2004 Public Fund Digest Vol4 No2

The International Consortium on Governmental Financial Management

Public Fund Digest Volume IV, No. 2, 2004

International Consortium on Governmental Financial Management 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. To achieve the above mission, the Consortium’s international activities include:

1. Providing comprehensive professional development activities in the fields of accounting, 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 best practices in government financial to improve management control and accountability to the public; 3. Disseminating and promoting to its members and to the public information concerning government financial management; 4. Promoting the development and application of professional standards to support government financial management activities; In addressing issues, the Consortium embraces many disciplines of governmental financial management including: accounting, auditing, budgeting, debt administration, information technology, tax administration and treasury management. These areas provide the general frame of reference for the programs, activities and operations of the Consortium. The material published herein may be reproduced without the consent of the Consortium, which in fact encourages their reproduction, translation and distribution. The views expressed in this publication do not necessarily reflect those of the editor nor do they coincide with the positions taken by the Consortium. The editor invites submission of articles, research papers, letters and reviews of books 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 Management 444 North Capitol Street-Suite 234 Washington, DC 20001, USA Telephone 202 624-5451 • Fax 202 624 5473 Email: [email protected] www.icgfm.org 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. 2 ISSN: 0736-7848

Published by the International Consortium on Governmental Financial Management Washington, D.C. August 2004

International Consortium on Governmental 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 the international community, the Consortium is unique—it serves as an “umbrella” bringing together diverse governmental entities, organizations (including universities, firms, and other professional associations), and individuals. At the same time, it welcomes a broad array of financial management practitioners (accountants, auditors, comptrollers, information technology specialists, treasurers, and others) working in all levels of government (local/municipal, state/provincial, and national). Additionally the mission statement emphasizes the organization’s focus on activities to promote professional development and the exchange of information. Our programs provide activities and products to advance governmental financial management principles and standards and promote their implementation and application. Internationally, the Consortium (1) sponsors meetings, conferences, and training that bring together government financial managers from around the world to share information about and experiences in governmental financial management, and (2) promotes best practices and professional standards in governmental financial management and disseminates information about 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 to assume responsibility for and to actively participate in the affairs of the Consortium. Each Sustaining Member has a seat on the ICGFM’s Board of Directors and receives 10 copies of all ICGFM publications to be distributed within their organization. (Dues: $1,000) 2. Organization Members: government entities with financial management responsibilities, educational institutions, firms, regional and governmental organizations, and other professional associations. Six organization members serve on the ICGFM’s Board of Directors and organization members receive 5 copies of publications to be distributed to their members. (Dues: $250/$150*) 3. Individual Members: persons interested in, dedicated to, or working with activities directly related to financial management and who wish to be members in their own right. Six members of the ICGFM Board of Directors will be selected from among all individual members. Each individual member will receive 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 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.

Foreword It is always difficult to implement good financial management practices in the public sector. This is especially true in those countries that are in transition to a market economy or the heavily indebted poor countries. In this issue, I have included a couple of articles identifying the actions taken by two separate donor agencies to assist developing countries in their efforts to improve governance in the public sector. The first details the countries that are eligible for assistance by the Millennium Challenge Corporation in Fiscal Years 2004 and 2005, as well as the conditions associated with that assistance. The second identifies actions taken by the U.S. Agency for International Development to assist countries throughout the world in their efforts to discourage and detect corrupt practices. These articles are followed by two articles dealing with actions taken in specific areas to implement good financial management practices. The first article provides an excellent overview of legislative budget oversight in the various countries of South America. The second identifies the actions taken in Bangladesh to establish good governance practices and improve their ranking in the Corruption Perception Index. A key component of good financial management practices is external auditing and we have included three articles on this area of expertise. The first article identifies the new structure of the International Standards on Auditing and identifies which public sector reports might be subject to external attestation. The second provides the elements needed to establish or enhance audit legislation for the Supreme Audit Institutions (SAIs). The third spells out the actions taken in Macedonia to improve their audit practices and challenges SAIs to work 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 public financial management (PFM). The primary purpose of the PFM Performance Measurement Framework is to provide a standard set of high level indicators that will enable the performance of country PFM systems to be regularly monitored, by domestic and international stakeholders. The framework was developed by a working group involving staff from the World Bank, IMF and the Public 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 might find beneficial in your work. I have also included some timelines to help you identify where you might be in your efforts to implement accrual accounting in your country. If you have difficulty understanding the timelines, I would encourage you to read the Hughes/Minovski article in the last issue of the Public 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 the Public 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 Publications Editor

Relmond Van Daniker President

Table of Contents 8.

