Standard on Assurance Engagements 3000, “AssuranceEngagements Other Than Audits or Reviews of Historical FinancialInformation” (IFAC, December 2003).

15. Pp. 926-935, ISAE 3400, The Examination of Prospective FinancialInformation (IFAC Handbook of International Auditing, Assurance, and EthicsPronouncements; 2004 Edition).

16. Ibid, p. 928.17. Budgetary Comparison Schedules-Perspective Differences, Governmental

Accounting Standards Board Statement No. 41, May 2003.

59August 2004

18. Par. 5.18, Financial Reporting Standard No. 29, Prospective FinancialInformation (April 1996). This Standard applies to the Crown and all depart-ments, Offices of Parliament and Crown entities, as well as local authorities.

19. For further information see www.intosai.org or www.icgfm.org.

Structure of Pronouncements Issued by the IAASB

IFAC Code of Ethics for Professional Accountants

ISQCs 1-99 International Standards on Quality Control

Related Services

FrameworkInternational Framework for Assurance Engagements

Audits and Reviews of Historical

Financial Information

Assurance Engagements Other Than

Audits or Reviews of Historical Financial Information

ISAs 100 -999

International Standards

On Auditing

ISREs 2000 -2699


On Review

Engagements

IAPSs 1000 -1999

International Auditing

Practice Statements

IREPSs 2700 -2999

Reserved for

International Review

Engagement Practice

ISAEs 3000 -3699


On Assurance

Engagements

IAEPSs 3700 -3999

Reserved for

International Assurance

Engagement Practice

Statements

ISRSs 4000 -4699


On Related Services

IRSPSs 4700 -4999

Reserved for

International Related

Services Practice

Statements

Structure of Pronouncements Issued by the IAASB

As Applied in the Public Sector

IFAC Code of Ethics for Professional Accountants

ISQCs 1-99 International Standards on Quality Control

Related Services

FrameworkInternational Framework for Assurance Engagements

Audits and Reviews of Historical

Financial Information

Assurance Engagements Other Than

Audits or Reviews of Historical Financial Information

ISAs 100 - 999


On Auditing

ISREs 2000 -2699

International Standar ds

On Review

Engagements

IAPSs 1000 -1999

International Auditing

Practice Statements

IREPSs 2700 -2999

Reserved for

International Review

Engagement Practice

ISAEs 3000 -3699


On Assurance

Engagements

IAEPSs 3700 -3999

Reserved for

International Assurance

Engagement Practice

Statements

ISRSs 4000 - 4699


On Related Services

IRSPSs 4700 -4999

Reserved for

International Related

Services Practice

Statements

Accrual

Standards

( IFRSs &

IPSASs)

Budget to Actual

Comparative

Schedule

IMF

Statistical

Statements

Legally

Approved

Budget

Projected

Budgetary

Information

IPSAS

Cash

Standard


Promoting Government Accountability:Critical Elements in Establishing or

Enhancing Audit LegislationLinda L. Weeks, CGFM

Executive Director-ICGFMEmail: [email protected]

“Financial accountability is a necessary condition for efficient public managementand hence for the management of funds in favor of poverty reduction, health and educa-tion, a clean environment, and peace.”1

James D. Wolfensohn, President, The World Bank Group

Institutions supporting and promoting development initiatives around theglobe are increasingly focusing attention on accountability as an essential ele-ment for sustainable development, and there is growing recognition that aneffective national audit office is crucial to ensuring accountability. As a conse-quence, donor organizations are more critically examining national audit offices,also known as supreme audit institutions (SAIs), in recipient countries. In manycases, as part of an overall sustainable development strategy, projects have beeninitiated to enhance and strengthen SAIs.

Because a carefully crafted audit law is an essential underpinning for aneffective national audit office, many SAI-related projects concentrate on auditlegislation. As new audit laws are being developed and existing audit laws arebeing revised, certain critical elements and the general principles and practicesthat define them should be considered. This paper was originally developed forthe Inter-American Development Bank in conjunction with a project to revisethe national audit act in the Co-operative Republic of Guyana, but the guidingtenets cited can be applied in any effort to draft or revise audit legislation.

Independence—The Most Critical FactorSAI independence, with the challenges related to establishing and maintain-

ing independence, has always been a primary issue for all national audit offices. The International Organization of Supreme Audit Institutions (INTOSAI) is

the internationally recognized organization of supreme audit institutions incountries that belong to the United Nations or its specialized agencies. Since itsfounding in 1953, INTOSAI has supported its member organizations and theirgovernments in improving financial management, enhancing good governance,and ensuring accountability. Through its specialized committees and its regionalworking groups, INTOSAI supports its members in establishing standards, shar-ing expertise, training staff, and developing methodology. SAI independencehas always been a major topic for INTOSAI studies, programs and publications.INTOSAI’s Lima Declaration

“Independence (of the SAI) is also required to be anchored in the legislation.”2

Dr. Franz Fiedler, Secretary General of INTOSAI

61August 2004

INTOSAI directs significant attention to the issues and challenges influencingaudit office independence. The Lima Declaration of Guidelines on Auditing Precepts,adopted by INTOSAI in 1977 and republished in 1995, is recognized globally asthe primary document defining an SAI. The basic principles included in theLima Declaration are timeless, and they are consistently applied in internationaldiscussions, standards, guidelines, and reports.

The Lima Declaration directs attention to several key elements related to estab-lishing and maintaining SAI independence. The Lima Declaration states that:

“Supreme Audit Institutions can accomplish their tasks objectively and effec-tively only if they are independent of the audited entity and are protectedagainst outside influence.”

“ Although state institutions cannot be absolutely independent because theyare part of the state as a whole, Supreme Audit Institutions shall have the func-tional and organizational independence required to accomplish their tasks.”

“In particular, adequate legal protection by a Supreme Court against anyinterference with a Supreme Audit Institution’s independence and audit man-date shall be guaranteed.”

“The independence of Supreme Audit Institutions is inseparably linked to the independence of its members.”

“In their professional careers, audit staff of Supreme Audit Institutions mustnot be influenced by the audited organizations and must not be dependent onsuch organizations.”

“Supreme Audit Institutions shall be provided with the financial means toenable them to accomplish their tasks.”

“If required, Supreme Audit Institutions shall be entitled to apply directly for the necessary financial means to the public body deciding on the nationalbudget.”

“Supreme Audit Institutions shall be entitled to use the funds allotted tothem under a separate budget heading as they see fit.”INTOSAI’s Task Force on the Independence of SAIs

“It is also essential that the mandate of SAIs and the authority and protection thatthey need to discharge their responsibilities be set out clearly in the constitution and/orlegislation. This is required if SAIs are to be in a position to fulfill their mandate, inde-pendent from undue direction or interference from government.”3

L. Denis Desautels, FCA, Auditor General of Canada, Chair of the INTOSAITask Force on the Independence of SAIs

The INTOSAI Task Force on the Independence of SAIs was established in1999 to examine the state of independence of member institutions and make rec-ommendations on ways and means to bring about realistic improvements. Theyconducted an extensive survey of SAIs, reviewed current literature, consultedwith selected SAIs, and met with international financial institutions and techni-cal co-operation agencies. They circulated a draft of their report to the membersof INTOSAI’s Governing Board, modified the draft, and presented their finalreport at the INTOSAI Congress in 2001.

Recommendations in the final report identified several “core principles ofSAI independence” generally recognized as “essential requirements of properpublic sector auditing.” These core principles included:1. The existence of an appropriate and effective constitutional/statutory/legal

framework and of defacto application provisions of this framework.


2. The independence of the SAI Head and “Members” (in collegial organiza-tions), including security of tenure and legal immunity in the normal discharge of duties.

3. A sufficiently broad mandate and full discretion in the discharge of SAI functions.

4. Unrestricted access to information.5. The right and obligation to report on their work.6. The freedom to decide on the content and timing of audit reports and to

publish and disseminate them.7. The existence of effective follow-up mechanisms on SAI recommendations.8. Financial and managerial/administrative autonomy and the availability of

appropriate human, material and monetary resources.4

SAI PracticesAs international and regional financial institutions and technical cooperation

agencies have studied national audit offices, they too have identified independ-ence as a critical factor. Jack Titsworth and Rick Stapenhurst published a WorldBank Discussion Note about Supreme Audit Institutions and reported that:

“Independence is a fundamental feature of all advanced countries’ SAIs.Independence must be clearly enunciated and the personal independence, based uponappointment and secure tenure of the Auditor General, (sometimes a chair or president)or Court of Audit members, has to be clearly established in legislation and acknowl-edged in tradition. The AG’s autonomy is essential, given the need to report directly toParliament without interference from other government branches. The SAI and itsleader’s independence are the hallmark of its effectiveness. It must be completely sovereign to determine what it audits and how to conduct those audits.”5

When INTOSAI’s Committee on EDP/IT Audit published its compendium ofSAI mandates, it organized the document around four major attributes—inde-pendence and administrative powers were two of them. Within the framework,independence includes mode of appointment, qualification, tenure, removal andconditions of service for the auditor general; administrative powers includebudget allocation and appointment of staff.6 An examination of selected SAImandates included in the compendium offers an array of strategies that havebeen adopted to provide SAIs with the requisite independence in different polit-ical systems and in diverse social and cultural environments.Essential Elements in Establishing Independence

To ensure SAI independence, it is clear that at least four essential elementsmust be addressed in developing or revising audit legislation.1. Auditor General: The appointment process, length of term, and conditions

of remuneration and retirement (and/or removal from office) must guaranteethat the head of the audit office is free from political and/or financial pres-sure and influence. (a) It is essential that the appointment process be as free as possible frompolitical influence. This may depend upon identifying candidates through acollaborative process involving various political groups, professional organi-zations, and/or governmental entities. Although approaches vary, these sys-tems generally rely upon one party, organization or entity proposing one ormore candidates and then another party or entity selecting the candidate(s)for a final review and confirmation process. The intent is to assure that awell-qualified Auditor General is selected and that this person is not

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obligated or beholden to any particular individual, party, or single governmental entity. (b) While the length of the Auditor General’s term of office may vary fromcountry to country, it should be long enough to protect the head of the SAIfrom political influence or pressure. A lifetime appointment or an appoint-ment until a mandatory retirement age is one way to meet this condition.Another option is to establish a lengthy fixed term, exceeding the terms formost elected officials, which does not permit a reappointment. For example,in the U.S., the Comptroller General serves for 15 years—the maximum timea President could serve is eight years, and although they can be re-elected, aSenator’s term is six years and a Representative’s term is two years. Othercountries have established “lengthy” terms ranging from seven to 12 years.The determination of the range for a “long” term must be developed in thecontext of the country’s overall government structure.(c) Salary, benefits, and the retirement allowance must be sufficient to assurethat the Auditor General is reasonably free from personal financial pressure.The salary and benefits for the Auditor General are often set at a level com-mensurate with cabinet level positions or Supreme Court justices. In manycases retirement benefits are also set at a relatively high rate, and in someinstances the head of the audit office may retire at full salary for life. Oftenthe legislation may place a limitation on future (post-retirement) job opportunities—i.e, prohibitions against running for political office, accepting government employment, working on government contracts, etc. (d) The criteria and process for removing the Auditor General from officeshould also be set forth in the audit legislation. Generally these would becomparable to the conditions and procedures that would be used to removeSupreme Court justices or the highest elected officials.

2. Budget: Recognizing that the SAI is part of government, it is still importantto establish its financial autonomy. An audit office that audits the ministrythat in turn can control the SAI’s budget is seriously handicapped. The SAI’sbudget approval process should not be subject to review and modification byany other government entity other than the authority approving the budget.Likewise, the allocation and disbursement of funds should not require addi-tional action by an intermediary government agency. The most desirableapproach is to have the budget request go directly from the SAI to theauthorizing authority (usually the legislature). If it is necessary to put thebudget through a finance or treasury ministry so that it can be incorporatedin the larger national budget, there should be stipulation that the request is“passed through” without any changes to the request. Under no circum-stances should the treasury or finance departments have an ability to alter,delay, or amend the request for and disbursement of SAI funds.

3. Staff: The human capital in an SAI is as critical to its effective operations asthe budget, and in establishing or revamping an audit office, it is importantto consider strategies and systems related to SAI personnel. Staff must beindependent; they must be well qualified and well trained; they must be ade-quately compensated, and they must be held to the highest ethical standards.They cannot effectively audit a government department that has the authori-ty to hire, promote, reward, discipline, or dismiss them. Although the provi-sions of the SAI’s personnel system may almost exactly mirror those of therest of government, it is important to recognize that they should be treatedseparately from the rest of the civil service. Therefore, a separate human capi-tal or personnel system should be established in the audit legislation,


although details of policies and procedures may be handled in subsequentregulations.

4. Public Reporting: Audit legislation should establish clear procedures and thetimeframes and processes for issuing audit reports to the public. If the SAI isto be effective in assuring public accountability, its reports cannot languish inthe office of a minister, a legislator, or a committee chair. The SAI, throughthe government audit standards, can detail the process for conducting itswork and preparing its reports, but the audit law should specify how reportsshould be handled once they are complete. The law should prescribe a rea-sonable timeframe clearly delineating how long a minister, a committee, orthe legislature may hold a report before it becomes available to the public.

Standards and Audit Responsibilities—Additional MajorConsiderations

Adequate attention must be given to the SAI’s role in establishing standardsand the delineation of its audit responsibilities. Although this may be secondaryto the attention devoted to independence issues, they should nonetheless beconsidered in preparing audit legislation. Standards

Recognizing that government is different from the private sector, internation-al and national private sector standards must be created, or adapted and modi-fied, to meet the needs of government. The SAI’s responsibility to establish government auditing standards should be included in audit legislation.

In order to effectively carry out its work, an SAI (and others conductingaudits of government activities) should act in accordance with documentedpolicies and procedures that are usually described as the “generally acceptedgovernment auditing standards.” These policies and procedures provide theframework within which audit engagements are planned and implemented, andthey provide the criteria against which the quality of the completed audits maybe measured. INTOSAI and other international and national standard settingbodies have developed public sector audit standards and guidelines that maybe used in creating specific national standards for government auditing. Whilethe auditing standards are not generally included in the audit legislation, it isimportant to note that the audit law should clearly state that the SAI is the gov-ernment entity charged with the responsibility for developing, introducing,applying (or evaluating other’s application of) the government’s auditing stan-dards.

