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Public Internal Financial Control (PIFC) – a GAP Analysis

Joop Vrolijk

Noel Hepworth

SIGMA

Tbilisi, Georgia – 29 June 2015

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Content presentation

1. Context of the analysis; 2. Coverage of the gap analysis; 3. Financial management and control; What is wrong with the present system What are the main weaknesses of the present arrangements The main problems that have to be addressed

4. The responsibilities of the manager 5. The responsibilities of the head of finance/economics

department 6. Conditions that should exist prior to financial

management and control (FMC) 7. Implementing FMC 8. The benefits of FMC

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1. Context of the analysis

Association Agreement conditions affecting PIFC requires: 1. Development of a PIFC system based on the principle of

managerial accountability; 2. Foster the development of good governance; 3. Support the Central Harmonisation Unit (CHU) for PIFC

and strengthen its competences. Direct Budgetary Support (DBS) conditions: 1. CHU develops rules and procedures for FMC; 2. FMC is established and functioning, initially in ministries. (Failure to meet these conditions could lead to loss of DBS

funding.)

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1.1 Coverage of the Gap Analysis

• The gap analysis SIGMA undertook, covered both financial management and control and internal audit.

• In Georgia, good progress has been made on developing internal audit but little progress made on developing financial management and control. Therefore this presentation focuses on introducing FMC.

• Until recently, the problems with achieving progress have been complicated by weaknesses in the arrangements for the development of the Central Harmonisation Unit of the Ministry of Finance. We welcome the recent changes.

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2. Financial management and control

FMC is an advanced system which covers: • Financial control; • Managerial control • Financial management. All three elements depend for their implementation upon

the existence of managers (such as programme and sub-programme managers) who have a specific responsibility for an activity or service or programme and are responsible (accountable) for the delivery of the objectives of the activity, service or programme within budget, to time and to standard and in a manner which gives value for money.

The principal benefit from introducing FMC is improved value for money in the use of public funds as well as a better quality of financial control.

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2.1. What is wrong with the present traditional

financial control system?

The aims of the present financial control system are to ensure that budgetary control is maintained. This is essential but is not enough, because:

The focus is solely on control to ensure expenditures are in accordance with the budget, rules and regulations (compliance);

The assumption is that the budget represents an exact statement of what should be spent on a detailed item, when at best a budget is only a forecast based upon historical spending, not any sort of value for money analysis;

No financial analysis is undertaken to link a budget with any objectives or with expected performance;

Value for money is not tested or systematically challenged.

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2.2. What is the main problem with the present

arrangements?

The main problem at present is the weakness of organisational management and hence lack of managerial accountability.

The benefits of effective management are:

• Higher organisational performance - which depends upon higher performing line managers;

• Top management has a greater capacity to focus on policy and strategy;

• Improved capability to identify and respond to changing circumstances;

• Better quality governance and improved accountability – often with traditional systems there is no accountability within organisations for service delivery and quality.

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2.3. The main problems that have to be addressed

to improve management

The problems include:

• How to persuade top management to delegate (they often fear they will lose control);

• An unwillingness of officials (such as departmental heads) to accept managerial responsibility;

• A lack of coordination of public administration reform with financial reforms;

• A lack of understanding of what financial management requires and the skills needed to develop financial management:

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2.4 The responsibilities of the manager

The manager should be responsible for:

• Budget preparation, linking objectives & performance

• Performance management - to meet objectives & performance requirements;

• Financial control – including compliance with the financial regulations and with the budget;

• Financial and performance forecasting – to ensure that within the year overspending/underperformance either will not occur or its occurrence is envisaged with reasons and is forecast in advance;

• Strategic financial planning – to provide a forward look (say up to 5 years) of where present policies/decisions will lead financially;

• Achieving improved performance (i.e. value for money).

The role of the head of finance/economics department is to support the manager NOT to substitute for the manager.

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2.4.1 The responsibilities of the manager

Second level organisations

• Managers within first level organisations should have a responsibility for ensuring that second level organisations are well run, achieve their objectives and performance standards and also do so in a manner that achieves value for money.