Reference Material

9.

Timelines for Transitioning to Accrual Accounting

10. The Millennium Challenge Corporation David Nummy 22. U.S. Agency for International Development Frederick W. Schieck 28. Reforming Fiscal Institutions and Strengthening Government Accountability: Legislative Budget Oversight in Emerging Economies Carlos Santiso 40. The Challenges of Good Governance: A View from Bangladesh Nurul 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 Legislation Linda L. Weeks 68. Current Situation and Perspectives of Development for Financial Control in the Republic of Macedonia Mito Naumoski 74. Public Financial Management Performance Measurement Framework Revised Consultative Draft, February 12, 2004 [With Amendment Regarding Procurement] 100. Public Sector Committee Update 12

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Some Reference Material (e-mail—[email protected]) 2003 book on “Reforming Government Accounting and Budgeting in Europe” edited by Klaus Luder and Rowan Jones published by Fachverlag Moderne Wirtschaft, Frankfurt, Germany: 3 countries (Finland, Spain, & Sweden) have completed the move to full accrual. 1 country (UK) has essentially completed the move to full accrual except no whole-of-government financial statements are yet in place. 2 countries (France & Switzerland) have begun the reform process 3 countries (Germany, Italy, & the Netherlands) have not yet begun the reform process 2002 summary of five African countries on Budget Transparency and Participation in the Budget Process (www.internationalbudget.org/resources/africalaunch.htm). Legal Transparency Participation South Africa good moderate moderate Ghana moderate weak weak Kenya moderate weak weak Nigeria weak weak weak Zambia weak weak weak OECD/World Bank 2003 Survey of Current Budgetary Practices for 30 OECD countries 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, 1999 The 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.

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Timelines for Transitioning to Accrual Accounting For Each Government Entity (Except GBEs) at Central, State, and Local Levels

Cash Basis IPSAS (Part 1)

Budget/Actual Comparative Statement

AP and Other CL

Long Term Debt

AR and Other CA

Fixed Assets

Net Assets/ Equity

All 20 Accrual IPSASs

Cash Basis IPSAS (Part 2)

For Each Government Business Entity (GBE)

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 Consolidated Government Entities (except GBEs) Consolidated Cash Statement (Part 1, Cash Basis IPSAS)

Consolidated Financial Statements (IPSAS 6)

For Consolidated Government Business Enterprises (GBEs) Consolidated Statement on Cash Flows (IAS 7)

Consolidated Financial Statements (IAS 27)

For Whole-of-Government Financial Statements

Consolidated Central Government Consolidated State Governments Consolidated Local Governments Consolidated GBEs

Consolidated Whole-ofGovernment Financial Statements (IPSAS 6)

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The Millennium Challenge Corporation Remarks by David Nummy International Consortium on Government Financial Management 20 April 2004