While other departments, ministries, institutions, or organizations may beresponsible for establishing the standards for government accounting and/orfor conducting government investigations the SAI should also be part of thosedevelopmental processes. Ideally the SAI should be included as these account-ing and investigative standards are being written—at a minimum the SAIshould be involved in reviewing and commenting on such standards beforethey are adopted. This is important because the accounting and investigationstandards will be used in conjunction with the auditing standards. Mention ofthe SAI’s role in these activities should be included in the audit law or in otherlegislation.Audit Responsibilities

The audit law should include a statement or statements about the scope ofthe SAI’s audit responsibilities.

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INTOSAI’s guidelines describe a range of audit activities. The LimaDeclaration and the subsequently issued INTOSAI Auditing Standards discuss theSAI’s responsibilities for conducting financial and performance audits. The LimaDeclaration also goes on to describe many specific types of audits. The SAI’sobligation to examine and report on internal (or management) controls is high-lighted in INTOSAI’s Auditing Standards and its Internal Control Guidelines.INTOSAI has also issued guidance on conducting audits related to informationsystems, public debt, privatization, and the environment. Generally audit legis-lation includes the SAI’s responsibility for conducting financial, performance,and internal/management control audits, although some countries do includelanguage about other more specific types of audits (i.e., information systems).

Some audit laws use very broad principles to describe the audit mandate forthe SAI (and then rely upon the SAI’s auditing standards to provide more spe-cific descriptions of the work performed) while other audit laws include veryspecific requirements. In drafting an audit law it is important to identify theapproach most appropriate to the SAI’s political and cultural environment. Forexample, the Budget and Accounting Act of 1921, establishing the U.S. GeneralAccounting Office, says that “The Comptroller General shall investigate, at theseat of government or elsewhere, all matters relating to the receipt, disburse-ment, and application of public funds…” The U.S. Government AuditingStandards, promulgated by GAO, describe in more detail the types of auditengagements they perform, but the law and the standards do not include a spe-cific list of agencies or programs to be audited. This general language enabledthe SAI to easily prioritize, adapt, and modify its work to meet changing needsand requirements. However, in situations where the concept of governmentaccountability is less generally accepted or where access to information orrecords can be difficult, it may be necessary to specifically identify the areassubject to SAI oversight.

Increasingly international and regional banks, development agencies andnational governments are advocating the application of INTOSAI principlesand practices in efforts to combat corruption. In an editorial for the INTOSAIJournal, James Wolfensohn, President of The World Bank wrote about the impor-tance of battling corruption which, “erodes development assistance to govern-ments, jeopardizes private sector investment, hinders growth and imposesheavy burdens on the poor.”7

At the 1998 INTOSAI Congress delegates examined the SAI’s contributions to improving transparency and accountability and the impact this might haveon limiting opportunities for corruption. During the congress, participants discussed reporting on fraud and corruption, procedures for referring thoseinvolved to the proper authorities for prosecution, and the role SAIs may playin preventing fraud by examining and reporting on internal management con-trols. Clearly, the SAI’s role in combating corruption, conducting investigations,and reporting fraud should be considered in drafting audit legislation.

Concluding CommentsWhile this paper captures significant aspects for consideration in crafting an

audit law, it is not all-inclusive. The issues of independence, standards, andaudit roles and responsibilities must be dealt with, but a comprehensive auditlaw will also address many other factors. For example, given local circum-stances and systems, a new or revised audit law may need to focus special


attention on access to information, follow-up on recommendations, the use ofcontractors, or an array of additional areas.

Keeping the political structure, societal attitudes, and size of the country inmind is crucial to developing effective audit legislation. When examining otheraudit laws or “models” it is important to recognize where there are fundamen-tal differences and where there are similarities, and how these differences andsimilarities relate to the audit laws that have been adopted. There can be no“one-size-fits-all” model, and there is little to be gained from trying to force-fitaudit legislation.8

Crafting “the best” audit law remains a goal that may forever be just over thehorizon. Government priorities change, and practices in national and interna-tional financial management systems are evolving. In evaluating existing auditlegislation and developing new or revised audit laws, examining the “betterpractices” of other SAIs, sharing experiences among colleagues, and co-operat-ing across borders is necessary to ensure progress toward that “best” audit law.

End Notes1. James D. Wolfensohn. “Accountability Begins at Home.” International

Journal of Government Auditing. (INTOSAI www.intosai.org, January 2004)2. Franz Fiedler. “Introduction.” Lima Declaration of Guidelines on Auditing

Precepts. (INTOSAI www.intosai.org, 1998 edition)3. L. Denis Desautels. “Preamble.” Independence of Supreme Audit Institutions

(SAIS)—Final Task Force Report. (INTOSAI www.intosai.org, March 31, 2001)4. Independence of Supreme Audit Institutions (SAIS)—Final Task Force Report.

Section 9.04 (INTOSAI www.intosai.org, March 31, 2001)5. Jack Titsworth and Rick Staphenhurst, with input from Bill Dorotinksy,

David Shand, and Anand Rajaram. A Discussion Note on Supreme AuditInstitutions. (The World Bank. www1.worldbank.org/publicsector/pe/sai.doc)

6. Attributes of SAI Mandates. INTOSAI Standing Committee on EDP Audit.(2001 update—CD ROM produced by Comptroller and Auditor General ofIndia. www.intosai.org)

7. James D. Wolfensohn. “Corruption Impedes Development and Hurts thePoor.” International Journal of Government Auditing. (INTOSAI www.intosai.org,October 1998)

8. Generic Models for Supreme Audit Institutions—prepared by Jagdish Narang,Fred Schenkelaars, and Larry D. Wood for the United Nations DevelopmentProgram/Programme for Accountability and Transparency, published by theOffice of the Comptroller and Auditor General of India.

Additional Resources and ReferencesInternational Organization of Supreme Audit Institutions (INTOSAI)Code of Ethics and Auditing Standards. INTOSAI Auditing Standards

Committee. (2001 edition—prepared by the INTOSAI Auditing StandardsCommittee, chaired by the Swedish National Audit Office. www.intosai.org

International Journal of Government Auditing (INTOSAI Journal)—published for INTOSAI by the U.S. General Accounting Office, and are available atwww.intosai.org

67August 2004

ASOSAI Assembly Addresses Governance Issues. (January 2001).Auditing in the South Pacific. David Macdonald, Controller and Auditor

General of New Zealand. (April 2000)Cooperation Produces Results—Theme I: Recommendations on the Role of Supreme

Audit Institutions in the Prevention and Detection of Fraud and Corruption. (January1999).

Eleventh OLACEFS Assembly Held in Panama—Theme III: Preventing, Identifying,and Combating Corruption. Linda Sellevaag, U.S. General Accounting Office.(October 2001).

Fifth Triennial CAROSAI Congress—Theme II: Institutional Strengthening ofSupreme Audit Institutions. (January 2001)

Fourth EUROSAI Congress Examines Independence—Conclusions. (July 1999).Global Forum on Fighting Corruption and Safeguarding Integrity. Monika

Gonzalez-Koss, Wilhelm Kellner, INTOSAI General Secretariat—Austria.(January 2002)

The Role of the Auditor in Promoting Good Governance. V.K. Shunglu,Comptroller and Auditor General—India. (April 1998).

SPASAI Celebrates Silver Jubiliee at Regional Congress (Suva Accords—Recommendations). Alberta Ellison, US General Accounting Office. (October 1998)

Other SourcesPublic Audit Law: Key Developments and Considerations. H. D. Myland, C.B.

Chartered Institute of Public Finance and Accountancy (UK: 1992)


Current Situation and Perspectives ofDevelopment for Financial Control

In the Republic of MacedoniaMito Naumoski

Assistant General State AuditorState Audit Office (SAO)Republic of Macedonia

I. Short History of the Country and SAO1. The Republic of Macedonia

The Republic of Macedonia is situated in the central part of the BalkanPeninsula and covers an area of 25.713 square kilometres. The total populationin the country is about 2 million. Neighbouring countries: Serbia andMontenegro to the North, Bulgaria to the East, Albania to the West and Greeceto the South. Skopje, population 500,000, is the political, financial and culturalcenter of the country.

The roots of the Macedonian state date back to the times of ancientMacedonia. The territory of Macedonia has witnessed many events and hasbeen subject to many conquests throughout this period. The new history ofMacedonia begins with the Krushevo Republic from August 1903 and FederalRepublic of Macedonia from August 1944. The Republic of Macedonia was con-stituted as an independent, sovereign state in 1991, with the September 8Referendum and the new Constitution of November 17, 1992. Before that periodMacedonia was one of the six constitutional federal republics of the formerSocialist Federal Republic of Yugoslavia.

The Republic of Macedonia is a unitary, civil and democratic state. There are124 local self-government units.

The state power consist of: Parliament with 120 elected representatives;President of the Republic; Government of the Republic; and Judiciary andPublic Prosecutor.2. SAO— Status

The first government auditing bodies were established after the SecondWorld War. Through the years they have undergone many reforms. Finally theState Audit Office was established as the Supreme Audit Institution in 1997 bythe Parliament of the Republic of Macedonia, under the State Audit Law (SAL).Through May 2004 there have been three amendments to the SAL. The last oneencompasses issues relating to the audit mandate over public sector entities andannual programme audit planning criteria (the potential risk of entities, modeof publicizing of audit results etc.).

The SAO started its operation in early 1999, with NINE employees, all ofthem coming from the Audit Department within the former institution—Payment Operation Service. The General State Auditor (GSA) and a deputymanage the State Audit Office. The General State Auditor and the Deputy are appointed by the Parliament for a period of 10 years. The SAO is a legal,

69August 2004

independent, and professional institution based in Skopje. The SAO is com-prised of 7 organizational units with 68 employees, as of June 30, 2004. Amongthe employees, 95 percent have a university degree, mainly in economics andlaw.3. Subject of Audit

Main audit areas: the budget of the Republic of Macedonia; the budgets ofthe units of the local self-government; the budgets of the Funds; budget fundsbeneficiaries and their unit beneficiaries; state-owned enterprises; the NationalBank of the Republic of Macedonia; legal entities in which the state is majorshareholder; political parties funded by the budget funds; agencies and otherinstitutions established by law; other institutions financed from the publicfunds; and beneficiaries of the EU funds and other organisations.

State audit, in terms of the law, represents: examination of documents, papersand reports on performed internal controls and internal audits; accounting andfinancial procedures and other records assessing whether the financial state-ments present truthfully and fairly the financial position and the results of thefinancial activities, in accordance with the adopted accounting policies, account-ing standards and INTOSAI auditing standards; examining the financial trans-actions, representing government expenditures, regarding their legal andauthorized spending; giving an assessment to what extent the funds are spenteconomically, efficiently and effectively.4. Audit Scope

The audit is carried out according to the SAO annual program, but mandato-ry at least once a year for: the budgets; beneficiaries of the budget of theRepublic of Macedonia and the budgets of units of the local self-government;state-owned enterprises founded by the Republic of Macedonia; and politicalparties funded by the budget. For the remaining entities according to the SAL,the audit is carried out in accordance with the annual work program adoptedby GSA. The auditees included in the annual programme have been selected onthe basis of size, amount of public funds engaged, potential risk, assessments ofpossible deviations, and request made by Parliament bodies. The total numberof the entities/accounts subject to audit is about 2,000 at all levels. As the SAOis still in the process of development, it audits an average of less than 10 percentof the total number of entities it is responsible for. Expressed in monetary unitsthe percentage of audit coverage is about 40 percent of the total amount of pub-lic expenditure. 5. How Does the SAO Work

The government auditing is carried out in compliance with the SAL provi-sions, the INTOSAI auditing standards and other legislation prescribed in theRepublic of Macedonia. During the audit procedure, the auditors have freeaccess to the official premises and property, to look into all documents andother records, to demand explanations from representatives of the audited enti-ties for all important matters, relating to the audit performance. The audits arecarried out by audit teams consisting of different number of auditors (depend-ing on the size and the complexity of the entities under audit) under the leader-ship of a team manager who must possess certification as a state auditor.

Upon the completion of the audit, the authorized state auditor issues a pre-liminary report, which is delivered to the legal representative of the auditedentity and the managing key official of the audited entity for the period beingaudited and to the entity’s governing body. The auditee may, within 15 daysfrom the day of the receipt, submit written comments against the findings of the


audit. The authorized state auditor issues and signs the final report, which isdelivered to the legal representative of the audited entity, to the ministries orfunds supervising the audited entity operations, and the managing key officialof the audited entity for the period being audited. The legal representative ofthe audited entity may lodge a complaint against the final report within 30days. Upon the complaint, the General State Auditor issues a resolution, statingthe acceptance or the refusal of the complaint. Based on personal judgement,the authorized state auditor may issue a report to the management of the audit-ed entity.

The authorized body to supervise the operation of the audited entity isobliged to notify the SAO for the measures undertaken relating to the findingsin the audit report, no later than 90 days from the receipt of the final report. Incases, where the authorized state auditor during the course of the audit deter-mines that there is reasonable ground to believe that an offence or a criminalact has been committed, the competent authorities are informed in order to ini-tiate an appropriate procedure.6. Publicity, Financing, Organizational Structure

The SAO submits an annual report on the conducted audits and its operationactivities to Parliament, no later than seven months after the deadline for sub-mitting the annual financial statements (September 30 in the current year forthe previous year audits). Audit reports on the Budget of the Republic ofMacedonia, the ministries, the budgets and funds and state owned enterprisesestablished by law are submitted to the Parliament. The audit reports contain-ing findings of major irregularities may also be submitted to the Parliament,prior to the submit ion of the Annual Report.

The General State Auditor also includes all reports on the website of theState Audit Office. The General State Auditor promulgates the final auditreports and the written decisions on the complaints against the final auditreports in the SAO’s Bulletin. The General State Auditor when necessary shallhold press conferences or otherwise communicate with the media in order toinform the public about the work of the State Audit Office and the results ofthe performed audits.

Funds for financing the SAO operation are provided from the budget of theRepublic (for budget users and beneficiaries of the EU funds and other interna-tional funds). Charges from the rest of the legal entities where audit is per-formed, in compliance with the Tariffs of the SAO, as adopted by Parliament.7. International Cooperation

The State Audit Office is a member of The International Organization ofSupreme Audit Institutions (INTOSAI) since March 29, 2001, (after the PublicRevenue Office withdrew its membership which it had held since 1994) and theEuropean Organization of Supreme Audit Institutions (EUROSAI) since May31, 2002. Since joining the above mentioned organizations, representatives fromthe SAO have participated in the XVII Congress of INTOSAI in Seoul, StrategicPlanning Workshop—EUROSAI/IDI Long Term Regional Training Programme(LTRTP) in Zagreb, meeting of the INTOSAI Working Group on EnvironmentalAuditing in Warsaw, and other seminars organized by these organizations.

