1. Unit 2– PFM domains and sequencing of reforms Budget execution 1 Module 2.2. Expenditure and accounting cycle

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

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

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

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

6. Two different approach: Francophone countries. oF ex-ante controls 6

7. 7 Two different approaches: Anglophone countries.

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

9. Payment systems: points to consider Francophones and some anglophones (50%?): Single Treasury Account (STA): Cash centralisation Desirable for a sound treasury management Different modes Francophone: pre-eminent role of the Treasury in the controls and establishment of payment priorities Others: other versions Anglophones without STA : hundreds or thousands of Government bank accounts, poor cash control 9

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

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

12. What does the PEFA tell us? PI-16 Predictability in the availability of funds for commitment of expenditures PI-17. Recording and management of cash balances, debt and guarantees PI-18 Effectiveness of payroll controls PI-19 Competition, value for money and controls in procurement PI-20 Effectiveness of internal controls for non-salary expenditure PI-21. Effectiveness of internal audit 12

13. PEFA Performance indicator: PI-16 PI-16 Predictability in the availability of funds for commitment of expenditures Dimensions assessed and grade : –Extent to which cash flows are forecast and monitored: A cash flow forecast is prepared for the fiscal year, but is not (or only partially and infrequently) updated : C –Reliability and horizon of periodic in-year information to MDAs on ceilings for expenditure commitment: MDAs are provided reliable information on commitment ceilings at least quarterly in advance: B –Frequency and transparency of adjustments to budget allocations, which are decided above the level of management of MDAs : Significant in-year adjustments to budget allocations take place only once or twice in a year and are done in a fairly transparent way : B 13

14. PI-17. Recording and management of cash balances, debt and guarantees Dimensions assessed and grade : (i) Quality of debt data recording and reporting : Grade B, Domestic and foreign debt records are complete, updated and reconciled quarterly, comprehensive management and statistical reports are produced at least annually. (ii) Extent of consolidation of the government’s cash balances : Grade B, Most cash balances calculated and consolidated at least weekly (iii) Systems for contracting loans and issuance of guarantees.. : Grade B, Central government’s contracting of loans and issuance of guarantees are made within limits for total debt and total guarantees, and always approved by a single responsible government entity 14 PEFA Performance indicator: PI-17

15. PI-20 Effectiveness of internal controls for non-salary expenditure Dimensions assessed and grade : Effectiveness of expenditure commitment controls: grade B, in place Comprehensiveness, relevance and understanding of other internal control rules/ procedures: Grade C; controls may be deficient in areas of minor importance Degree of compliance with rules for processing and recording transactions : Grade B 15 PEFA Performance indicator: PI-20

16. PI-21. Effectiveness of internal audit Dimensions assessed and grade (i) Coverage and quality of the internal audit function: Grade C, The function is operational for at least the most important central government entities and undertakes some systems review (at least 20% of staff time), but may not meet recognized professional standards (ii) Frequency and distribution of reports : Grade A, Reports adhere to a fixed schedule and are distributed to the audited entity, ministry of finance and the SAI. (iii) Extent of management response to internal audit findings : Grade C, a fair degree of action taken by many managers on major issues but often with delay Remarks: (i) refers to an audit system culture that is rare or none existant in francophone DC and rare in other DC 16 PEFA Performance indicator: PI-21

17. The PIFC (Public Internal Financial Control) Promoted by the European Comission in Eastern Europe Principles Manager responsibility Independent internal audit Central Harmonization Unit – CHU Organisation: Internal audit systems include risk identification and are under the responsibility of the managers Independent internal audit of managers and inspections are put in place by the ministry The Ministry of Finance is in charge of coordination and unification of the PIFC system 17

18.  Expenditure cycle  Payroll management and procurement  Financial monitoring  Accounting bases 18 Module 2.2. Outline 18

19. Procurement – Key points Transparency from the bidding stage to contract award Guarantee competition: adequate legislative and regulatory framework Avoid corruption:  Rules to avoid corruption: –Separation of authority, rotation of positions –Appeal procedures –Audit of the procurement process Adequate infrastructure Adequate organisational dispositions 19

20. PEFA performance indicator PI-19 PI-19 Competition, value for money and controls in procurement Dimensions assessed and grade (i) Transparency, comprehensiveness and competition in the legal and regulatory framework : Score B (ii) Use of competitive procurement methods: Score C; for at least 60% of the value of contracts awarded (iii) Public access to complete, reliable and timely procurement information: Score B iv) Existence of an independent administrative procurement complaints system: Grade D 20