Lessons in Development For the last 10 years, I have worked in the US Treasury Department’s technical assistance program responsible for managing all projects related to public expenditure management. Our counterparts are typically Ministries of Finance in 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 be very successful. The very first country I engaged with ten years ago was a relatively new country coming out of difficult times. One of my first meetings was with the Minister of Finance and I asked him to explain briefly how government revenues were managed. He explained that each morning at 9am, he called the Governor of the Central Bank to learn how much revenue had been deposited the day before, he conferred with his cabinet colleagues and made a decision on how 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 them improve government finances. Over time, I learned some very valuable lessons observing this particular country. Our program, along with other donors, explained the need to have an open, transparent, accountable and comprehensive budget process that provided meaningful information to its citizens. Being overburdened by the problems of the day, little commitment to change was made, not out of resistance but because it wasn’t a priority. This particular country has a very large and successful Diaspora, including one individual with one of the world’s larger fortunes. This individual was particularly generous toward his homeland and offered to provide a substantial amount of money to address some of the most urgent needs of its people. He informed the government that he would consider providing funding directly through government mechanisms but did not have faith that the existing financial management process could appropriately track his funds and provide information about impact and results. He chose to establish a foundation but left out the 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. My first lesson...incentives are powerful. In deciding what course they wanted to take in financial management reform, they began to look at the experience of their peer countries, they thought a great deal about their own needs, the experience and strengths of their employees, and the pace at which it made sense for them to proceed. Their program was far more effective than any which had previously been suggested.

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My next lesson...when governments have developed their own reform course, it is frequently more successful than when imposed from outside. Being a poor and inexperienced country, they needed technical expertise and financial resources. They turned to our program and to other donors and, working all together, the collective assets of determination, experience, and finance resulted in rapid and meaningful change. Today, that country has one of the best financial management information systems among its peers and it has made the transition in budgeting from what I call, “what we spend money on” to “why we spend money,” instituting a program-based budget process that is carefully establishing performance indicators. Another lesson...when donors are able to work as partners with their counterpart countries, their contributions are symbiotic. This reform has impacted every aspect of resource allocation and the overall efficiency and effectiveness of all public monies has dramatically changed, not least of which is due to the attention being paid to results. Economic growth has taken off and people’s lives are demonstrably better. Yet another lesson is one that 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 involved with over thirty countries either in transition from one economic system to another, various stages of development or in a post-conflict situation. The lessons I’ve referenced have been reinforced time and again. But perhaps the most important 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 Corporation When I had the opportunity to become a part of the Millennium Challenge Corporation, I knew immediately that it was an organization I wanted to be part of because the MCC is built around some fundamental principles including incentives, country driven development programs, working as a partner, being accountable for results, and, most importantly, the idea that policies matter. The MCC was proposed by the President two years ago coincident with the Summit on Financing for Development held in Monterrey, Mexico, and enacted into law in January of this year. I would like to briefly explain how these core principles permeate all aspects of the MCC’s design and operations.

Incentives One 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 their actions and the impact of their policies. The President and Congress have insulated the MCC from being impacted by the political imperatives of the day. In our first year, only countries that can borrow from the International Development Association (IDA) with per capita incomes of $1415 are candidates to participate. That results in a list of 75 countries. Twelve of those are prohibited by other provisions of law from receiving US assistance, leaving 63 “candidate countries.”

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These 63 countries will be measured against their peers using sixteen indicators taken from independent sources. These indicators have been chosen to measure a country’s performance in three important areas: Governing Justly, Investing in People, and Encouraging Economic Freedom. The details of these indicators and more detail about everything I mention today can be found at our web site, MCC.GOV. Governing Justly 1. 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 People 7. 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 Freedom 11. 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 that are eligible to request MCC assistance. The primary factors in their consideration 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 consider data gaps, lags, trends, or other weaknesses in the indicators. Additionally, the Board may deem ineligible a country that performs substantially below its peers 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 have been following sound policies and that it provides a powerful incentive to candidate countries to enact policies that will change their ranking. The first group of eligible countries will be selected at a Board meeting taking place next week. We have already gotten indications that candidate countries are examining how they rank among their peers and discussing what policy changes they can make to improve them.

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To further increase the incentive provided by MCC assistance, we expect that the MCC will be one of the most substantial donors in those countries with whom we eventually conclude an agreement. In addition, our assistance commitments will be multi-year in nature. We expect them to cover a period of three to five years in duration. Our appropriated funding for this fiscal year is $1 billion. The request in the FY 2005 budget is $2.5 billion and is projected to be $5 billion in FY 2006. This will represent in increase of 50 percent in US development assistance. In short, an MCC partnership will be substantial, real, and will have a significant impact in the recipient country.