The State Audit Office maintains multilateral and bilateral relationships andco-operation with other SAIs and other international organizations and institu-tions for the purpose of exchanging experiences and acquiring new knowledgein the area of public sector auditing. The SAO has made bilateral contacts with

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several European SAIs and has signed an agreement on co-operation with someof them.

II. Current Activity And Main AchievementsThe SAO continually tries to increase the number of conducted audits of the

entities subject to audit. Increasing coverage is closely connected with sufficientstaff for the performing the SAO task. The government restriction imposed onnew employment in the public sector represents an obstacle for SAO. Recruitingprofessional and highly qualified staff is of great significance for the SAO. Only60 percent of the assessed SAO staff needs have been meet.

The SAO currently is developing a financial audit manual. The World BankSAO development project, funded by Dutch government, is under way.Realization of the project is carried out according to the plan of activities. Theproject includes analysis of organizational issues, training needs analysis, prepa-ration of performance audit manual, and improving audit reporting. The train-ing covers areas like financial audit, performance audit, accounting standards,and audit techniques. The project also funds study tours abroad, where the SAOstaff have the opportunity to exchange experiences with and learn from otherSAI.

Activities also include taking part in courses, seminars, workshops andworking meetings organized by INTOSAI, EUROSAI, other SAIs and otherorganizations. Currently, SAO representatives are participating in the IDI-EUROSAI Course Design and Development Workshop in Sofia as part of theIDI-EUROSAI Long Term Regional Training Programme.

The cooperation agreements signed with Bulgarian, Romanian andHungarian SAIs will promote the exchange of audit experiences, professionaltraining, joint research and audits and other key audit issues. We had also avery productive visit to European Court of Auditors where we have exchangedexperiences especially in the context of audits of users of EU funds.

SAO also cooperates with EU organisations and the World Bank concerningrecommendations and commitments resulting from the documents issued bythese organisations (Stabilisation and Association Report of the EuropeanCommission, World Bank Country Financial Accountability Assessment andMission Aide Memoire). The SAL was recently amended to respond to someWorld Bank recommendation.

III. The Prospects of Further Development of State FinancialControl In The Near Future

Development of financial control in Republic of Macedonia is beginning tomove quickly. During 2004, Parliament passed legislation establishing internalaudit units in most of the Ministries and expanding the central internal auditunit in the Ministry of Finance. Plans are in the first phase to establish internalaudit capabilities within 18 budget users. In the second phase (to the end of2005) internal audit shall be included in other government institutions, and inthe third phase (up to 2010) in unit users. To assist in the development of theinternal audit function, the World Bank sponsored a project that resulted in thedevelopment and publication of an internal auditing handbook to guide thework of internal auditors, supplemented with a two-week training course forinternal auditors.


The audit work and coverage of the SAO will be greatly facilitated by theestablishment of internal audit offices. Once these offices are fully functioningand carrying out audit work in accordance with auditing standards, the SAOcan begin to rely on their work. By relying on the work of internal auditors, theSAO can greatly expand its audit coverage.

The SAO is hiring more staff during 2004 that will enable it to increase itsaudit coverage of government activities. Further, as a result of the current WorldBank project, SAO staff will be provided comprehensive training to enhance andimprove their auditing skills. A performance audit manual is currently underdevelopment and SAO staff will be trained in how to conduct performanceauditing. We will initiate pilot performance audits, which will enable the SAO to further expand its audit activities and address more systemic-type issues confronting the Government of Macedonia.

The SAO is constantly looking for ways to improve its operations. This yearwe plan on developing systems and processes that will enable us to better iden-tify systemic weaknesses disclosed by SAO audits. Also, we plan to develop arecommendation tracking system so that we know at any one time what actionsare being taken to implement our recommendations and which entities have notbeen responsive. We plan to look into ways to publicize our audit reports. Wewill include a list of audit reports on our web page and also a short summary ofthe report, noting significant audit findings and recommendations. Theseimprovements will help the Macedonia public become more aware of the SAO’swork, put additional pressures on Government organizations to improve theiroperations, and allow the SAO to focus its audit efforts on more systemic-typeissues.

As part of the European Commission CARDS—Long-term IndicativeProgramme 2005-2006, the SAO intends to emphasize its need for further devel-opment of government auditing. The SAO plans to address development issuesby working closely (through the Twinning Project) with another EU memberSAI. The main goal of this Project would be to enhance the external audit pro-vided by the SAO and bring it to the level of the SAI of the EU member states.The Project would include a wide range of issues like training (variety of issuesrelating to financial and performance audit), joint pilot audits, modernising themethodological approach, improvement of the audit manuals, and guidelinesfor conducting audits of different types of auditees and areas. The other issueswill result from the needs and the program of the European Commission inagreement with the potential SAO partner. Emphasize will be given to the com-pletion of the tasks, that were initially planned to be covered by the World BankSAO Development project (that is under way) and, which due to lack of suffi-cient funds were dropped, conducting IT audits using auditing software.

The SAO audits will identify areas susceptible to corruption and at the sametime promote and support establishing internal controls. Thus, audits will helpprevent corruption. SAO operations will include analysis of its audit reports indifferent audit areas like health, environment, etc. These analyses will identifythe most important trends, recurring problems and changes in these areas andtheir cause. The SAO will identify areas that present increased risks of corrup-tion where, primarily by performing audits that promote and support the opera-tion of internal control mechanism, these audits will help force back corruption.Another new task is auditing the reliability of operation of information technol-ogy systems.

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IV. Proposals on the Further Development of InternationalCooperation Between SAIs in Europe

The SAO of Macedonia is extremely interested in finding ways to cooperateand work with other SAIs in Europe. We are looking for opportunities to workwith and learn from other SAIs and, under our current World Bank project, areconsidering study tours and exchange programs to other SAIs to learn abouttheir operations and practices. For example, we consider sending one or morestaff members to another SAI in Europe to learn first hand about that SAI’squality assurance program so that the information and practices could be con-sidered for possible adoption by SAO.

We believe it would be useful if EUROSAI could publish or make knownwhat expertise or particular specialties may be available in specific EuropeanSAIs. For example, some SAIs in Europe may have a well-developed trainingcurriculum for their staff and have instructors who could give certain typetraining at other SAIs. Knowing what expertise and specialties are available inother SAIs would help developing SAIs, such as the Macedonia SAO, in findingexpert assistance that they could possibly draw upon to enhance and improvetheir operations and practices.

Another area where we could benefit is learning which SAIs may have doneaudits in certain areas, such as procurement. Procurement is a particular vulner-able and high-risk area and it would be good to know the experiences and prac-tices of other SAIs. We could then either request the assistance of the SAI orpossibly send staff to observe first hand how the SAI goes about conducting aprocurement audit.

We envision future cooperation between the European SAIs (including theEuropean Court of Auditors) in conducting joint audits on different projects thatare of common interest, audit of the use of the EU funds, etc.

Another aspect of this cooperation would be taking part in congresses, meet-ings, seminars, and conferences as well as being active in the work of the per-manent committees and working groups of INTOSAI and EUROSAI. This willenable efficient transfer of knowledge between SAIs. The substantial supportprovided by IDI in supporting the initiatives for professional development andbuilding the training capabilities of a SAI is deemed especially important. Inorder to keep abreast of the latest development in auditing, the SAO plans to beactive in the international audit community.


Public Financial ManagementPerformance Measurement Framework

Revised Consultative Draft, February 12, 2004

[With Amendment RegardingProcurement1]

1. Introduction and BackgroundThis note presents a preliminary draft Public Financial Management (PFM)

Performance Measurement Framework, on which comments from a wide rangeof stakeholders are sought. The framework identifies a set of critical objectivesof a PFM system, and a standard set of high-level PFM indicators to assess per-formance against those objectives. This note has been prepared following initialcomments received on a preliminary draft of the framework dated October 16,2003.

The preliminary draft PFM Performance Measurement Framework has beendeveloped by a working group involving staff from the World Bank, IMF andthe Public Expenditure and Financial Accountability (PEFA2) Secretariat. TheFramework is currently a consultative draft proposal and has not been endorsedby the World Bank, IMF or PEFA partners. The working group is seeking toidentify and develop approaches to public expenditure and PFM work that sup-port greater country ownership, reduce transactions costs, improve donor har-monization, better meet developmental and fiduciary concerns, and lead toimproved impact on the reform of country systems.3 The PFM PerformanceMeasurement Framework is one element of the proposed new approach, andspecifically is to contribute to an integrated, standard PFM assessment that isunder development. The need for such a framework was also identified in theOECD-DAC Donor Harmonization Task Force Good Practice Reference Paper onMeasuring Performance in Public Financial Management (2003).

The PFM Performance Measurement Framework is designed to measurePFM performance of countries across a wide range of development. This incor-porates systems of fiscal and debt management, budget formulation, budgetexecution, internal controls procurement, accounting and reporting, auditing,transparency and external scrutiny. It draws upon the 16 HIPC expendituretracking benchmarks where appropriate,4 while taking a wider perspective of PFM performance (including, for example, fiscal risk and predictability of funding).

2. Purpose of the PFM Performance Measurement FrameworkThe primary purpose of the PFM Performance Measurement Framework is to

provide a standard set of high level indicators that will enable the performanceof country PFM systems to be regularly monitored, by domestic and interna-tional stakeholders. In so doing it should allow progress over time to be

75August 2004

demonstrated, while noting that a set of high level indicators necessarily willnot be able to detect small improvements in performance.

In addition, the PFM Performance Measurement Framework is intended toprovide a standard set of indicators that is applied in a consistent and objectivemanner for all countries assessed, and that can be readily understood by inter-national and national stakeholders. It is also intended to focus attention oncapacity building in core PFM areas. Cross-country comparison is an additionalexpected benefit.

In order to meet these objectives, it is necessary that a standard high level setof core PFM indicators are monitored over time and across different countries.The PFM Performance Measurement Framework presents this standard, highlevel set, which are considered to be relevant in all country circumstances. Inaddition, this Framework recognizes that these may not cover all the core PFMissues relevant to a particular country. It is understood, therefore, that individ-ual countries may add some further indicators that meet their specific countrycircumstances. The standard set plus the country specific additions would thenprovide a high level set of indicators that the government and donors couldagree as the means of measuring overall PFM performance.

The standard set should have wide international acceptability so as to facili-tate harmonization, and have a clearly defined system of calibration to ensureconsistency over time and across countries. The set should be sufficient to provide a broad overview of how the PFM system is performing, but should be limited in number for ease of use and so should not seek to measure theoperation of every individual part of the system or the factors that affect PFMperformance.

The nature of the high level indicators will mean that they can only providelimited information. The intention is that the high level indicators in this frame-work will be supplemented by “second level” indicators which support diagno-sis and detailed analysis of specific areas. An example is the set of procurementindicators, which is currently being developed by the World Bank and OECD-DAC.

3. Critical objectives of the PFM system measured by the framework

A good PFM system is an essential tool of government in the implementationof policy and achievement of developmental objectives. Specifically, the goal ofa PFM system is to support the achievement of aggregate fiscal discipline,strategic allocation of funds, value for money, and probity in the use of publicfunds. Ultimately, we are concerned as to whether these budgetary outcomesare achieved, but it has not been possible identify indicators that directly cap-ture outcomes that are not country specific and that would not require detaileddata analysis.

This set of high level PFM indicators, therefore, focuses on the operationalperformance of the systems, processes and institutions of PFM, and seek toassess these against a set of six critical objectives of a PFM system. The six critical objectives reflect the requirements of an open and orderly PFM system.The critical objectives have been determined on the basis of what is desirable to measure but also what has proved feasible for a standard set of high-levelindicators to address, and are as follows:


1. Budget Realism: The budget is realistic and implemented as intended in apredictable manner.

2. Comprehensive, Policy-based Budget: The budget captures relevant fiscaltransactions, and is prepared with due regard to government policy.

3. Fiscal Management: Aggregate fiscal position and risk are monitored andmanaged.

4. Information: Adequate fiscal, revenue, expenditure, procurement, andaccounting records and information are produced, maintained and disseminated to meet decision-making, control, management and reportingpurposes.

5. Control: Arrangements are in place for the exercise of control and steward-ship in the use of public funds, including on procurement.

6. Accountability and Transparency: Arrangements for external transparencyand scrutiny of public finances (including procurement) are operating.The indicators do not, therefore, seek to determine whether expenditures

incurred through the budget have their desired effect on reducing poverty orachieving other policy objectives, or whether there is value for money achievedin service delivery. In addition, the critical objectives listed above do not includethe results/performance orientation of the PFM system.5

4. Structure and coverage of the indicator setThe indicators are structured into three categories:

A. PFM system out-turns: These are the immediate results of the PFM system in terms of actual expenditures composition, revenues, and deficit, and areassessed by comparison to the original approved budget. These provide, inparticular, a measure of the realism of the budget and the extent to which thebudget is an authoritative tool of government policy.

B. Key cross cutting features of the PFM system: This category of indicatorscaptures two key features of the quality of the PFM system that are importantas they cut across the whole of the cycle: • Comprehensiveness: This refers to (i) the extent to which the whole of

government (central government, state-owned enterprises and sub-nationalgovernments) is captured in aggregate fiscal oversight, and (ii) the scope, content and classification of fiscal and budget information produced acrossthe various stages of the central government budget cycle.

• Transparency: This refers to the extent to which fiscal and budget information is accessible to the public.6

C. Budget cycle: The third, and largest, category of indicators provides broadmeasures of the performance of the key systems, processes and institutionswithin the budget cycle of central government; these are planning and budg-eting, budget execution, accounting and reporting, external scrutiny andaccountability. Procurement has been integrated into each part of the cycle asit features in all of them. Where possible, an output (such as funds flow to aspending ministry, or audited financial statements) is measured, in order tocapture the performance of a chain of systems, processes and institutionalinteractions.7

The structure and coverage of the set of high level indicators that has beendeveloped is illustrated in this diagram.