• This means that the first level organisation should set managerial objectives and should systematically monitor the performance of second level organisations.

• Accountability should therefore exist between the management of the second level organisation and that of the first level organisation. (This may require some reorganisation where managers of first level organisations are also directly responsible for the management of second level organisations to avoid conflict of interest.)

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2.5 The responsibilities of the head of

finance/economics department

The head of the finance/economics department is to support the manager:

• With financial analyses and advice generally:

• In the preparation of the budget;

• To secure ongoing compliance with the budget and with the law and financial regulations;

• In preparing re-forecasts for the current year;

• With advice and technical analyses to enable the manager to prepare strategic financial plans;

• In monitoring second level organisations;

• By undertaking the financial analyses required to link financial and performance information, as far as possible and to identify for the manager where improvements might be made; (this will involve the development of cost accounting).

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2.5.1 The position of the head of finance/economics

department

With FMC finance has a much more central role in the management of the delivery of public services than under traditional systems.

Bookkeeping (one element only of accounting) has only a minor role: what are far more important are:

• A financial analytical capability, including development of costing;

• An understanding of forward financial planning, policy and investment analysis;

• A capability to develop and manage new financial systems;

• A capability to work with and advise managers as all levels, not least top management;

• A capacity to work with top management to develop financial policy.

This head should be well trained and be a very senior official.

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2.6. The conditions that should exist before

the full implementation of FMC

1. Clear objectives for both the organisation as a whole and each main part (e.g. at least each programme and sub programme area)

2. A specific manager is made responsible for achieving the objectives of each main part (e.g. a programme manager)

3. Each such manager is given the authority to take actions to ensure that objectives are delivered to time, to performance specification and within budget, efficiently and effectively;

4. Information and support systems and arrangements exist to allow the manager to achieve 3.

5. An accountability process exists that ensures that the manager is made responsible for what has occurred or not occurred.

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2.7. Implementing FMC

Implementing FMC is a significant reform taking some years to become fully established.

We propose a 3 stage approach with each stage preceded by pilot experiments before a full ‘roll-out’ of each stage.

The 3 stages are develop:

1. Financial control involving the managers (this should improve the quality of financial control and should reduce corruption risks and may result in some improvements in value for money because managers will become more financially aware);

2. Managerial control (this will include risk management which should also improve value for money and add to financial awareness);

3. Financial management in all its aspects in order to start the full process of improving value for money when the manager has to become fully financially aware.

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2.8 The main benefits of FMC

Primary benefit of FMC is to improve the quality of public service management; as a result:

• Delegation and accountability exists throughout public organisations;

• Greater overall financial awareness;

• Control focuses on risk and therefore more likelihood of objectives being achieved;

• Tighter control occurs of second level organisations;

• Overall improved value for money.

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2.9 The benefits to heads of organisations (1)

• More effective managerial control can be achieved than by the head making all decisions and authorising all documents;

• Focus of the head’s activity shifts to policy and strategy and away from detail;

• More time is available for supervision and the exercise of leadership;

• Routine signing of orders and invoices is delegated;

• Effective risk management becomes possible;

• The development of financial management allows the head of the organisation to develop more robust budgets and better quality forward forecasts.

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2.9 The benefits to heads of organisations (2)

• A better quality of financial information is available to support decision making through the development of financial analytical expertise using cost analysis;

• Information becomes available to help the head establish a ‘cost conscious’ culture in the organisation and in turn develop a focus on improving value for money;

• More effective budgetary management can be undertaken focussing on both expenditure and service performance, instead of a single focus on expenditure with traditional control arrangements;

• Even though the head of an organisation retains overall responsibility, the authority and responsibility of civil servants is made much sharper through the establishment of clear lines of accountability.

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Summary

• Ensure that financial reforms and public administration reforms are integrated;

• Introduce FMC in stages – we advocate 3;

• Use pilot organisations to test out each stage;

• Ensure that a management process is developed supported by clear objectives and performance standards;

• Ensure that accountability arrangements exist including for second level organisations;

• Develop the financial/economics competence and status to provide the financial advice and analyses the manager requires;

• Look for the benefits – do not regard this simply as a development of a financial control activity.

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