Country Driven Programs Once countries are selected by the Board, it does not mean that they will automatically receive MCC assistance. These countries will be invited to make a comprehensive proposal outlining a program to be funded or partially funded by the MCC. The MCC will expect the country itself to have developed the key elements of its proposal, the core element being their determination of the primary obstacles blocking economic growth and poverty reduction. The MCC will expect a compact proposal to have been developed using a consultative process, which includes citizens and civil society, to develop its Compact program and will expect it to include measurement benchmarks that can be used to evaluate progress.

A Philosophy of Partnership If 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 refrain from identifying problems or imposing solutions but, rather, to work together with countries in making our relationships successful. It is our mandate and our intent to work in partnership with other US, multilateral, and bilateral donors. While an independent Federal corporation, our Board of Directors is chaired by the Secretary of State and includes the Secretary of 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 in their proposals. As mentioned above, the most important elements will be an identification of the obstacles to economic growth and poverty reduction, goals and outcomes they believe will overcome those obstacles, and indicators that will serve as a benchmark and a measure of progress in achieving Compact goals. I believe one of the unique aspects of MCC is that assistance discussions will initially be centered on measurable outcomes, a strategy to change economic growth and poverty reduction, and, only later on specific projects and implementation. If you have a chance to read the guidelines, when posted, I think

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you’ll find a business-like approach to a partnership agreement that reflects all the principles that I’ve outlined. One key element of interest to you, will be a fiscal accountability plan for the Compact program which we will evaluate using all the MCC principles I touch on today including accountability, results, and transparency. We will also look at factors such as whether vendors can be paid in a timely fashion. As we’ve learned in our own government, when we can’t pay our bills on time, we hurt the private sector. In many of these countries, the government is one of the largest customers in the economy and they set a standard for good business practices.

Policies Matter As I’ve already mentioned, the MCC is founded on the belief that policy change is the most important ingredient of development. Our mandate and our actions will be guided by that belief. We will and should be measured on our own success by our ability to motivate governments to adopt the kind of policies that we know result in positive change in people’s lives. While those policies are many and diverse, we characterize them in three broad categories: governing justly, investing in people, and encouraging economic freedom.

Summary I find it a great privilege to be able to be part of this new approach to assistance. When I was asked why I was interested in working for the MCC, I responded that, first, it had a mission that I could believe in and that it embodied all the lessons I had learned working for ten years with governments wanting to improve their countries and the lives of their citizens. Paul Applegarth, the nominee to be our CEO, has put it quite succinctly and to the point, “the MCC is an effort to be something new and different and good.” I want to thank the ICGFM for giving me the opportunity to be here today and introduce you to the MCC.

Millennium Challenge Corporation Reducing Poverty Through Growth PRESS RELEASE (May 6, 2004) The Millennium Challenge Corporation Names MCA Eligible Countries Washington, DC—Today, the Board of Directors of the Millennium Challenge Corporation (MCC) selected the 16 countries eligible to apply for Millennium Challenge Account (MCA) assistance in FY04. MCC, a newly created government corporation designed to work with some of the poorest countries in the world, is based on the principle that aid is most effective when it reinforces sound political, economic, and social policies that promote economic growth. “This is a historic day for the Millennium Challenge Corporation,” said Secretary of State, Cohn L. Powell, Chair of the MCC Board. “The President’s vision has come to pass, and today’s decision by the Board of Directors is a major 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,

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Nicaragua, Senegal, Sri Lanka and Vanuatu. In making its determinations, the Board considered both the past and current policy performance of the candidate countries in the areas of governing justly, investing in their own people and promoting economic freedom. The Board also considered trends that indicated policy improvement or slippage. “Our mission—encouraging and rewarding good policies that produce sustainable economic growth—holds profound implications for freedom and security across the globe,” MCC CEO Paul Applegarth said today. “Today’s decision demonstrates the clear commitment of the U.S. to reducing poverty and human suffering.” The Board also approved a “Threshold Country” program, which will be directed toward a limited number of candidate countries that have not met the requirements for MCA eligibility but demonstrate a significant commitment to meeting the requirements for eligibility. The Threshold Country program will provide an added incentive to countries that are committed to reform, and will be used to assist such countries in making further progress towards becoming eligible for MCA assistance in future years. MCC expects to work closely with USAID in this effort. The United States is committed to the MCC as an innovative approach to delivering foreign aid. Congress has appropriated $1 billion for the MCC for this fiscal year, and President Bush has requested $2.5 billion for FY05.