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The indicator set is not intended to be fully comprehensive, so as to keep it toa manageable size. Revenue administration, and PFM systems of sub-nationalgovernment and of the parastatals and state-owned enterprise sector are impor-tant dimensions of national PFM systems, but are covered only to a very limiteddegree.8 As mentioned in section 2 above, within the new approach to PE/PFMwork under development, consideration will be given to the addressing theseareas through separate, “second level” indicator sets.

5. The selection criteriaDrawing on the OECD-DAC Good Practices Reference Paper and other rele-

vant sources, the criteria identified for selecting individual indicators are shownin Box 1 below. Some indicators initially identified have been removed on thebasis of these criteria, such as those related to the performance orientation of thesystem.

Box 1: Criteria for PFM performance indicators• Relevant and necessary to measure performance of the PFM system

against the six critical PFM objectives• Observable and verifiable• Avoids major data collection/analysis requirement• Avoids overlap between indicators• Capable of calibration to cover different stages of development

and capture progress over time

6. The preliminary draft standard set of high level PFM indicators On the basis of the rationale outlined above and of the selection criteria

applied to test the robustness of individual indicators described in section 6below, the Public Expenditure Working Group has developed a standard set of

RevenuesRevenues

ExpendituresExpenditures

DeficitDeficit

Aspects of the PFM system measured by the indicators

A. PFM Out-turns

Comprehensiveness

Transparency

B. Key cross-cutting features

External Scrutiny and

Accountability

Accounting and

Reporting

Budget Execution

Planning and

Budgeting

C. Budget Cycle


high-level indicators for testing and for consultation. These are organized in thestructure shown in Diagram 1, and are listed in the Table 1 below.

Table 1: A revised set of high-level PFM performance indicatorsA. PFM OUT-TURNS1. Aggregate fiscal deficit compared to the original approved budget. 2. Composition of budget expenditure out-turn compared to the original

approved budget.3. Aggregate revenue out-turn compared to the original approved budget.4. Stock of expenditure arrears; accumulation of new arrears over past year. B. KEY CROSS-CUTTING FEATURES : COMPREHENSIVENESS ANDTRANSPARENCY 5. Comprehensiveness of aggregate fiscal risk oversight.6. Extent to which budget reports include all significant expenditures on central

government activities, including those funded by donors.7. Adequacy of information on fiscal projections, budget and out-turn provided

in budget documentation 8. Administrative, economic, functional and programmatic classification of the

budget.9. Identification of poverty related expenditure in the budget.10. Publication and public accessibility of key fiscal information, procurement

information and audit reports.C. BUDGET CYCLEC(i) Medium term planning and budget formulation11. Extent of multi-year perspective in fiscal planning, expenditure policy-

making and budgeting.12. Orderliness and participation in the budget formulation process.13. Coordination of the budgeting of recurrent and investment expenditures.14. Legislative scrutiny of the annual budget law.C(ii) Budget execution15. Effectiveness of cash flow planning, management and monitoring 16. Procedures in operation for the management and recording of debt and

guarantees.17. Extent to which spending ministries and agencies are able to plan and

commit expenditures in accordance with original/revised budgets.18. Evidence available that budgeted resources reach spending units in a

timely and transparent manner. 19. Effectiveness of internal controls.20. Effectiveness of internal audit.21. Effectiveness of payroll controls.22. The existence of a transparent procurement system as an integral part of the

overall PFM system which is supported by a clear regulatory framework thatprovides for competition, value for money and effective controls.

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C(iii) Accounting and reporting23. Timeliness and regularity of data reconciliation.24. Timeliness, quality and dissemination of in-year budget execution reports.25. Timeliness and quality of the audited financial statements submitted to the

legislature.C(iv) External accountability, audit and scrutiny26. The scope and nature of external audit.27. Follow up of audit reports by the executive or audited entity. 28. Legislative scrutiny of external audit reports.

In addition to indicators of country PFM performance, this Framework alsoincludes two indicators of donor practices which impact country PFM systems.Through these indicators it is proposed that donor performance, and the extentof the negative impact of donor practices, are also measured. Indicators of donor practicesDonor 1. Completeness of donor information provided on aid flows, and comparison of actual donor flows with donor forecasts.Donor 2. Proportion of aid that is managed using national procedures.

7. Calibration of the individual indicatorsThe calibration of the high level indicators is related to the six critical PFM

objectives, of budget realism, comprehensive and policy-based budget, fiscalmanagement, information, control, and accountability and transparency, asthese have been defined in section 3 above. Together these objectives define thenature and quality of the core elements of a PFM system that are necessary toachieve open and orderly management of public finances.

Each indicator seeks to measure performance of a core PFM element, againstthe critical PFM objective relevant to that core PFM element. Each indicator ismeasured against a four point ordinal scale A-D.9 Standard levels have beenapplied across the indicators as far as possible. A score of A. is warranted for anindividual indicator if the core PFM element meets the relevant objective in acomplete, orderly (predictable, authorized, in accordance with procedures),accurate, timely and coordinated way.10

Guidance has been developed on what performance would meet each score,for each of the indicators. This is shown at Annex 1. In addition, intermediatescores will be allowed (designated by C+, for example).11 Consideration is alsobeing given to adding an arrow to the score to allow direction of change to becaptured. The four point ordinal scale was selected to allow a greater range ofperformance to be differentiated than the HIPC expenditure tracking bench-marks were designed to do, while at the same time being sufficiently limited innumber to allow clear and specific guidance to be assigned to each score.

In addition to the A-D ordinal scoring of the high level indicators, additionalquantified data that can be utilized to support or supplement those scores willalso be recorded and monitored within the PFM Performance MeasurementFramework. This additional data is identified alongside the list of indicators inAnnex 1.


8. Testing and applying the new frameworkThe next step in developing the indicators involves pilot testing. Pilot tests

are planned to determine the relevance of the indicators in specific country cir-cumstances. PEFA funding is being used to support the process of testing theindicators in Cambodia, Madagascar, Uganda and Chad.

How the scores from the indicators are interpreted is an important considera-tion. The PFM Performance Measurement Framework has been designed as acontribution to a fuller, standard PFM diagnostic assessment, that is currentlyunder development as part of the new approach to PE/PFM work. The indica-tors feed into the fuller analysis but, given the limitations of what the indicatorsare able to measure, cannot alone provide the whole picture. They require care-ful interpretation on a country-by-country basis. The standard assessment is thesubject of a separate working group paper and this will address, inter alia,issues such as how the standard assessment, incorporating the indicators, willbe applied (by whom, how data will be collected, how frequent etc).

The manner in which the indicators are recorded can also help to avoid over-interpretation of the scores. In addition to the scores themselves, the reportingshould including explanatory information and a justification of the score, specif-ic reference to the evidence used to determine the score, and the cardinal dataavailable to support or supplement the score. A standard format in which torecord the scores and the supporting information, such as that indicated in thetable below, will also help to ensure accessibility to different stakeholders andallow different users greater assurance about the basis on which scores weredetermined. Indicator Score Given Commentary Justification/ Cardinal data

Evidence used

8. ConsultationA major process of consultation regarding the strengthened approach to

PE/PFM work is in process by the working group, involving stakeholders fromdeveloping countries, the donor community, academics and practitioners. Thisrevised note has been prepared to facilitate the consultation on the PFM per-formance measurement framework component of the strengthened approach.

Key considerations during consultation include: • The purpose and rationale that underpin the indicator set.• The structure and scope of the indicator set.• The requirement for a limited number of indicators.• The inherent limitations of a set of high-level indicators.

The working group invites comments on this revised draft PFM PerformanceMeasurement Framework.Public Expenditure Working GroupFebruary 12, 2004Nicola SmithersPublic Expenditure and Financial Accountability SecretariatRoom MC4-579, World Bank offices1818 H Street, NWWashington, DC 20433, USATel: +(1) 202 473 1912 • Fax: +(1) 202 522 7132 • [email protected]

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Consultative Draft—PFM Performance IndicatorsANNEX 1A. PFM OUT-TURNS

Indicator

1. Aggregate fiscal deficit compared to original approved budget.

Cardinal data:

i. Deviation from budgeted aggregate fiscal deficit as percent of budgeted expenditure.

ii. Deviation from budgeted primary fiscal balance (before interest) as percent of budgeted expenditure.

GuidanceThe aggregate fiscal deficit is a “bottom line” measure of budget out-turn. If the deficitout-turn exceeds the budgeted deficit this may indicate that the PFM system is not delivering effective fiscal discipline or is unable to respond to changes in macroeconomicsituations. [The appropriate definition of the deficit for each country will depend on theIMF article IV consultation reports].

Good budgetary practice includes budget monitoring and review processes. A mid-yearreview process will involve updating the revenue forecast and making an adjustment toexpenditure to maintain the balance target.

The specific measure is:

a. In no more than one out of the last three years has the actual deficit exceeded the bud-geted deficit by an amount equivalent to more than 2% of total budgeted expenditure,and in that one year the excess was less than 5 % of total budgeted expenditure.

b. In no more than one out of the last three years has the actual deficit exceeded the bud-geted deficit by an amount equivalent to more than 5 % of total budgeted expenditure.

c. In no more than two of the last three years has the actual deficit exceeded the budgeteddeficit by more than an amount equivalent to 5% of total budgeted expenditure.

d. Meets neither a, b or c

Indicator

2. Composition of expenditure out-turn compared to original approved budget

Cardinal data:

i. Average deviation between actual and budgeted expenditure by functional classification

ii. Average deviation between actual and budgeted expenditure by economic classification

iii. Average deviation between actual and budgeted expenditure on administrative basis

iv. Budget volatility (median of year-to-year policy changes in each functional or administrativeclassification over the preceding four years: policy change is reflected by change in percentageshare in the budget) Where the composition of expenditure regularly varies considerably fromthe original budget, that budget will not be a useful ex ante statement of intent.

GuidanceMeasurement against this indicator requires an empirical assessment of expenditure out-turns (excluding expenditures on donor-funded projects) against budget at a sub-aggregate level. As budgets are usually adopted and managed on an administrative (ministry/agency) basis, then the administrative basis is preferred for assessment. Afunctional basis is also acceptable. In addition, consideration should be given to the economic composition.

a. The composition of expenditures is close to budget,- an average of no more than 10percent variance at administrative or functional level in at least two of the three years.


(excluding interest on debt), and no more than 10 percent variance on an economicbasis in at least two of the last three years would indicate a composition close to budget.

b. An average of no more than 15% variance at administrative or functional level in atleast two of the three years (excluding interest on debt), and no more than 15% vari-ance on an economic basis in at least two of the last three years.

c. An average of no more than 20% variance at the administrative or functional level in at least two of the last three years (excluding interest on debt).

d. An average of more than 20% variance at the administrative or functional level in at least two of the last three years (excluding interest on debt).

Indicator

3. Aggregate revenue out-turn compared to original approved budget.

Cardinal data:

Actual revenue minus budgeted revenue as a percent of budget

Guidance

Accurate forecasting of domestic revenue is a critical factor in determining budget performance, since budgeted expenditure allocations are based upon it. A comparison ofbudgeted and actual revenue provides an overall indication of the quality of forecastingand revenue administration. External shocks may however occur, that could not havebeen forecast and do not reflect inadequacies in administration, and the variance notedbelow should exclude those that IMF recognizes as arising from external shocks.

The specific measure is:

a. In no more than one out of the last three years has domestic revenue out-turn beenbelow 95% of total budgeted domestic revenue.

b. In no more than one out of the three years has domestic revenue out-turn been below92% of total budgeted domestic revenues.

c. In no more than two out of the last three years has domestic revenue out-turn beenbelow 92% of total budget domestic revenue.

d. Meets neither a, b, or c

Indicator

4. Small stock of expenditure arrears; little accumulation of new arrears over past year.

Cardinal data:

Level of expenditure arrears as a percentage of total expenditures

Guidance

Arrears are expenditures that have been incurred by government, for which payment ofthe employee, supplier, contractor or creditor is overdue, and are a form of non-transpar-ent financing. A high level of arrears can indicate a number of different problems such asinadequate commitment controls, cash rationing, inadequate budgeting for contracts,under-budgeting of specific items and lack of information.

This indicator is concerned with measuring the extent to which there is a stock ofarrears, and the extent to which the systemic problem is being brought under control andaddressed. While special exercises to identify and payoff old arrears may be necessary,this will not be effective if new arrears continue to be created.

a. There are very few or no expenditure arrears.

b. There is a stock of some expenditure arrears (up to 5% of total expenditure), the accumulation of new arrears is low and the net stock level declined in the last year.

83August 2004

c. It is estimated that there is a significant stock of expenditure arrears (5%-10% of totalexpenditure), though the information available may be incomplete. The accumulationof new arrears slowed down in the last year. This score will also apply if the estimatedexpenditure arrears are between 10% and 15%, but there has been a significant reduc-tion in the level in the last year, and the accumulation of new arrears has slowed downin the last year.

d. It is estimated that the stock of expenditure arrears exceed 10% of total expenditures,and/or no information on arrears is available. The stock of arrears has not beenreduced significantly, and/or the accumulation of new arrears is continuing at a significant rate.

B. KEY CROSS-CUTTING FEATURES: COMPREHENSIVENESS AND TRANSPARENCY

Indicator

5. Comprehensiveness of aggregate fiscal risk oversight.

Guidance

Central government should monitor and manage fiscal risks arising from its own activi-ties, and fiscal risks that will impact nationally that arise from activities of parastatals andstate-owned enterprises (SOEs), including state -owned commercial banks, and fromactivities of sub-national levels of government.

