1. ADB Grant 0133-CAM: Public Financial Management in Rural Development Ministries (Component 1) Day 2: April 27, 2010 Assuring Financial Compliance Budget Execution, April 26 - 30, 2010

2. ADB Grant No.0133-CAM/Component 1: PFMRD Content 1.Authority and responsibility (Who’s in charge) 2.Receipt of revenue 3.Release of funds 4.Commitment control (Monitoring forward commitment) 5.Authorization of payments, payments system and accounting 6.Compliance control 7.Internal/external audits 8.Achievement of budget control by parliament (settlement law) 2 Session 2 Assuring Financial Compliance

3. ADB Grant No.0133-CAM/Component 1: PFMRD Budget execution covers both: 1.Activities related to the implementation of policies; and 2.Tasks related to the administration of the budget. Both central ministries and the spending agencies are involved in these tasks. – The distribution of responsibilities in budget organization should be organized according to their respective areas of responsibility and accountability. 3 1. Authority and responsibility (Who’s in charge?)

4. There is a need to clearly define and coordinate the roles of: Central Ministries (MEF, MOP, etc) Line Ministry head offices Line Ministry subordinate agencies (provincial offices, PIUs, etc) 4 1. Authority and responsibility (Who’s in charge?)

5. ADB Grant No.0133-CAM/Component 1: PFMRD The responsibilities of Central Ministries for budget execution are: Concerning budget administration: – administering the system of release of funds, monitoring expenditure flow, – preparing in-year budget revisions, – managing the central payment system and supervising government bank accounts, – administering the central payroll system (if any), – consolidating the accounts and preparing progress reports. 5 1. Authority and responsibility (Who’s in charge?)

6. ADB Grant No.0133-CAM/Component 1: PFMRD The responsibilities of Central Ministries for budget execution are: (continued) Concerning policies: – reviewing progress independently or jointly with spending agencies, – identifying policy revisions where appropriate, and eventually proposing to the Cabinet reallocations of appropriations within the framework authorized by Parliament and the Legislature. 6 1. Authority and responsibility (Who’s in charge?)

7. The responsibilities of Spending Agencies for budget execution are the following: Concerning budget administration: – allotting funds among their subordinate units, – making commitments, – purchasing and procuring goods and services, – verifying the goods and services acquired, – preparing requests for payment (and making payments, if the payment system is not centralized), – preparing progress reports, monitoring performance indicators, and keeping books. 7 1. Authority and responsibility (Who’s in charge?)

8. ADB Grant No.0133-CAM/Component 1: PFMRD The responsibilities of Spending Agencies for budget execution are the following: (continued) Concerning policy implementation: – periodically reviewing the implementation of the program (including the monitoring of performance indicators), – identifying problems and implementing adequate solutions, and – reallocating resources among sector programs (but within the policy framework of the budget). 8 1. Authority and responsibility (Who’s in charge?)

9. ADB Grant No.0133-CAM/Component 1: PFMRD There are many types of revenue, e.g. IMF-GFS2001 – Taxes; – Social security contribution; – Donations; – Income from property; – Sale of goods and services; – Fines, penalties and forfeitures; – Voluntary conveyances other than donations; – Miscellaneous and unidentified revenue 9 2. Receipt of Revenue

10. ADB Grant No.0133-CAM/Component 1: PFMRD Cambodia: Taxes and duties, fees and other equivalent revenue, non tax revenue, fines and other pecuniary penalties, as well as other authorized incomes.... (Article 26, Sub- decree 82). – The full amount of revenue is brought in without any offsetting between revenue and expenditure (article 27, sub-decree 82), this reminds us of the principle of universality. 10 2. Receipt of Revenue (continued)

11. ADB Grant No.0133-CAM/Component 1: PFMRD – Under any circumstance, revenues shall be validated before being collected. The purpose of validation is to determine the debt amount to be paid by the persons liable for the payment (article 27, sub-decree 82); – Any revenue or debt validated shall be subject to a revenue order (article 27, sub-decree 82); – The passing of revenue orders to the assigned accountant constitutes the collection enforcement; this process usually takes the form of a periodic summary statement that is used for entry in management accounting (i.e. in the authorizing officer’s accounting) and forwarded to the accountant for take over. Supporting documents are to be attached. 11 2. Receipt of Revenue (continued)