Abstract of Remarks by President George W. Bush at Ceremony Celebrating Countries Selected for the Millennium Challenge Account (May 10, 2004) Two years ago, I announced a new and hopeful approach in America’s aid to developing nations. Under this approach, America has pledged to increase development assistance by 50 percent over three years. To make sure that governments make the right choices for their people, we link new aid to clear standards of economic, political, and social reform. We invited governments in developing nations to meet those standards so that they may truly serve their people. America formed the Millennium Challenge Corporation to oversee this new program. Last week, the first group of Millennium Challenge Account nations was 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 have chosen the path of reform, and your people and your nations are better off as a result 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 board members who are with us-- Secretary John Snow, the Secretary of the Treasury; Ambassador Bob Zoellick, the United States Trade Representative; Andrew Natsios, the Administrator of the US Agency for International Development; and Paul Applegarth, who is the CEO of the Millennium Challenge Corporation. I want to welcome the ambassadors and representatives from the 16 Millennium Challenge Account nations. We are glad you’re here. Congratulations.

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In many nations, poverty remains chronic and desperate. Half the world’s people 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 compassion. Persistent poverty and oppression can spread despair across an entire nation, and they can turn nations of great potential into the recruiting grounds of terrorists. The powerful combination of trade and open markets and good government is history’s proven method to defeat poverty on a large scale, to vastly improve health and education, to build a modern infrastructure while safeguarding the environment, and to spread the habits of liberty and enterprise. The Millennium Challenge Account encourages all nations to embrace political and economic reform. The United States has pledged to increase its core development assistance by half, adding $5 billion annually by 2006. To be eligible 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 improving their health care systems and their schools. They must unleash the energy and creativity necessary for economic growth by opening up their markets, removing barriers to entrepreneurship, and reducing excessive bureaucracy and regulation. The 16 nations represented here today have done all this and more. Each has worked hard to be here today, and their efforts are already yielding results. For example, Madagascar is aggressively fighting corruption. The Ministry of Justice has suspended a dozen magistrates on suspicion of corrupt activity. The government is also implementing an ambitious program of judicial reform. Senegal, Africa’s longest-standing democracy, has also enacted new anti-corruption laws, and is implementing new measures to fight money laundering. Honduras has made the improvement of education and health services a top priority. Its immunization rate of 96 percent is among the highest of all eligible countries. The new government of Georgia has doubled its investment in health care and raised teacher salaries by two-thirds. Mozambique has curbed government spending and lowered tariffs. These, and other reforms, have resulted in double-digit growth rates over the last decade. Since launching its program of economic reform in 2002, Sri Lanka has reduced its budget deficit by a third, and cut inflation by half. Other nations represented here can point with pride to similar examples of progress. Yet funding is not guaranteed for any selected country. To be awarded a grant, nations must develop proposals explaining how they will further address the needs of their people, and increase economic growth—proposals that set clear goals and measurable benchmarks. The countries selected today represent a small fraction of those struggling to emerge from poverty and establish reform. I urge all nations of the world to follow the progressive standards of governing justly, investing in people and encouraging economic freedom. Reform can bring more aid from America, and it will also bring more investment and more trade, lessening the need for aid over time. Reform will be repaid many times over in the relief of poverty, and rising national wealth and stability for their countries. The 16 chosen in this round are showing the way, are showing what is possible, are serving as a bright light in the developing world. You have taken the first courageous steps toward greater independence and greater wealth, and greater hopes for the people you serve.