(i) Central government should require and receive quarterly financial statements andaudited year end statements from parastatals and SOEs, and monitor performance againstfinancial targets. (ii) Where sub-national governments can generate fiscal liabilities forcentral government, their fiscal position should be monitored, at least on an annual basis.(iii) Central government should have mechanisms that enable it to take corrective actionto manage fiscal risks arising from the actions of parastatals, SOEs and sub-national gov-ernments, in a manner consistent with transparency, governance and accountabilityarrangements, and the relative responsibilities of government and the rest of the publicsector.

a. (i) Well-established procedures are in operation for monitoring all major parastatalsand SOEs on a quarterly basis, and reports are published on the full aggregate fiscalposition annually (ii) Either sub-national governments cannot generate fiscal liabilitiesfor central government, or where they can central government monitors the net fiscalpositions of sub-national governments on an annual basis (iii) The central governmenttakes corrective action to manage fiscal risks if these arise from actions of parastatals,SOEs and sub-national governments, in an appropriate manner, and reports the fiscalrisks annually.

b. (i) Procedures are in place for monitoring parastatals and SOEs on a quarterly basis,and these are largely complied with by central government and by the parastatals andSOEs. (ii) Central government monitors the net fiscal positions of the major tier of sub-national government on an annual basis (where they can generate liabilities for centralgovernment), (iii) Some mechanisms are available to central government to take correc-tive action to manage fiscal risks arising from actions of parastatals, SOEs and sub-national governments, and these are utilized from time to time. Government providesreports including major fiscal risks arising from parastatals/SOEs and sub-nationalgovernment.

c. (i) Parastatals and SOEs are monitored on an annual basis. (ii) Major fiscal risks arisingfrom sub-national governments are monitored.

d. The fiscal risks arising from parastatals, SOEs and sub-national governments are notroutinely monitored.


Indicator

6. Extent to which budget reports include all significant expenditures on central government activities, including those funded by donors.

Guidance

Budget reports (annual budget documentation, year end financial statements and otherfiscal reports for the public) should cover all budgetary and extra-budgetary activities ofcentral government to allow a complete picture of central government revenue, expendi-tures across all categories, and financing. This will be the case if extra-budgetary activities(central government activities which are not included in the annual budget law), such asthose funded through extra-budgetary funds, are insignificant. However, even if there aresignificant, it is still possible to obtain a complete picture if the expenditures on extra-budgetary activities are included in fiscal reports. This guidance has drawn from theIMF’s Code of Good Practices on Fiscal Transparency—section 2.1.1.

a. The level of extra-budgetary activities of central government is not significant (below1% of total spending). Alternatively, the level is somewhat higher (up to 10% of totalspending) but fiscal reports include complete information on these expenditures. Allmajor donor-funded expenditures on government activities are captured in annualbudget documents.

b. The level of extra-budgetary activities of central government is below 10% to totalspending and some fiscal reports cover the majority of these expenditures; alternative-ly extra-budgetary activities may be as high as 15%, but fiscal reports provide completeinformation on these expenditures. The majority of donor-funded expenditures on gov-ernment activities are captured in the annual budget documents.

c. The level of extra-budgetary activities of central government is less than 10% of totalspending, but fiscal reports provide limited or no information on these expenditures;alternatively, extra-budgetary activities are higher than 10% and the majority of theseexpenditures are reported. Some donor-funded expenditures on government activitiesare captured in annual budget documents.

d. The level of extra-budgetary activities of central government is more than 10% of totalspending and fiscal reports provide limited or no information on these expenditures.Little or no donor-funded expenditures on government activities are captured in annu-al budget documents.

Indicator

7. Adequacy of information on fiscal projections, budget and out-turns provided in budgetdocumentation

Guidance

Annual budget documentation, (the annual budget and budget supporting documents)should allow a complete picture of central government fiscal forecasts, budget and out-turns. As well as revenues, expenditures, financing, it should include debt level and com-position, financial assets, and the fiscal impact of contingent liabilities. It should also pro-vide information comparable to the budget for the out-turns for the two preceding fiscalyears, and forecasts of the main budget aggregates for the two years following the budget.This guidance has drawn from the IMF’s Code of Good Practice on Fiscal Transparency—sections 2.1.3 and 2.1.4.

a. Annual budget documentation includes complete information on debt and financialassets, some information on contingent liabilities, and comparable information on prioryear out-turns and future year projections.

b. Annual budget documentation includes information on the debt level and comparableinformation to the out-turn of the prior year.

85August 2004

c. Annual budget documentation provides either information on the level of debt, or provides comparable information of the prior year.

d. Annual budget documentation provides information on neither debt nor comparableinformation of the prior year.

Indicator

8. Administrative, economic, functional and programmatic classification of the budget.

Guidance

A robust classification system allows the tracking of spending on the following dimen-sions: administrative unit, economic, functional and program. Where standard interna-tional classification practices are applied, then the tracking of poverty-reducing and other spending can be facilitated.

Under the UN-supported Classification of Functions of Government (COFOG), whichis the functional classification applied in GFS, there are ten main functions at the highestlevel and 69 functions at the second level.

The Budget and Budget expenditures are classified:

a. On an administrative, economic, functional, programmatic basis.

b. On an administrative, economic, and functional (to sub-functional level) or administrative, economic and programmatic basis

c. On an administrative, economic and functional level (10 main COFOG functions)basis.

d. On another basis.

Indicator

9. Identification of poverty related expenditure in the budget

Guidance

The ability to clearly identify poverty-reducing spending is an important element ofimplementing government poverty reduction strategies through the budget and in reallocating resources.

Ideally, the classification system will be sufficiently comprehensive to identify povertyreducing expenditures. If not, specific appropriations in the budget can be tagged aspoverty reduction—this has been named a “virtual fund” as it involves no separate insti-tutional, governance, or execution devises from those used generally. They may involvethe application of a special poverty-reducing code within a consolidated and reliablydepicted line item budget. The use of institutional poverty funds is generally consideredto be poor practice as it tends to reflect considerable weaknesses in current classificationand recording, and leads to fragmentation in the budget process.

The identification and tracking of poverty-reducing spending is undertaken

a. Through the existing budgetary classification system, either through a pre-existingcomprehensive system or by adding a special, virtual fund code.

b. By the prior identification of poverty reducing expenditure items in the budget and by reporting on those items (without the addition of a special code to the classificationof expenditures).

c. Through the use of a separate institution/fund.

d. Poverty reducing spending is not identified.

Indicator

10. Publication and public accessibility of key fiscal information, procurement information and audit reports.


Cardinal data:

i. Number of days after quarter end that quarterly budget report made public

Guidance

This indicator measures the general level of transparency that exists regarding the fiscalplans, position and performance of the government. The key fiscal information providedby government includes:

• Budget reports (as defined in indicator 6.)

• Annual budget documentation (as defined in indicator 7.)

• Within year budget execution reports

• Year end financial statements

• Public procurement information (eg. on major contracts)

Additional important sources of information on the financial position and performanceof the government are the external audit reports, provided by the Supreme AuditInstitution.

Transparency will depend on whether key fiscal information and external audit reportsare published in a timely manner, can be accessed by the public (eg. whether informationis provided on websites which the public is able to access, or in mainstream press), and itis in a clear, readable format (eg. understandable structure/layout, appropriatelysummarized).

a. There is comprehensive, timely publication of key fiscal information and external auditreports, these are readily accessible to the general public, and are provided in a clear,readable format.

b. Most key fiscal information and all external audit reports are published without majordelays, and the format is understandable.

c. Some key fiscal information and external audit reports are published, but not on atimely basis. The format/presentation makes it very difficult for non-experts to understand.

d. Either little fiscal information or no audit reports are published.

C. BUDGET CYCLE

Medium term planning and budget formulation

Indicator

11. Extent of multi-year perspective in fiscal planning, expenditure policy-making andbudgeting.

Guidance

Policy decisions have multi-year implications, and therefore multi-year fiscal forecasts andestimates of forward expenditures (including expenditures both of a recurring nature andthose involving multi-year investment commitments) are required to determine whethercurrent and new policies are affordable, within aggregate fiscal targets. At the same time,national and sectoral strategies are needed to guide the development of forward esti-mates. The extent to which forward estimates are integrated into the annual budget formulation process will then complete the policy-budget link.

a. Multi-year aggregate fiscal forecasts and forward expenditure estimates (based on eco-nomic and sectoral breakdown) are prepared on a rolling annual basis, costed state-ments of national and major sector strategies exist, and there is a strong direction pro-vided in the budget circular (or equivalent) regarding the multi-year forecasts to beadhered to in budget submissions.

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b. Multi-year aggregate fiscal forecasts and forward expenditure estimates (based on aneconomic breakdown) are prepared on a rolling annual basis, statements of nationalstrategy and sectoral strategy exist, and the budget circular (or equivalent) makes alink between the annual and multi-year forecasts and the national strategy.

c. Multi-year aggregate fiscal forecasts are updated annually but no forward estimates ofexpenditure other than at the aggregate level, a statement of national strategy exists,and there is reference to the multi-year fiscal forecasts in the budget circular (or equiv-alent). Alternatively, fiscal forecasts cover the budget year only but the budget circularmakes clear reference to national strategy.

d. The fiscal forecasts cover the budget year only. No linkage is made between the annualbudget and national strategy in the budget circular.

Indicator

12. Orderliness and participation in the annual budget process.

Guidance

Effective participation in the annual budget process impacts the extent to which the budg-et reflects fiscal and sectoral policies. This requires an integrated top-down and bottom-upbudgeting process, involving central agencies, spending agencies and political leadershipin an orderly and timely manner, in accordance with a pre-determined budget formula-tion calendar. Clear guidance on the budget process should be provided in the budget cir-cular and budget formulation manual. Negotiations on allocations should be transparentand systematic.

a. Spending ministries are given clear guidance for the preparation of budget submis-sions, including indicative ceilings that are informed by specific agreement at the polit-ical level on the relative spending priorities across sectors. Ministries adhere to thebudget calendar and are generally able to fulfill the requirements of the budget calen-dar, including ceilings and data submissions. Negotiations with ministry of finance areopen and transparent; line ministries know their final allocation at the conclusion ofsuch negotiations.

b. Spending ministries are given clear guidance for the preparation of budget submis-sions, and indicative ceilings are informed by general guidance from the political levelconcerning relative spending priorities. Ministries adhere to the budget calendar andcircular requirements in most cases. Negotiations between ministry of finance and lineministries are rather opaque, and there may be a delay in line ministries learning theoutcome of negotiations.

c. There are occasional delays in the budget calendar and budget submissions from lineministries may be incomplete or lack the detail requested by ministry of finance. Thepolitical level is involved in reviewing and approving the estimates only after theyhave been prepared by ministry of finance, thereby constraining their ability to makeadjustments. Budget conferences between ministry of finance and line ministries arehighly restricted, with final outcomes reflecting the will of ministry of finance.

d. Although a budget calendar and budget instructions may exist, they are generally notadhered to. Budget submissions are often late and if indicative ceilings are given, theyare normally exceeded by line ministries. The political leadership generally only getsinvolved prior to the budget being submitted to the legislature, at which time littleopportunity for adjustment exists. Ministry of finance prepares the budget with littleinput from line ministries, and the latter may only learn of their budget allocationswhen the budget is submitted to the legislature.


Indicator

13. Coordination of the budgeting of recurrent and investment expenditures.

Guidance

A common problem is the separation of budgeting for expenditures that are of a recurringnature and budgeting for multi-year investment projects. This means that decisions aboutthe investment and recurrent funding for a particular sector or ministry are taken inde-pendently and may be inconsistent. In addition, the recurrent implications of investmentexpenditure are not considered when making the decision to invest.

a. There is a single budget process, based on a single calendar and circular, that fullycoordinates the budgeting for investment and recurrent expenditures at the central,ministry/agency and sub-functional/program levels. Recurrent implications of invest-ment decisions are budgeted.

b. Linkages between the processes for budgeting for investment and for recurrent expen-ditures are made at key points, for the central and ministry/agency levels. The budgetsare documented together at the central and ministry/agency levels.

c. The budgets for investment and recurrent expenditure are only brought togethertowards the end of the budget process.

d. The budgeting for investment and recurrent expenditures are separate processes andproduce separate documents.

Indicator

14. Legislative scrutiny of the annual budget law.

Cardinal data

i. Number of days the legislature has to review the budget.

Guidance

The power to give the government authority to spend rests with the legislature, and isexercised through the passing of the annual budget law. If the legislature does not rigor-ously examine and debate the law, that power is not being effectively exercised and willundermine the accountability of the government to the electorate.

Assessing the legislative scrutiny and debate of the annual budget law will beinformed by consideration of several factors :

I. (i) The scope of the legislature’s review in particular the extent to which it covers fiscalpolicies and medium term fiscal framework, in advance of the review of details ofexpenditure and revenue.

(ii) The extent to which the legislature’s procedures are well-established, provide adequate time, and involves scrutiny of the budget by specialized committee(s)

(iii) The adequacy and user-friendliness of the information received by the legislature.

II. Whether the budget is generally passed before the beginning of the financial year.Delays in passing the budget may create uncertainty about the level of approvedexpenditures and delays in some government activities including major contracts.

Adequate performance on both I and II is required to receive a, b or c score.

a. I. Legislative scrutiny is comprehensive, well-informed by summary and detailed information, and involves in-depth review by specialized committee. II. The budget is passed before the financial year commences.

b. I. Legislative scrutiny covers aggregates and detailed estimates of expenditure and revenue, is informed by user-friendly information, and involves some review by specialized committees. II. The budget is generally passed before the financial yearcommences.

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c. I. Legislative scrutiny covers the details of expenditure and revenue, only budget esti-mates are provided, some procedures exist and are partially followed. II. The budget isgenerally passed within two months of the start of the financial year.

d. I. Legislative scrutiny is extremely limited and procedures are generally not followed.II. The budget is not generally passed within two months of the start of the financialyear.

Budget execution

Indicator

15. Effectiveness of cash flow planning, management and monitoring. The objectives ofcash flow planning, monitoring and management are (i) orderly execution of the budget,(ii) borrowing synchronized with cash inflows and outflows, (iii) avoidance of idle cashbalances resulting in unnecessary interest payments. This requires regular calculation andconsolidation of cash balances (including those for extra-budgetary funds), and regularand reliable forecasts of cash inflows and outflows which are linked to the budget imple-mentation and procurement plan, and borrowing plan.

Guidance

Calculation and consolidation is facilitated where there exists a single Treasury account orwhere all accounts are centralized. In order to achieve regular consolidation of multiplebank accounts not held centrally, timely electronic clearing and payment banking arrange-ments will generally be required.

a. There is daily calculation and consolidation of all the government’s cash balances.Forecasts of all cash inflows and outflows are prepared for the fiscal year and updatedmonthly, based on revenue forecasts and budget implementation and procurementplans. Borrowing is planned on the basis of cash flow forecasts.

b. There is daily calculation and consolidation of government cash balances, though sometransactions such as those from extra-budgetary funds may remain outside the cashplanning and consolidation arrangements. Cash flow forecasts are prepared for the fis-cal year and updated monthly.

c. The calculation of most government cash balances takes place regularly, though someaccounts are not included in the cash planning arrangements. The system used doesnot allow for daily consolidation of bank accounts. Cash flow forecasts are updatedperiodically.

d. The calculation of cash balances takes place irregularly, or cash flow planning is notundertaken.