12. ADB Grant No.0133-CAM/Component 1: PFMRD Recording Revenues – After checking and signing a revenue order transmittal form, the accountant is to check the identification of the debtor, examine the supporting documents and check to see that revenue order is in due form (article 13, sub-decree 82) Collection Revenue – The public accountant then notifies the debtor of the amounts to be paid and receives the remittance; – In the absence of amicable collection, enforced collection action is to be taken by means of legal procedures under a legally binding document (article 30, sub-decree 82); – Payment may have been carried out automatically; the public accountant then receives them, notifies the authorizing officer and requests an adjustment receipt order from him 12 2. Receipt of Revenue (continued)

13. ADB Grant No.0133-CAM/Component 1: PFMRD To ensure effective budget implementation, the authority to spend must be given to agencies on time. Funds should be released in conformity with budget authorizations. However, for good cash management, the releases of appropriations must be regulated. 13 3. Release of Funds

14. ADB Grant No.0133-CAM/Component 1: PFMRD a. Day-to-day cash rationing In some countries, funds are released to line ministries through day-to-day cash rationing because of fiscal problems or an overestimated budget. 14 3. Release of Funds – weak systems

15. ADB Grant No.0133-CAM/Component 1: PFMRD b. Budget implementation plans and cash plans To release appropriations, many countries slice the budget into four quarterly parts, or release one- twelfth of the budgeted amount every month, or prepare a budget implementation plan. Whatever method is adopted, the system for releasing funds should ensure effective and efficient implementation of the budget and avoid generating of arrears. 15 3. Release of Funds – stronger systems

16. ADB Grant No.0133-CAM/Component 1: PFMRD b. Budget implementation plans and cash plans Hence, the following elements need to be taken into account: – To prepare the implementation of programs, agencies should know in advance the funds that will be allocated to them. – Funds must be released in due time, without delay. – In case of cash problems, the plan for releasing funds must be revised, but the revised plan should be communicated to the line ministries instead of making a non-transparent revision by delaying the release of funds. 16 3. Release of Funds – stronger systems

17. ADB Grant No.0133-CAM/Component 1: PFMRD b. Budget implementation plans and cash plans Regulating cash flows without regulating commitments generates arrears. – In some cases, when monthly cash limits are established, it is unclear whether spending units are allowed to make commitments up to the ceiling given in the budget appropriations or up to the monthly cash limits. Financial needs of ongoing commitments must be taken into account. – Adjustment of commitments needs time. 17 3. Release of Funds – stronger systems

18. ADB Grant No.0133-CAM/Component 1: PFMRD Monitoring and recording of multiyear commitments is necessary, especially when the investment budget is large. Budget overspends are often due to badly estimated multiyear commitments in the budget. – Multiyear expenditure programming tools, in which new prospects are included in the second and the third years in an indicative manner, often do not provide an adequate framework for administering these multiyear commitments. 18 4. Commitment Control (Monitoring forward commitment)

19. ADB Grant No.0133-CAM/Component 1: PFMRD To control commitments, a multiyear expenditure program must be detailed enough to identify the activities in multiyear contracts. A ceiling for forward commitments should be established. This could take the form of: – a commitment authorization included in the budget; – a multiyear appropriation; or – authorizations derived from a multiyear expenditure programming document. The commitments are authorized up to these ceilings and should be reported in the same way as the uses of annual appropriations. 19 4. Commitment Control (Monitoring forward commitment)

20. ADB Grant No.0133-CAM/Component 1: PFMRD Payment and Accounting Controls Arrangements for payment processing and accounting control vary from one country to another. – In many countries, a Paymaster Office is responsible for making accounting controls and payments. This office is also generally responsible for cash management, and forms the Treasury Department – In other countries, payments are processed by line ministries, but cash and bank accounts are controlled by the Treasury Department which is responsible for cash management. 20 5. Authorization of Payments (payment system and accounting)

21. ADB Grant No.0133-CAM/Component 1: PFMRD a. Limits of accounting controls Many budget systems focus on accounting control to ensure compliance. This approach is insufficient. Accounting controls can prevent blatant cases of misuse of appropriations. However, accounting controls do not prevent the accumulation of arrears since obligations are made earlier. They do not prevent the commitment of expenditures that are not authorized in the budget. 21 5. Authorization of Payments (payment system and accounting)