21. 21 Personnel management Personnel management and payroll Very centralised in francophone countries, variable situation in other countries But, weaknesses exist in all systems “ghosts”, personnel data files incoherent with compensation Periodical census, often unsatisfactory results 21

22. 22 PEFA performance indicator : PI-18 PI-18 Effectiveness of payroll controls Dimensions assessed and grade (i) Degree of integration and reconciliation between personnel records and payroll data. : Grade C, reconciliation every 6 months (ii) Timeliness of changes to personnel records and the payroll : Grade B, Up to three months ‟ delay occurs in updating of changes to the personnel records and payroll, but affects only a minority of changes. Retroactive adjustments are made occasionally. (iii) Internal controls of changes to personnel records and the payroll: grade C, Controls exist, but are not adequate to ensure full integrity of data. (iv) Existence of payroll audits to identify control weaknesses and/or ghost workers: grade C, Partial payroll audits or staff surveys have been undertaken within the last 3 years 22

23.  Expenditure cycle  Payroll management and procurement  Financial monitoring  Accounting bases 23 Module 2.2. Outline 23

24. Financial monitoring  A necessary condition to move forward  Check its effectiveness  Occurrence  Delays  Reliability  Coverage 24

25. Occurrence and deadlines: basics Internally financed expenditure: monthly Maximum period <1 month Quarterly or semi-annual basis, depending on the project aids End-of-year accounts Maximum period of 5 months for final accounts, and only 2 months for provisional accounts 25

26. Reliability How to tell? Check comparison procedures Between banks, between the Treasury and authorising officers Check issues related to arrears 26

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

28.  Expenditure cycle  Payroll management and procurement  Financial monitoring  Accounting bases 28 Module 2.2. Outline 28

29. Accounting Ex-post evaluation, monitoring, audit, feedback useful for preparation In African French-speaking countries, public accounting developed in the traditional way, training of public accountants in the Treasury schools, assistance from French Treasury accountants UDEAC: 1974 works to develop corporate accounting ! In English-speaking countries, accounting was relatively simple, but over the last few years, the influence of NPM has induced a greater emphasise placed on costs, statements, etc. 29

30. Accounting methods Cash-based accounting Keeps track of expenses when paid for, implementation of revenue when registered Accruals-based accounting Similar to corporate accounting Keeps track of transfers and other events when they occur. Assets, liabilities, net assets/net position, outputs and expenses Expenses are accounted for (including depreciation, inventory, etc.) 30

31. Accounting methods Depends on the country. There are many variants between the two extremes 31 Cash-based Accounting Accruals- based accounting, similar to commercial accounting Modification of the cash basis Modification of the accrual basis 31

32. Towards an accruals-based accounting? Many projets of accruals-based accounting exist –WAEMU –Syria –Etc. However, This requires a lot of effort –UK: White paper published in 1995; first "accrual” accounts published in 2002. –France: mission for accruals-based accounting initiated in 1996; first publication in 2007. Risks of creative accounting Will the financial statements be more transparent for the Parliament? 32

33. Two important points to keep in mind Liabilities accounts (not including pension rights) Accruals-based accounting of public debt »Commonly used (in annex systems) Recording expenditures as soon as this debt is confirmed (liquidation) Financial assets accounts Eg., loans to companies Methods sometimes designated as “modified accrual accounting” 33

34. The basics The accounting system must enable to secure the basics in terms of budget preparation, control, reporting, and complying to accounts republishing obligations as defined by the country’s regulations This encompasses: An adequate budgetary classification (cf. module 1.2) Registration od expenditures at the stage of commitment and payment Debt accounting though accrual accounting Reports on arrears and other liabilities A comprehensive coverage of the accounting system Reports on financial assets An assets register at least for physical assets prone to be misappropriated or wasted 34

35. Beyond basics General accounting Anglophone and Francophone –Implementation of a modified accrual system encompassing liabilities and financial assets ->Anglophone: double-entry book-keeping Transition countries –Unification of the accruals-based accounting of the Ministries with the cash-based accounting of the Treasury Estimate for possible liabilities Then, accruals-based accounting for some service agencies 35

36. Key message Budgetary procedures must guarantee that the budget is credible and the expenditure cycle is smooth. Reforms must account for both these requirements Audit and security procedures are essential for personnel data files management A comprehensive financial monitoring of expenditure is a necessary condition for a reliable PFM system 36