Indicator

16. Procedures in operation for the management and recording of debt and guarantees.

Guidance

Debt management, in terms of contracting, servicing and repayment, and the provision ofgovernment guarantees are often major elements of overall fiscal management. Poor man-agement of debt and guarantees can create unnecessarily high debt service costs and cancreate significant fiscal risks.

Critical aspects of debt management performance include the proper recording andreporting of debt and guarantees, the approval of all guarantees by the ministry offinance, and regular analysis of debt sustainability.

a. Domestic and foreign debt records are maintained on an single computerized debtmanagement system and produce comprehensive reports for government routinely.Debt sustainability analysis is undertaken regularly. The issue of government


guarantees is made against transparent criteria and fiscal targets, and approved by the ministry of finance.

b. Regular reports on domestic and foreign debt are recorded on computerized debt man-agement systems, or, in cases where debt levels are low, using spreadsheet recordswhich have been demonstrated to be accurate and robust. These produce regularreports. Debt sustainability analysis is undertaken from time to time. All guaranteesare approved by the ministry of finance, and a limit is placed on the total that may beissued.

c. Spreadsheet or manual records are maintained on debt, and reports on debt stock andservice are prepared periodically. Debt sustainability is undertaken only infrequently.Some guarantees may be issued without ministry of finance approval.

d. Debt records are incomplete or inaccurate to a significant degree. Government guarantees are issued on an adhoc basis in an opaque manner.

Indicator

17. Extent to which spending ministries and agencies are able to plan and commit expen-ditures in accordance with original/revised budgets.

Guidance

Efficient use of resources requires that managers know the level of resources they can uti-lize (meaning here the point at which they can incur expenditure commitments) and thetiming, and that the timing meets the operational requirements of the ministries This isparticularly so for seasonal expenditures and major procurement contracts. In some sys-tems, funds (or authority to spend) are released by the ministry of finance within thebudget year. In others, the passing of the annual budget law grants the full authority tospend at the beginning of the year, but the ministry of finance (or other central agency)may in practice impose delays on ministries in incurring new commitments when cashflow problems arising.

Poor predictability in being able to utilize funds prevents managers from planning andmay mean that funds are available at the wrong time.

Governments often need to make within-year adjustments to allocations in the light ofunanticipated events impacting revenues and/or expenditures. The impact on predictabil-ity and on the integrity of original budget allocations is minimized by specifying, inadvance, an adjustment mechanism that relates adjustment to the budget priorities in asystematic and transparent manner. In contrast, adjustments can take place without clearrules/guidelines or can be undertaken informally (eg. through imposing delays on newcommitments).

a. Spending ministries and agencies are able to commit expenditures (eg. sign contractswith contractors and suppliers) in an orderly manner throughout the year, broadly inaccordance with cash flow forecasts (agreed with finance ministry) and with the budg-et. Adjustment to the allocations takes place only once during the year and is done in apredictable, transparent way.

b. Spending ministries and agencies have reliable information about the resources avail-able/to be provided for a given quarter, and adjustments to budget allocations aretransparent and occur only a limited number of times each year.

c. Spending ministries and agencies have reliable information about the resources avail-able/to be provided for a given quarter or more, but adjustments are not undertakenin a systematic and transparent manner. Alternatively, spending ministries and agen-cies have reliable information about the resources available/ to be provided for a givenmonth, and the variation in the non-salary resources available to individual line min-istries on a month-to- month basis is limited.

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d. Spending ministries and agencies have information about resources available for amonth or less, and there is significant variation in the non-salary resources available toindividual line ministries on a month-to-month basis.

Indicator

18. Evidence available that budgeted resources reach spending units in a timely and transparent manner.

Cardinal data:

i. Percentage of intended resources that reach front-line service delivery units

Guidance

Problems frequently arise in front-line service delivery units providing services at thecommunity level in obtaining resources that were intended for their use (as reflected inthe original or revised approved budgets/estimates), or in obtaining the delegation tocommit expenditures (in the Francophone system). Leakages may arise in respect of fundsand in respect of the procurement and distribution of goods, at different levels within thesystem, and there may be significant delays.

Information about the receipt of resources by service units is often lacking. Theaccounting system, if sufficiently extensive, reliable and timely, should provide this butfrequently information on expenditures in the field is incomplete and unreliable. PublicExpenditure Tracking Surveys, audits (either by the external auditor or by donor-fundedconsultants) or other assessments, may provide alternative sources. In addition, availabili-ty of this information to the local community provides a means for ensuring that the fundsreceived are used as intended.

a. There is reliable accounting and/or survey information available periodically, and thisdemonstrates that service delivery units obtain the vast majority of resources intended,in a timely manner. Communities have routine access to information about resourcesreceived by local service units.

b. Information is available from time to time, and this indicates that service delivery unitsreceive, on average, at least 80% of resources intended and that the delays are limited.Communities have information about the resources received by service units in severalkey sectors.

c. Only limited information is available and this indicates that some leakages exist andthat delays can be significant. There is a system, partially operating, to make informa-tion available to communities about receipts.

d. The information available provides an indication that leakages can exceed 50% ofintended resources, and that there are major delays in receipt of resources by servicedelivery units. Alternatively, very little or no information is available regarding theresources reaching service units.

Indicator

19. Effectiveness of internal controls

Cardinal data:

i. Error rates in routine financial transactions

Guidance

Internal control has a number of dimensions. An effective internal control system is onethat is relevant (ie based on an assessment of risks and the controls required to managethe risks), incorporates a comprehensive and generally cost effective set of controls (whichaddress compliance with rules in procurement and other expenditure processes, preven-tion and detection of mistakes and fraud, safeguard of information and assets, and qualityand timeliness of accounting and reporting) which are widely understood and complied


with, is circumvented only for genuine emergency reasons, and for which top manage-ment takes full responsibility. Evidence of the effectiveness of the internal control systemshould come from regular audits.

a. The internal control system is relevant, incorporates a comprehensive and generallycost effective set of controls which are widely understood, the rate at which rules arenot complied with is very low (no more that 3% error rate in routine financial proce-dures, as demonstrated by audit), the controls are only rarely bypassed, and top man-agement takes clear and full responsibility for the effective operation of the system.

b. The internal control system has a comprehensive set of controls, which are generallyunderstood and which audit indicates are complied with (no more than 5% error ratein routine financial procedures). Emergency procedures are utilized on occasion, but ina deliberate and controlled manner.

c. The internal control system consists of a basic set of rules for the processing andrecording of transactions, which are well understood by those directly involved in theirapplication, and which audit indicates are observed in a significant majority of transac-tions. Emergency procedures are utilized in non-emergency situations from time totime.

d. The core set of rules is not complied with on a routine and widespread basis due todirect breach of rules or routine use of emergency procedures.

Indicator

20. The effectiveness of internal audit

Guidance

Regular and adequate feedback to management is required on the performance of theinternal control systems, through an internal audit function (or other systems monitoringfunction) that is appropriately structured, has adequate independence, breadth of themandate, and power to report, utilizes appropriate professional standards, and reports onsignificant systemic issues. Specific evidence of an effective internal audit (or systemsmonitoring) function would also include assessment and monitoring of error rates in pro-curement and expenditure transactions, a focus on high risk areas, reporting on correctionrates, use by the SAI of the internal audit reports, and action by management on internalaudit findings.

a. An effective internal audit (or systems monitoring) function, as defined above, is inoperation.

b. The internal audit (or systems monitoring) function is in operation, and provides regular reports to top management on systemic issues which are widely disseminated.Its mandate and access may not fully meet professional standards.

c. The internal audit (or systems monitoring) function exists and undertakes some systems review. Reports are often not disseminated and little evidence is available offollow up action by management.

d. There is little or no internal audit or systems monitoring.

Indicator

21. Effectiveness of payroll controls

Guidance

The wagebill is usually one of the biggest items of government expenditure and suscepti-ble to weak control and corruption. The payroll is underpinned by the “nominal roll,”which is a list of all staff who should be paid every month and which can be verifiedagainst the approved establishment list. The link between the payroll and the nominal rollis a key control. Any amendments required to the nominal roll should be processed in atimely manner through a change report, and should result in an audit trail. Payroll audits

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should be undertaken regularly, and may include audits to identify ghosts workers, andcontrol weaknesses. In addition, in order that the wagebill is adequately monitored, theministry of finance should have full access to payroll information

a. Payroll records and nominal roll are directly linked through a computerized informa-tion system to which the ministry of finance has easy access, authority to change thepayroll is restricted, and changes result in an computerized audit trail being created.Changes required to the nominal roll and pay requirements are updated in a timelyway. There is a strong system of payroll audit to identify control weaknesses and/orghost workers.

b. Payroll data is supported by the nominal roll records. The authority and basis forchanges to the payroll database are clear. Some delays exist in processing changes tothe nominal roll and payroll database. The routine controls are complemented, fromtime to time, by payroll audits to identify weaknesses and/or ghost workers. Payrollinformation is regularly provided to the ministry of finance.

c. The nominal roll, which supports the payroll data, is not fully maintained. Controlsexist over changes to the nominal roll and payroll database but these are not adequateto ensure full integrity of the system. There may be significant delays in processing ofpayroll changes. Aggregate payroll information only is provided to the ministry offinance.

d. The lack of controls significantly undermines the integrity of the payroll database.

Indicator

22. The existence of a transparent procurement system as an integral part of the overallPFM system which is supported by a clear regulatory framework that provides for com-petition, value for money and effective controls.

Cardinal data: Prices paid by public sector for goods, works and services is comparable to prices paid by the private sector for similar items.

Guidance

Public procurement is a major component of the PFM system which directly impacts effi-ciency and economy of expenditures and also contributes to the budget formulation andexpenditure management process. Assessment against this indicator will depend on theadequacy of the regulatory framework in promoting competition, transparency and valuefor money and the extent to which the system has effective control, remedy and feedbackmechanisms. Evidence of the performance of the system against these requirementsinclude the percentage of contracts subject to competitive bidding, the regular publicationof opportunities and outcomes of public contracts, the absence of major delays in the pro-cessing and payment of contracts, the comparability of prices paid by the public sector topricing of items available in the marketplace and the ability of the system to providetimely information on the cost of goods, works and services to support budget formula-tion, execution and expenditure management.

a. The system is defined by a clear regulatory framework which is consistently imple-mented under the oversight of both internal and external control systems. Contractsare awarded on the basis of competition, in accordance with rules, or justified whenother methods are employed. There is regular advertisement of opportunities and pub-lication of data on public contracts. There are few unexplained delays in awardingcontracts and in making payments. The system provides for timely feedback of costdata and execution against plans to support the PFM process.

b. The system is defined by a regulatory framework which is consistently implemented.The majority of contracts are awarded on the basis of competitive procedures. There isregular advertisement of opportunities but little publication of information on public


contracts. Control mechanisms and linkages to the overall PFM system are not wellestablished leading to budgeting issues and delays in contract award and payments.

c. The system is defined by an outdated regulatory framework which enables inconsis-tent and poorly controlled implementation. Lack of competition as the basis for con-tract awards is evidenced by poor comparison between prices paid in the public sectorwhen compared to market prices. Delays in award of contracts and payments are fre-quent. Disclosure of information is poor leading to a lack of transparency and confi-dence in the system.

d. There is a lack of definition and clarity in the regulatory framework with inconsistentimplementation evidenced by a lack of competition in the award of contracts and littledisclosure of information. Control systems are weak or non-existent. Delays in awardsand in payments are common and contribute to overall lack of efficiency in the systemand consistent over payment by the public sector.

Accounting and reporting

Indicator

23. Timeliness and regularity of data reconciliation.

Guidance

Reliable reporting of financial information requires constant checking and verification ofthe recording practices of accountants—this is an important part of internal control and afoundation for good quality information for management and for external reports. Timelyand frequent reconciliation of data from different sources is fundamental for data reliabili-ty. Two critical types of reconciliation are (i) reconciliation of fiscal data, held in the gov-ernment’s books, with government bank account data held by central and commercialbanks. High quality bank reconciliation requires that large differences are not left unex-plained (ii) reconciliation of suspense accounts, and advances. In addition, balance shouldbe cleared out of suspense and advance accounts on a regular basis.

a. High quality bank reconciliation is undertaken at aggregated and detailed levels atleast monthly, with very little backlog. Suspense accounts are routinely reconciled andcleared quarterly, and advances accounts are reconciled quarterly. Few suspense andadvance accounts have old, brought-forward balances.

b. High quality bank reconciliation is undertaken monthly for bank accounts throughwhich revenues are collected and expenditures made, with no major backlog. There isno major backlog in the annual reconciliation of suspense and advances accounts, andin the annual clearing of the suspense account balances. There are old, brought-for-ward balances in some suspense and advances accounts.

c. Bank reconciliation is undertaken quarterly for bank accounts through which revenuesare collected and expenditures made, with no major backlog. Not all differences areexplained. Reconciliation of suspense and advances accounts generally takes placeannually, though there are a significant number of accounts with old, brought-forwardbalances.

d. There is a major backlog in quarterly bank reconciliation, and in annual reconciliationof suspense and advances.

Indicator

24. Timeliness, quality and dissemination of in-year budget reports.

Cardinal data:

Number of days following end of quarter that quarterly budget report is disseminated within thegovernment

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Guidance

The ability to “bring in” the budget requires timely and regular information on actualbudget performance to be available both to the ministry of finance, to monitor perform-ance and if necessary to identify new actions to get the budget back on track, and to theline ministries for managing their own affairs for which they are accountable.

The division of responsibility between the ministry of finance and line ministries in thepreparation of the reports will depend on the type of accounting and payment system inoperation. The role of the ministry of finance may simply to consolidate reports providedby line ministries from their accounting records; in other cases the ministry of finance mayundertake the data entry and accounting for transactions in which case the role of the lineministry is reduced, perhaps to reconciling ministry of finance data with their ownrecords. The important requirement is that there be a two way flow of informationbetween the ministry of finance and the line ministries.

a. Budget reports, with classification that allows direct comparison to the budget andwhich incorporate expenditure, revenue and debt information, are disseminated withingovernment within four weeks of month and quarter end. There are no material con-cerns about the quality of the information.

b. Budget reports, with classification that allows comparison to the budget at some levelsand which incorporate expenditure and revenue information, are disseminated withingovernment within four weeks of quarter end. Where there is some information that islacking this is recognized and adequately reflected in the reports, and there may besome limited concerns about accuracy, but these shortcomings do not fundamentallycompromise the overall consistency and usefulness of the reports.

c. Budget reports are prepared within six weeks of quarter end, but major gaps exist inthe information and the manner of compilation allows for a significant level of inaccu-racy. Dissemination to line ministries is limited.

d. Budget reports are not prepared within six weeks of the quarter end.