22. ADB Grant No.0133-CAM/Component 1: PFMRD b. Centralized or decentralized accounting controls? Central payment systems – ensure that accounting is done by a staff of qualified accountants – allow the central agencies to ensure that payments are appropriately documented and that every expenditure fits the purpose stated in the budget. This explains why such centralized controls are sometimes seen as the cornerstone of fiscal discipline. 22 5. Authorization of Payments (payment system and accounting)

23. ADB Grant No.0133-CAM/Component 1: PFMRD b. Centralized or decentralized accounting controls? In other countries, spending units maintain accounts with commercial banks and deal directly with their banks when making payments. – This has the advantage of avoiding delays in payment processing – However, this arrangement could impede fiscal discipline since commercial banks could grant overdraft facilities to spending units and the Ministry of Finance cannot monitor payment transactions, and idle balances are kept in the bank accounts of line ministries. 23 5. Authorization of Payments (payment system and accounting)

24. ADB Grant No.0133-CAM/Component 1: PFMRD c. Partly decentralized systems When payments are processed under the control of central agencies (Ministry of Finance, Treasury, etc.), locating the accounting offices within the line ministries is preferable to locating them in a separate central treasury office. This reduces delays in processing invoices and requests for payment, and the risk of distortions in budget execution. 24 5. Authorization of Payments (payment system and accounting)

25. ADB Grant No.0133-CAM/Component 1: PFMRD c. Partly decentralized systems A system of ‘revolving accounts’ or ‘revolving cash limits’ can satisfy requirements for accounting control and reporting. – Funds are periodically released once the spending agencies produce statements and relevant documents of the payments made in the previous period. In some countries, this system is used on a nationwide scale. However, it may present inconveniences for cash management. 25 5. Authorization of Payments (payment system and accounting)

26. ADB Grant No.0133-CAM/Component 1: PFMRD The basic compliance controls during budget execution are the following: 1. At the commitment stage (financial controller), it is necessary to verify that: (i) the proposal to spend money has been approved by an authorized person; (ii) money has been appropriated for the purpose in the budget and sufficient funds remain available in the proper category expenditure; and (iii) the expenditure is proposed under the correct category. 26 6. Compliance Controls

27. ADB Grant No.0133-CAM/Component 1: PFMRD The basic compliance controls during budget execution are the following: 2. When goods and services are delivered (verification), the documentary evidence that the goods have been received and that the service was actually performed must be verified. 27 6. Compliance Controls

28. ADB Grant No.0133-CAM/Component 1: PFMRD The basic compliance controls during budget execution are the following: 3. Before payment is made (accounting control), it is necessary to confirm that: (i) a valid obligation exists; (ii) a competent person has signified that the goods have been received and that the service has been performed as expected; (iii) the invoice and other documents requesting payment are correct and suitable for payment; and (iv) the creditor is correctly identified. 28 6. Compliance Controls

29. ADB Grant No.0133-CAM/Component 1: PFMRD The basic compliance controls during budget execution are the following: 4. After final payment is made (audit), it is necessary to examine and scrutinize any expenditure and report any irregularity. 29 6. Compliance Controls

30. ADB Grant No.0133-CAM/Component 1: PFMRD Generally within any organization, there is a separation of duties for: 1.Authorizing expenditures, approving contracts and placing orders; 2.Certifying that goods have been received and that services have been provided as specified; and 3.Authorizing payments. Some of these activities may be performed by the same person. In most cases, however, the same person does not make the payment and perform the other activities or control them. This arrangement allows better internal control. 30 6. Compliance Controls

31. ADB Grant No.0133-CAM/Component 1: PFMRD Within governments, this separation of duties may govern the distribution of responsibilities between the spending agencies and the central agencies (Ministry of Finance, Treasury, etc.). Depending on the country, controls may be either internal to the relevant line ministries or performed by a central ministry (Ministry of Finance, Treasury, etc). 31 6. Compliance Controls

32. ADB Grant No.0133-CAM/Component 1: PFMRD “Audit is...part of a regulatory system whose aim is to reveal deviations from accepted standards and violations of the principles of legality, efficiency, effectiveness and economy of financial management early enough to make it possible to take corrective action in individual cases, to make those accountable accept responsibility, to obtain compensation, or to take steps to prevent—or at least render more difficult—such breaches.“ (INTOSAI) 32 7. Internal/External Audits

