1. Assessment of Fiduciary Risks in the Use of Country PFM Systems for Bank-Supported Projects Presentation at the Fiduciary Forum March 2008

2. Objectives Objectives of this presentation Objectives of this presentation –Present initial ideas on assessing fiduciary risks in the use of country PFM systems –Elicit suggestions and ideas from the FM community so as to further develop the framework

3. Guiding Principles for Developing Fiduciary Risk Assessment Framework (for the use of country PFM systems) At the FM Sector Board meeting in September 2007, the following guidance was noted: At the FM Sector Board meeting in September 2007, the following guidance was noted: No new PFM diagnostic tool should be developed; make use of the existing PFM diagnostic tools No new PFM diagnostic tool should be developed; make use of the existing PFM diagnostic tools Risk-based framework should be consistent with the risk assessment framework mandated in the FM Manual Risk-based framework should be consistent with the risk assessment framework mandated in the FM Manual

4. Proposed Elements of country PFM System Budgeting Budgeting Accounting and Financial Reporting Accounting and Financial Reporting Treasury Management- Funds Flow Treasury Management- Funds Flow Internal Controls and Internal Audit Internal Controls and Internal Audit Audit Audit

5. Mapping of PEFA Indicators to Elements of the Country PFM System Map PEFA indicators to the elements of the Country PFM system (i.e. Budgeting, Accounting Financial Reporting, …etc) Map PEFA indicators to the elements of the Country PFM system (i.e. Budgeting, Accounting Financial Reporting, …etc)

6. PEFA Indicator Elements of Financial Management Budgeting PI-1 Aggregate expenditure out-turn compared to original approved budget PI-2 Composition of expenditure out-turn compared to original approved budget PI-4 Stock of expenditure arrears and monitoring of expenditure arrears PI-5 Classification of the Budget PI-10 Public Access to Key Fiscal Information Accounting and Financial Reporting PI-7 Extent of unreported government operations PI-23 Availability of information on resources received by service delivery units PI-24 Quality and timeliness of in-year budget reports PI-25 Quality and timeliness of annual financial statements Proposed Mapping of PEFA indicators to elements of PFM system

7. Treasury Management-Funds Flow PI-16 Predictability in the availability of funds for commitment of expenditures PI-17 Recording and management of cash balances, debt and guarantees Internal Controls and Internal Audit 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 PI-22 Timeliness and regularity of accounts reconciliation PI-27 Legislative scrutiny of the annual budget law PI-28 Legislative scrutiny of external audit reports External Audit PI-26 Scope, nature and follow up of external audit Proposed Mapping of PEFA indicators to elements of PFM system

8. Conversion of PEFA Scores into Fiduciary Risk PEFA Scores to be converted into fiduciary risk rating of high, substantial, moderate, and low PEFA Scores to be converted into fiduciary risk rating of high, substantial, moderate, and low

9. Description for PI-18 Effectiveness of Payroll controlsPEFA RatingFiduciary Risk Personnel database and payroll are directly linked to ensure data consistency and monthly reconciliation. Required changes to the personnel records and payroll are updated monthly, generally in time for the following months payments. Retroactive adjustments are rare (if reliable data exists, it shows corrections in max. 3% of salary payments). Authority to change records and payroll is restricted and results in an audit trail. A strong system of annual payroll audits exists to identify control weaknesses and/or ghost workers. ALow Personnel data and payroll data are not directly linked but the payroll is supported by full documentation for all changes made to personnel records each month and checked against the previous months payroll data. 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. Authority and basis for changes to personnel records and the payroll are clear. A payroll audit covering all central government entities has been conducted at least once in the last three years (whether in stages or as one single exercise). BModerate Conversion of PEFA rating into Fiduciary Risk Rating

10. DescriptionPEFA RatingFiduciary Risk A personnel database may not be fully maintained but reconciliation of the payroll with personnel records takes place at least every six months. Up to three months delay occurs in processing changes to personnel records and payroll for a large part of changes, which leads to frequent retroactive adjustments. Controls exist, but are not adequate to ensure full integrity of data. Partial payroll audits or staff surveys have been undertaken within the last 3 years. CSubstantial Integrity of the payroll is significantly undermined by lack of complete personnel records and personnel database, or by lacking reconciliation between the three lists. Delays in processing changes to payroll and nominal roll are often significantly longer than three months and require widespread retroactive adjustments. Controls of changes to records are deficient and facilitate payment errors. No payroll audits have been undertaken within the last three years. DHigh Conversion of PEFA rating into Fiduciary Risk Rating

11. PIElement of the country PFM systemPEFA Score Fiduciary Risk Budgeting PI-1Aggregate expenditure out-turn compared to original approved budget BModerate PI-2Composition of expenditure out-turn compared to original approved budget BModerate PI-4Stock of expenditure arrears and monitoring of expenditure arrears B+Moderate PI-5Classification of the BudgetALow PI-10Public Access to Key Fiscal InformationBModerate Accounting and Financial Reporting PI-7Extent of unreported government operationsD+High PI-23Availability of information on resources received by service delivery units BModerate PI-24Quality and timeliness of in-year budget reportsC+Substantial PI-25Quality and timeliness of annual financial statementsD+High Sample Summary Risk Table

12. PIElement of the country PFM systemPEFA Score Fiduciary Risk Treasury Management-Funds Flow PI-16Predictability in the availability of funds for commitment of expenditures D+High PI-17Recording and management of cash balances, debt and guarantees BModerate Internal Controls and Internal Audit PI-18Effectiveness of payroll controlsD+High PI-19Competition, value for money and controls in procurement D+High PI-20Effectiveness of internal controls for non-salary expenditure C+Substantial PI-21Effectiveness of internal auditC+Substantial PI-22Timeliness and regularity of accounts reconciliationALow PI-27Legislative scrutiny of the annual budget lawB+Moderate PI-28Legislative scrutiny of external audit reportsD+High External Audit PI-26Scope, nature and follow up of external auditD+High

13. Element of the country PFM system Risk RatingRisk Mitigating MeasuresEarliest date by which time risk mitigating measures will begin to have an impact (month & year) Residual Risk Rating BudgetingModerate(a) (b) (c) Accounting and Financial Reporting Substantial(a) (b) (c) Treasury Management-Funds Flow Substantial(a) (b) (c) Internal Controls and Internal Audit Substantial(a) (b) (c) External AuditHigh(a) (b) (c) Overall RiskSubstantial Sample Risk Matrix

14. Seek Your Views General: What are your broad views on the proposed framework? What are your broad views on the proposed framework?Specific: How do we factor in governance and corruption? How do we factor in governance and corruption? Should we use judgment or mathematical aggregation to arrive at the overall risk for the component? Should we use judgment or mathematical aggregation to arrive at the overall risk for the component?