Indicator

25. Timeliness and quality of audited financial statements submitted to the legislature

Cardinal data:

i. Number of months after year end that financial statements presented to legislative

Guidance

The consolidated year end financial statements are a critical element of transparency in thesystem. In addition, the ability to prepare year end financial statements in a timely fashionis a key indicator of how well the accounting system is operating, and the quality ofrecords maintained. Validation is required through certification of the financial statementsby the external auditor.

In addition, in order to be useful and to contribute to transparency, financial statementsmust be understandable to the reader, and deal with transactions, assets and liabilities in atransparent, consistent manner. This is the purpose of financial reporting standards. Somecountries have their own public sector financial reporting standards, set by government oranother authorized body. In addition, there are the Government Finance Statistics (GFS)standards, and the International Federation of Accountants’ International Public SectorAccounting Standards (IPSASs), some relevant for countries that adopt accrual basedaccounting, and others relevant for cash-based systems.

For the most recent financial statements:

a. The complete set of financial statements, certified by the external auditor, are presented to the legislature within 12 months of the year end. The financial statementsare presented in accordance with IPSASs, GFS or an acceptable national standard.


b. A complete set of financial statements was presented to the legislature within 12months of year end. The financial statements are presented in accordance with IPSASs,GFS or an acceptable national standard.

c. Financial statements were presented to the legislature within 12 months of year end.The financial statements are presented in a consistent manner over time and there issome disclosure of accounting policies applied.

d. Financial statements were not to the legislature within 12 months of year end.

External accountability, audit and scrutiny

Indicator

26. The scope and nature of external audit.

Guidance

A high quality external audit is an essential requirement for creating transparency in theuse of public funds. Key elements of quality include whether external audit (i) is ade-quately empowered—ie authority exists to obtain necessary information and the scopecovers the full public sector, (ii) adheres to appropriate auditing standards (INTOSAI,IFAC) and focuses on significant and systemic PFM issues in its reports, and (iii) coversthe full range of financial audit—reliability of financial statements, regularity of transac-tions and functioning of internal control and procurement systems.

a. The external audit is adequately empowered, covers all major entities in the public sector and the full range of financial audit, focuses on significant and systemic issues inits reports, and generally adheres to auditing standards.

b. All central government expenditures and revenues are covered by the external audit.Audit work includes assessment of internal control systems, and reports identify sys-temic issues as well as irregular transactions.

c. 80% or more of central government expenditures are covered by the external audit. TheSAI has authority to obtain information and reports identify significant issues. Auditwork is predominantly transaction level testing.

d. Less than 80% of central government expenditures are covered by external audit,and/or external audit has very weak authority and so is unable to obtain the basicinformation required.

Indicator

27. Follow up of audit reports by the executive or audited entity.

Guidance

While the exact process will depend to some degree on the system of government, in gen-eral there should be direct follow up of the audit findings by the executive, which mayinclude follow up by the ministry of finance and follow by the individual audited entity.Evidence of effective follow up of the audit findings includes the timely reduction inuncleared findings, and the provision by the executive or audited entity a formal writtenresponse to the audit findings indicating how these have and are being addressed.[Another important aspect of audit follow up in this system is that undertaken by the legislature and this is addressed in a separate indicator].

a. There is evidence of effective follow up being taken to audit findings, in a timely manner.

b. There is a formal response to audit findings, provided in a timely manner, but the follow up is not taken systematically.

c. There is a formal response to audit findings, though delayed. Little follow up takesplace.

d. These is little evidence of response or follow up taken to audit findings.

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Indicator

28.. Legislative scrutiny of external audit reports.

Cardinal data:

i. Number of months following external audit report before specialized legislative committee completes examination of the report

Guidance

The legislature has a key role in exercising scrutiny over the execution of the budget thatit approved.

A common way in which this is done is through a legislative committee/commissionthat examines the external audit reports and questions responsible parties about the find-ings of the reports. The operation of the committee will depend on adequate financial andtechnical resources, and on adequate time being allocated to keep up-to-date on reviewingaudit reports. The committee may also recommend actions and sanctions by the executive.

a. A committee examines the external audit reports and completes in-depth hearings onkey findings within one year of the report’s issue and within two years of the end ofthe relevant period. Follow up actions are recommended to the executive, and are gen-erally acted upon.

b. A committee examines the external audit reports and completes hearings within 18months of the report’s issue, and within three years of the end of the relevant period.Follow up actions are recommended to the executive, some of which are acted upon.

c. A committee examines the external audit reports but this is not completed within 30months of the report’s issue. Follow up actions may be recommended but are rarelyacted upon.

d. There has been no examination of the external audit reports within the last three years,or the examinations are for periods ended 5 years or earlier.

INDICATOR OF DONOR PRACTICESDonor 1. Actual donor flows are close to donor forecasts, and donor information providedto government on forecasts and actual expenditures are largely complete.

Cardinal data:

i. Actual donor flows minus forecast, as percentage of forecast.

ii. Percentage of donor flows for which timely information is provided

Donor practices can support or hinder PFM in partner countries. This indicator capturestwo key aspects of donor practices: (i) the extent to which donors provide adequate infor-mation to the government about the funds that are to be provided, and on the funds orother forms of development assistance that have been provided, and (ii) how close theactual funds/resources provided are to the forecasts given by donors.

a. Financial information is provided by donors on all significant funding/assistance in atimely manner. Actual funds provided by donors in the last two years are within 90%of forecasts provided.

b. Financial information is provided by donors on at least 80% of funding/assistance pro-vided. Actual funds provided by donors in the last two years have been within 75% offorecasts provided.

c. Financial information is given by donors for the majority of funds/resources provided.


d. The financial information provided on actual funds provided is substantially incom-plete. Actual funds provided by donors bear little relation to the forecasts provided, orno forecasts are provided.

Donor 2. Proportion of aid that is managed using national procedures.

Cardinal data:

i. Percentage of aid funds to government that are managed using national procedures.

The requirement that national authorities use different procedures for the management ofaid funds diverts capacity away from managing the national systems. This is compound-ed when different donors have different requirements. Conversely, the use of national sys-tems by donors can help to focus effort on strengthening, and complying with, the nation-al procedures. The use of national procedures need not mean that donor funds cannot bekept separate from government funds, but that the banking, authorization, procurement,accounting, disbursement and reporting arrangements are the same as those used for government funds.

a. 90% or more of aid funds to central government are managed through national procedures.

b. 75% or more of aid funds to central government are managed through national procedures.

c. 50% or more of aid funds to central government are managed through national procedures. Of the balance, a material part is managed through common donorarrangements.

d. Less than 50% of aid funds to central government are managed through national procedures.

End Notes

1. Amendment dated May 6, 2004. This document is the same as that issued onFebruary 12, 2004, except that the procurement indicator (no.22) has been amended andprocurement issues has been better reflected in the other indicators. This document doesnot represent a full revision of the document issued on February 12; other comments thathas been received in respect of the document issued on February 12 will be fed into thenext full revision that is to take place following further consultation and testing of theindicators.

2. PEFA is a partnership program of the European Commission, World Bank, the IMFand the governments of France, Switzerland, Norway and UK. The Secretariat is locatedin the World Bank offices in Washington.

3. The new approach is consistent with the principles contained in the paper Bank/FundCollaboration on Public Expenditure Issues, (Washington, DC: The World Bank and International Monetary Fund, February 14, 2003). Seewww.imf.org/external/np/fad/pubexpen/2003/021403.htm.

4. See Actions to Strengthen the Tracking of Poverty-Reducing Public Spending in HeavilyIndebted Poor Countries (HIPCs), (Washington, DC: The World Bank and InternationalMonetary Fund, March 22, 2002). See www.worldbank.org/hipc/hipc-review/tracking.pdf. Sincethat paper was prepared, a benchmark capturing performance of the procurement systemhas been added to the original 15.

5. That said, the indicators do capture the extent to which the budget cycle is implemented in a predictable and orderly manner, which is an essential pre-requisite for efficient use of resources.

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6. While accountability may also be viewed as cross-cutting feature, it was felt that theprocesses involved in exercising external accountability could be more adequately cap-tured as a distinct component of the budget cycle.

7. The set does not include indicators of factors impacting good or bad performance,such as staffing or the legal framework, but rather the performance itself.

8. Revenue is included only insofar as it is adequately forecast and monitored so as tosupport orderly cash flow management and budget execution. Coverage of the sub-national government and the parastatal/SOE sectors are limited to the monitoring of andreporting on the impact of these sectors on aggregate fiscal position and risk.

9. This is compatible with the IDA Country Policy and Institutional Assessment ratingsystem, which includes an indicator on budgetary management.

10. A score of B. indicates that the core PFM element is generally operating in an order-ly and timely manner but lacks completeness, coordination, compliance and/or accuracyin some limited respects. C. indicates the core PFM element is working at a rudimentarylevel, but there are some significant weaknesses in terms of completeness, coordination,compliance, accuracy, and/or timeliness. D. indicates there are very substantial weakness-es in the operation of the relevant core PFM element.

11. A score of C+ will be justified if a country has all the attributes of a C score, andsome of those specified for a B score.


Public Sector Committee Update 12

Introduction The Public Sector Committee (PSC) met in New York, USA on July 5-7, 2004.

This update summarizes the major features of the meeting. Agenda papers forPSC meetings are made available on the PSC page of the IFAC web site beforethe meeting. In conjunction with this meeting, the PSC met with members of itsConsultative Group and held a round table meeting with representatives fromthe United Nations on International Public Sector Accounting Standards(IPSASs) and reform of financial reporting in the United Nations. The Chair ofthe US Governmental Accounting Standards Board (GASB) also joined the PSCfor discussion of certain items.

IPSAS Approved: Impairment of Non-Cash-Generating Assets The PSC reviewed a draft IPSAS that was prepared after consideration of the

responses to ED 23 Impairment of Assets. The PSC approved the draft as IPSAS21 Impairment of Non-Cash-Generating Asset, subject to final review of editorialrevisions by a sub-committee of the PSC and approval by the Chair, and confir-mation of the application date of this IPSAS. Because of the linkages betweenthis IPSAS and the IPSASs being revised as part of the PSC’s improvementsproject (see below), the PSC intends to co-ordinate the application date of thisIPSAS and the improved IPSASs. The PSC noted that respondents to ED 23 hadagreed that the impairment of cash-generating assets should be dealt with inaccordance with IAS 36 Impairment of Assets. Accordingly, the PSC agreed todevelop an IPSAS Impairment of Cash-Generating Assets reflecting the require-ments of IAS 36 without change, but with the inclusion of public sector examples. The PSC appointed a sub-committee to develop a draft document for consideration at the next PSC meeting in November 2004.

PSC External Review The PSC received and discussed the Report of the Externally Chaired Review

Panel on the Governance, Role and Organisation of the IFAC-PSC. The Panel waschaired by Sir Andrew Likierman, former Head of the UK Accountancy Serviceof HM Treasury. Members discussed each recommendation in detail, notingthat: they supported the majority of recommendations and were of the viewthat the report was comprehensive and balanced; and that the survey resultsgenerated as part of the review process were very supportive of the PSC’s stan-dards setting activities. Members also discussed the PSC’s work program andagreed that the PSC should address the public sector specific issues on its workprogram as its first priority, that convergence with IFRSs/IASs would be its sec-ond priority and convergence with statistical reporting models its third priority.The Chair attended the IFAC Board meeting following the PSC meeting andpresented the PSC views on each recommendation. It is anticipated that theIFAC Board will consider an action plan for implementing the Panel’sRecommendations at its next meeting in November 2004.

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PSC Consultative Group PSC met with Consultative Group members from Canada, the Association of

Accounting Bodies of West Africa (AABWA), the North Atlantic TreatyOrganization (NATO) and USA, including the Executive Director of theFinancial Accounting Standards Advisory Board (FASAB) in the USA. TheConsultative Group noted the PSC’s proposed work program, noting that guid-ance on key public sector issues should be a priority but that there was also aneed to keep existing IPSASs up to date and that it was important for the PSC,and IFAC generally, to support initiatives for the education of public sectoraccountants in developing countries. The Consultative Group then discussed: • the PSC’s strategy for convergence of IPSASs with IASs/IFRSs where appro-

priate, noting that the convergence strategy agreed at this meeting appearedappropriate (see below for a discussion of that strategy); and

• the Research Report Budget Reporting, noting support for the development ofan IPSAS on the comparisons of actual to budget as a priority. TheConsultative Group also noted that developing an IPSAS on ex-ante report-ing of budget information was a longer term project which could benefitfrom further research including consideration of the role of a managementdiscussion and analysis in communicating budget information. Written submissions from Consultative Group members on these topics were

also considered.

Work Program Budget Reporting

The Research Report Budget Reporting was published in May 2004. TheReport which can be downloaded free of charge from the PSC page of the IFACweb site represents the views of Dr. Jesse Hughes, the consultant who had pre-pared the Report, and not necessarily the PSC. The PSC discussed the processfor the ongoing development of this project and agreed that it should be devel-oped in two components as follows: • The development of an IPSAS on the comparison of budget and actual (“ex-

post” budget reporting) should be actioned as a priority project. A first draftof an Exposure Draft (ED) is to be prepared for consideration by the PSC atits next meeting; and

• The development of an ED on the “ex-ante” reporting of budget informationat the time the budget is approved is a longer term project and should beprogressed after the PSC has considered a detailed project brief which out-lines specific matters to be addressed. It is anticipated that project brief willbe prepared for consideration at the PSC’s first meeting in 2005.

Accounting for Development Assistance Under the Cash Basis of Accounting Mr. Ian Mackintosh, Chair of the Project Advisory Panel (PAP) and Mr.