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

Report on Countries That Are Candidates for Millennium Challenge Account Eligibility in FY 2005 and Countries That Would Be Candidates but for Legal Prohibitions. SUMMARY: Section 608(d) of the Millennium Challenge Act of 2003 requires the Millennium Challenge Corporation to publish a report that identifies countries that are “candidate countries” for Millennium Challenge Account assistance 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 States to support policies and programs that advance the prospects of such countries achieving lasting economic growth and poverty reduction. The Act requires the Millennium Challenge Corporation to take a number of steps in determining the countries that, based on their demonstrated commitment to just and democratic governance, economic freedom and investing in their people, will be eligible for MCA assistance during Fiscal Year 2005. These steps include the submission of reports to the congressional committees specified in the Act and the publication of 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 to receive assistance under U.S. law and countries that would be candidate countries but for legal prohibitions on assistance (section 608(a) of the Act); 2. The criteria and methodology that the Board of Directors of the Millennium Challenge Corporation (the “Board”) will use to measure and evaluate the relative policy performance of the candidate countries consistent with the requirements 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” for Fiscal Year 2005, including which of the eligible countries the Board will seek to 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 2005 The Act requires the identification of all countries that are candidates for MCA assistance in FY 2005 and the identification of all countries that would be candidate countries but for legal prohibitions on assistance. Section 606(a) of the Act provides that, during FY 2005, countries shall be candidates for the MCA if they: 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 $1465 for FY 2005); and 2. Are not subject to legal provisions that prohibit them from receiving United States economic assistance under part I of the Foreign Assistance Act of 1961, as amended.

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Pursuant to section 606(c) of the Act, the Board of Directors of the Millennium Challenge Corporation has identified the following countries as candidate countries under the Act for FY 2005. In so doing, the Board has anticipated that prohibitions against assistance that applied to countries during FY 2004 will again apply during FY 2005, even though the Foreign Operations, Export Financing and Related Appropriations Act for FY 2005 has not yet been enacted and certain findings under other statutes have not yet been made. As noted below, the Millennium Challenge Corporation will provide any required updates on subsequent changes in applicable legislation or other circumstances that would affect the status of countries as candidate countries for FY 2005. 1. Afghanistan 2. Angola 3. Armenia 4. Azerbaijan 5. Bangladesh 6. Benin 7. Bhutan 8. Bolivia 9. Burkina Faso 10. Cameroon 11. Chad 12. China 13. Comoros 14. Congo, Dem. Rep 15. Congo, Rep. (Brazzaville) 16. Djibouti 17. Egypt, Arab Rep. of 18. Equatorial Guinea 19. Eritrea 20. Ethiopia 21. Gambia 22. Georgia 23. Ghana

24. Guinea 25. Guyana 26. Haiti 27. Honduras 28. India 29. Indonesia 30. Iraq1 31. Kenya 32. Kiribati 33. Kyrgyz Republic 34. Lao PDR 35. Lesotho 36. Madagascar 37. Malawi 38. Mali 39. Mauritania 40. Moldova 41. Mongolia 42. Morocco 43. Mozambique 44. Nepal 45. Nicaragua 46. Niger 47. Nigeria

48. Pakistan 49. Papua New Guinea 50. Paraguay 51. Philippines 52. Rwanda 53. Sao Tome and Principe 54. Senegal 55. Sierra Leone 56. Solomon Islands 57. Sri Lanka 58. Swaziland 59. Tajikistan 60. Tanzania 61. Timor-East 62. Togo 63. Turkmenistan 64. Tuvalu 65. Uganda 66. Ukraine 67. Vanuatu 68. Vietnam 69. Yemen, Rep. 70. Zambia

1 Iraq is identified as a candidate country on a provisional basis. Iraq is subject to section 620(t) of the Foreign Assistance Act of 1961, as amended, which prohibits assistance to countries with which the United States severed diplomatic relations, unless diplomatic relations have been resumed and an agreement for the furnishing of assistance has subsequently been entered into. While the United States has resumed diplomatic relations with Iraq, an assistance agreement, 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 Board determines eligible countries pursuant to section 607 of the Act, Iraq will not be treated as a candidate country as of that date.