33. ADB Grant No.0133-CAM/Component 1: PFMRD External auditors report to Parliament. They are independent of the government executive. Best practice external auditing is governed by International Standards on Auditing. Internal auditors report to the executive. They are part of the government’s system of internal control. Their work is determined by the organisation they report to (e.g. Line Ministry, or Ministry of Finance). 33 7. Internal/External Audits

34. ADB Grant No.0133-CAM/Component 1: PFMRD Effective auditing can contribute in several important ways to the management of a government's finances. It can: Detect irregularities involving the misuse of public funds Identify weaknesses in management controls Determine the reliability of reports on budget execution Identify instances and patterns of waste and inefficiency Provide reliable data about program results. 34 7. Internal/External Audits

35. ADB Grant No.0133-CAM/Component 1: PFMRD Respecting Cambodian Law of Public Financial System, 2008, the budget payment is subject to the law (Article 76 of the public financial law 2008). This point was developed in the section dealing with the budget. Income statements shall describe all surpluses and deficits incurred by the State during each management period... " (Article 112, sub- decree 82). 35 8. Achievement of Budget Control by Parliament (settlement law)

36. ADB Grant No.0133-CAM/Component 1: PFMRD Government Accounts shall be drawn up annually by the Minister of Finance, the summary account of the Administration of Finance shall comprise: – Trial balance of accounts as per results of the account aggregation by public accountants; – Development of budget revenue; – Development of budgetary expenditures showing, for each ministerial department, the amount of expenditure per chapter certified by the relevant ministry. – Development of the operations recorded in special Treasury accounts (and in annex budgets). – Development of income statements (Article 113, Sub-decree 82) Each minister shall write up an annual financial management report and certify the compliance of its own entries with the development of its department expenditures that the Minister of Finance has forwarded to him." (Article 114, Sub-decree 82) 36 8. Achievement of Budget Control by Parliament (settlement law)

37. ADB Grant No.0133-CAM/Component 1: PFMRD The management accounts of public accountants shall be forwarded to the Minister of Finance who shall submit them to the Inspectorate General of Finance for examination by June 30 of the year following the one for which they are drawn up." (Article 115, Sub-decree 82) Parliament shall pass the accounts and approve final settlement of the State budget. The draft settlement law is to be submitted to the Parliament before the end of the year following the one to which it refers. The draft settlement law shall be supported by the general statement of finance administration and the financial management reports drawn up by the ministries." (Article 116 of Sub-decree 82). The settlement law is published as like the annual budget law (Article 81, Public Financial Law, 2008) 37 8. Achievement of Budget Control by Parliament (settlement law)

38. ADB Grant No.0133-CAM/Component 1: PFMRD Complementary period Additional time is allowed to the National Treasury to close budget execution in order to regularize budget operations, which were pending at the end of each fiscal year. (End of December of each fiscal year, MEF sets the deadline for the National Treasury to accept payment orders sent by all ministries, it take more time to process the payment orders and to close budget accounts). A complementary period is given to the National Treasury to clear all payment orders - budgetary operations stop at the end of the fiscal year, accounting operations still continue in order to complete the record of all government financial transactions during the fiscal year. This means that at the end of fiscal year, data on the revenue side can be made available to decision makers, but, data on expenditure execution is not yet available, as accounting transactions will continue until the end of the complementary period. 38 8. Achievement of Budget Control by Parliament (settlement law)

39. ADB Grant No.0133-CAM/Component 1: PFMRD Complementary period (continued) In the past a three month period, i.e. a complementary period until end-March is given to the National Treasury. This resulted in the delays in the release of financial statements of the government. Moreover, some line ministries also abused the complementary period by sending the payment orders executed during the new financial year in order to use up all budget appropriations that were left not used by changing the date of budget backtracking budget execution recorded on the payment orders. Such practices resulted in lax budget control and loose budgetary discipline. At present, the Ministry of Economy and Finance only gives the National Treasury a one-month complementary period to complete accounting transactions for the last year. 39 8. Achievement of Budget Control by Parliament (settlement law)