Charles Coe, consultant, were present at the meeting and advised the PSC thatthe draft ED had been circulated to PAP members, that responses received todate were included in the PSC’s Agenda and identified key issues raised inthose and an additional response. Members reviewed the draft ED focusing onissues raised by the PAP, particularly in respect of: key definitions; whether thescope of the project should be extended to deal with external assistance, whatseparate disclosures should be required; and practical issues related to the avail-ability of information to satisfy the disclosure requirements. Members noted


that Mr. Coe would make a presentation on the draft ED to a meeting of theOECD Joint Venture on Public Financial Management, which comprises allOECD countries, developing countries, and the Multi-lateral DevelopmentBanks (MDBs). Mr. Coe advised that the ED would be further developed fol-lowing input from that meeting and ongoing consultation with the PAP, and an updated draft ED would be presented to the PSC for approval to issue at the PSC’s next meeting. Convergence with International Financial Reporting Standards (IFRSs) issued by the IASB

The PSC considered a staff paper on a proposed strategy for the PSC’sIAS/IFRS convergence program. Major features of the proposed strategyincluded establishment of a stable platform of IPSASs for the medium term,adopting without change key IASs/IFRSs for which there were no public sectorreasons to depart, developing new IPSASs where the requirements of anIAS/IFRS needed amendment for application to the public sector, and issuingEnglish, French and Spanish versions of the second generation IPSASs at thesame time. To ensure the PSC’s due process was complied with, and that link-ages with the PSC’s public sector specific projects were recognized, the paperproposed that the full suite of “second generation” IPSASs would not be onissue until January 2008, for application on January 2009. Convergence of IPSASs with GFS and ESA 95

The PSC considered a project brief for the development of an IPSAS encour-aging disclosure of information about the General Government Sector in whole-of-government general purpose financial statements. The PSC discussed keyfeatures of the project brief and directed staff to further develop the project brieffollowing input from the Project Advisory Panel. An updated project brief is tobe presented to the PSC’s next meeting. The PSC noted that staff was develop-ing a project brief for the development of an IPSAS on a comprehensive reportof financial performance that distinguished between transactions and other eco-nomic flows. The PSC confirmed that the project brief should be developedafter consultation with the IASB on their project on reporting financial performance/comprehensive income.

PSC MEMBERS 2004 FRANCE—Philippe Adhémar (Chair), Conseiller Maître à la Cour des

Comptes. UNITED KINGDOM—Mike Hathorn (Vice Chair), Partner, MooreStephens, United Kingdom. ARGENTINA—Carmen Palladino, ConsultantInterAmerican Development Bank. AUSTRALIA—Wayne Cameron, Auditor-General, State of Victoria. CANADA—Rick Neville, Vice-President and ChiefFinancial Officer, Royal Canadian Mint. GERMANY—Norbert Vogelpoth,Partner, PwC Deutsche. ISRAEL- Zvi Chalamish, Deputy Accountant General,Ministry of Finance. JAPAN—Ryoko Shimizu, Partner, PwC Japan.MALAYSIA—Mohd. Salleh

Mahmud, Deputy Accountant-General, Malaysia. MEXICO—Javier PérezSaavedra, Subdirector de control de Calidad, Petroleos Mexicano. NETHER-LANDS—Peter Bartholomeus, Director, Government Audit Policy Department,Ministry of Finance. NEW ZEALAND—Greg Schollum, Chief Financial Officer,Greater Wellington Regional Council. NORWAY—Tom Olsen, Partner, PwCNorway. SOUTH AFRICA—Terence Nombembe, Deputy Auditor-General ofSouth Africa and CEO of the Office of the Auditor-General of South Africa.

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UNITED STATES OF AMERICA—Ron Points, Manager, FinancialManagement for East Asia and Pacific Region, World Bank.

PSC OBSERVERS 2004 Asian Development Bank (ADB), European Union (EU), International

Accounting Standards Board (IASB), International Monetary Fund (IMF),International Organisation Of Supreme Audit Institutions—Committee onAccounting Standards (INTOSAI-CAS), Organisation For Economic Co-Operation And Development (OECD), United Nations/United NationsDevelopment Programme (UN/UNDP) and the World Bank.

INTERNATIONAL PUBLIC SECTOR ACCOUNTING STANDARDS(IPSASs—Accrual Basis) IPSAS 1 Presentation of Financial Statements sets out the overall considera-tions for the presentation of financial statements, guidance for the structure ofthose statements and minimum requirements for their content under the accrualbasis of accounting. IPSAS 2 Cash Flow Statements requires the provision of information about thechanges in cash and cash equivalents during the period from operating, invest-ing and financing activities. IPSAS 3 Net Surplus or Deficit for the Period, Fundamental Errors and Changesin Accounting Policies specifies the accounting treatment for changes inaccounting estimates, changes in accounting policies and the correction of fun-damental errors, defines extraordinary items and requires the separate disclo-sure of certain items in the financial statements. IPSAS 4 The Effects of Changes in Foreign Exchange Rates deals with account-ing for foreign currency transactions and foreign operations. IPSAS 4 sets outthe requirements for determining which exchange rate to use for the recognitionof certain transactions and balances and how to recognize in the financial state-ments the financial effect of changes in exchange rates. IPSAS 5 Borrowing Costs prescribes the accounting treatment for borrowingcosts and requires either the immediate expensing of borrowing costs or, as anallowed alternative treatment, the capitalization of borrowing costs that aredirectly attributable to the acquisition, construction or production of a qualify-ing asset. IPSAS 6 Consolidated Financial Statements and Accounting for ControlledEntities requires all controlling entities to prepare consolidated financial state-ments which consolidate all controlled entities on a line by line basis. TheStandard also contains a detailed discussion of the concept of control as itapplies in the public sector and guidance on determining whether control existsfor financial reporting purposes. IPSAS 7 Accounting for Investments in Associates requires all investments inassociates to be accounted for in the consolidated financial statements using theequity method of accounting, except when the investment is acquired and heldexclusively with a view to its disposal in the near future in which case the costmethod is required. IPSAS 8 Financial Reporting of Interests in Joint Ventures requires proportion-ate consolidation to be adopted as the benchmark treatment for accounting forsuch joint venturers entered into by public sector entities. However, IPSAS 8


also permits—as an allowed alternative—joint ventures to be accounted forusing the equity method of accounting. IPSAS 9 Revenue from Exchange Transactions establishes the conditions for therecognition of revenue arising from exchange transactions, requires such rev-enue to be measured at the fair value of the consideration received or receivableand includes disclosure requirements. IPSAS 10 Financial Reporting in Hyperinflationary Economies describes thecharacteristics of a hyperinflationary economy and requires financial statementsof entities which operate in such economies to be restated. IPSAS 11 Construction Contracts defines construction contracts, establishesrequirements for the recognition of revenues and expenses arising from suchcontracts and identifies certain disclosure requirements. IPSAS 12 Inventories defines inventories, establishes measurement require-ments for inventories (including those inventories which are held for distribu-tion at no or nominal charge) under the historical cost system and includes dis-closure requirements. IPSAS 13 Leases establishes requirements for the accounting treatment of operating and finance leasing transactions by lessees and lessors. IPSAS 14 Events After the Reporting Date establishes requirements for thetreatment of certain events that occur after the reporting date, and distinguishesbetween adjusting and non-adjusting events. IPSAS 15 Financial Instruments: Disclosure and Presentation establishes requirements for the presentation of on-balance-sheet financial instruments andidentifies the information that should be disclosed about both on-balance-sheet(recognized) and offbalance-sheet (unrecognized) financial instruments. IPSAS 16 Investment Property establishes the accounting treatment, and relateddisclosures, for investment property. It provides for application of either a fairvalue or historical cost model. IPSAS 17 Property, Plant and Equipment establishes the accounting treatmentfor property, plant and equipment, including the basis and timing of their initialrecognition, and the determination of their ongoing carrying amounts and relat-ed depreciation. It does not require or prohibit the recognition of heritage assets. IPSAS 18 Segment Reporting establishes requirements for the disclosure offinancial statement information about distinguishable activities of reportingentities. IPSAS 19 Provisions, Contingent Liabilities and Contingent Assets establishesrequirements for the recognition of provisions, and the disclosure of contingentliabilities and contingent assets. IPSAS 20 Related Party Disclosures establishes requirements for the disclosureof transactions with parties that are related to the reporting entity includingMinisters, senior management, and their close family members. IPSAS 21 Impairment of Non-Cash-Generating Assets establishes requirementsfor determining whether an asset is impaired, for the recognition and reversal ofimpairment losses, and for the disclosures to be made in respect of impairedassets. (The application date is still to be finalized)Glossary of Defined Terms (IPSAS 1-IPSAS 20) identifies the terms defined inIPSASs on issue at 31 December 2003.

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CASH BASIS IPSAS AND TRANSITIONAL GUIDANCE CASH BASIS IPSAS Financial Reporting Under the Cash Basis of Accountingis a comprehensive IPSAS on financial reporting under the cash basis. It estab-lishes requirements for the preparation and presentation of a statement of cashreceipts and payments and supporting accounting policy notes. It also includesencouraged disclosures which enhance the cash basis report. IFAC PSC Study 14 Transition to the Accrual Basis of Accounting: Guidancefor Governments and Government Entities 2nd Edition (December 2003): identi-fies key issues to be addressed and alternate approaches that can be adopted in implementing the accrual basis of accounting in an efficient and effectivemanner in the public sector.

INVITATIONS TO COMMENT (Issued January 2004) ITC Accounting for Social Policies of Governments deals with accounting forsocial policies of governments. The ITC proposes a conceptual model for therecognition and measurement of social policy obligations derived from conceptsimplicit in existing IPSASs, particularly IPSAS 19. This conceptual model is thenapplied to a variety of social policy obligations, including the provision ofhealth care, education, social welfare benefits and aged pensions. The ITC alsoproposes disclosure requirements for social policy obligations. The commentperiod closed 30 June 2004. ITC Revenue from Non-Exchange Transactions (Including Taxes and Transfers)deals with the recognition and measurement of revenue from non-exchangetransactions including taxes of various kinds, and transfers including grants,appropriations, gifts, bequests and fines. The ITC proposes an “assets and liabil-ities” model for the recognition of revenue from non-exchange transactionsbased on the definition of revenue already provided in IPSASs. The ITC demonstrates the application of this model to different classes of revenue. The comment period closed 30 June 2004.

RESEARCH REPORT (Issued May 2004) Budget Reporting (May 2004). The primary objective of this Research Report is to determine if an IPSAS should be issued on budget reporting.

The PSC Update is prepared by staff after each meeting of the PSC with the aim of providing a timely report on the progress of PSC projects. The viewsexpressed in this document may not necessarily reflect the final views of theCommittee or of individual members.

Next PSC Meeting: New Delhi, India, November 1–4, 2004. For further infor-mation please contact: Paul Sutcliffe, PSC Technical Director, [email protected] Matthew Bohun, PSC Technical Manager, [email protected].


International Consortium on Governmental Financial Management

Membership ApplicationWorking globally with governments, organizations, and individuals, the InternationalConsortium on Governmental Financial Management is dedicated to improving financialmanagement by providing opportunities for professional development and informationexchange.

1. Enclosed are dues for calendar year _______. These dues are in payment for member-ship as a (please check appropriate category):_____Sustaining Member ($1,000)

_____ Organization Member ($250)

_____ Organization Member* (150)

_____ Individual Member ($100)

_____ Individual Member* ($50)

2. Organization:

3. Name and Title (individual member/contact person for sustaining and organizationmember):

4. Mailing Address:

Street/Post Box

City

Province/State

Postal/Zip Code and COUNTRY

5. Telephone: Fax:

6. E-mail/Internet:

* A special discount is offered to developing countries, countries with economies in transi-tion and regional groups/organizations in such countries to encourage their participation.This discount is available to all countries other than Australia, Canada, China, Egypt,European countries (except transition economies) India, Iran, Israel, Japan, Kuwait,Libya, Mexico, New Zealand, Nigeria, Oman, Saudi Arabia, United Arab Emirates, USA,Russia, and Venezuela.

Return this form and a check or money order in the appropriate amount to the International Consortium on Governmental Financial Management

444 North Capitol Street-Suite 234

Washington, DC 20001 USA

If you have questions, please call the ICGFM at +202.624.5451, or fax +202.624.5473.Additional information is also available on the website: www.icgfm.org.

107August 2004

Members of the Board of DirectorsMembers for the ICGFM Board of Directors serve a two-year term. EachSustaining Organization is represented on the Board. The NominatingCommittee solicits nominations to select six Organization Members and sixIndividual Members to fill remaining Board seats.

ICGFM Board of Directors as of July 31, 2004Sustaining Members:Association of Government Accountants (USA)Casals and Associates CPA AustraliaFree BalanceGraduate School, USDA-Government Audit Training Institute (GATI)Grant ThorntonInter-American Development Bank—Auditor GeneralInternational Business and Technical Consultants, IncInstitute of Internal Auditors National Association of State Auditors, Comptrollers and Treasurers (USA)Organization of American States—Inspector GeneralUS Agency for International Development—Inspector General US General Accounting Office The World Bank—Auditor General

Organization Members Cameroon—State Audit Office Hungary—State Audit OfficeIndia - Office of the Comptroller and Auditor GeneralInternational Monetary FundPakistan—Office of the Auditor General VACANT

Individual Members Dr. Mort Dittenhoffer (USA)Mr. James Hamilton (USA)Dr. Jesse Hughes (USA)Ms. Blandina Nyoni (Tanzania) Ms. Virginia Robinson (USA) Mrs. Linda Weeks (USA)

ICGFM Officers and Directors


ICGFM Officers (Executive Committee)ICGFM officers must be members of the Board of Directors, and they are elected for a two-year term. Officers may be re-elected to the same position or a new one. Officers are nominated by the Nominating Committee based oninput from the ICGFM members.

ICGFM Officers as of July 31, 2004President: Relmond Van Daniker (AGA)Past President: J. Graham Joscelyne (formerly w/The World Bank)Vice President: Jacquie Williams-Bridgers (USGAO)Vice President: (vacant)Vice President: Bill Taylor (IIA)Treasurer: Peter Aliferis (GATI)Secretary: Dick Willett (Grant Thornton)

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111August 2004

The International Consortium on Governmental Financial Management

444 North Capitol Street, Suite 234Washington, DC 20001 USA

www.icgfm.org

Public Fund Digest · 2017. 6. 19. · Public Fund Digest Vol. 4, No. 2 ISSN: 0736-7848 Published...

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