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Albania, Bosnia and Herzegovina, Cape Verde, and Tonga were candidate countries for FY 2004 but are not candidate countries for FY 2005, due to increases in their levels of per capita income above the historical ceiling of the International Development Association. In addition, Serbia & Montenegro, which would have been a candidate country for FY 2004 but for legal prohibitions that apply to Serbia, is not a candidate country for FY 2005 due to an increase in its per capita income above the International Development Association historical ceiling. Countries That Would Be Candidate Countries but for Statutory Provisions That Prohibit Assistance Countries that would be considered candidate countries during FY 2005 but are subject to legal provisions which prohibit them from receiving U.S. economic 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 on legal prohibitions against economic assistance that apply during FY 2004 that are 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 has been identified as a major drug-transit or major illicit drug producing country for 2004 (Presidential Determination No. 2003-38, dated 9/15/03) and designated as having “failed demonstrably” to adhere to its international obligations and take the measures required by section 89(a)(1) of the Foreign Assistance Act, thus making Burma ineligible for assistance. Burma is listed as a Tier III country under the Trafficking Victims Protection Act for not complying with minimum standards for eliminating trafficking and not making significant 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 Appropriations Act”), which prohibits assistance to the government of a country whose duly elected 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 2004 Appropriations 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 assistance to Cuba. The Cuban Liberty and Democratic Solidarity Act of 1996, Pub. L. 104-114 requires the President to take all necessary steps to ensure that 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 assistance under part I of the Foreign Assistance Act based on past due indebtedness to the United States. 9. Somalia is subject to section 620(q) of the Foreign Assistance Act and section 512 of the FY 2004 Appropriations Act.

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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 of the FY 2004 Appropriations Act and section 620A of the Foreign Assistance Act. 11. Syrian Arab Republic. Section 507 of the FY 2004 Appropriations Act prohibits 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 central Government of Uzbekistan may be made available only if the Secretary of State determines and reports to the Congress that the government is making substantial and continuing progress in meeting its commitments under a framework 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 provisions that prohibit U.S. economic assistance, may be the subject of future statutory restrictions or determinations, or changed country circumstances, that affect their legal eligibility for assistance under part I of the Foreign Assistance Act during FY 2005. The Millennium Challenge Corporation will include any required updates on such statutory eligibility that affect countries’ identification as candidate countries for FY 2005, at such time as it publishes the notices required 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 particular countries identified in this report will not affect the date on which the Board of Directors is authorized to determine eligible countries from among candidate countries which, in accordance with section 608(a) of the Act, shall be no sooner than 90 days from the date of publication of this notice.

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U.S. Agency for International Development Remarks by Mr. Frederick W. Schieck Deputy Administrator The International Consortium on Governmental Financial Management Miami, Florida April 20, 2004 I am pleased to have the opportunity to return to Miami to meet with you today. I appreciate Mr. Van Daniker’s invitation. Two years ago I had the pleasure of discussing with many of you the United States Agency for International Development’s (USAID’s) role in financial management. Today I want to share with you our views on the challenge to development presented by corruption and what we can do to address this serious problem. I want also to give a special thanks to two Inspector Generals, member of the ICGFM Board, with who I have had the pleasure to work—Everett Mosley the IG of USAID, and Bill Taylor recently retired from the Inter American Development Bank where I worked 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 transformed how we view the subject at hand. One such instance began in 1977 when Congress passed the Foreign Corrupt Practices Act. This piece of legislation prohibited certain business practices of US companies, most notably, the offering of bribes to foreign government officials. It was widely characterized in some quarters at the time as ill-conceived and quite possibly counterproductive. Critics said that US companies would be placed in a competitive disadvantage with foreign firms. In fact, while the US was seeking to stop the practice of bribery of foreign governments, other countries continued to allow their firms to count such payments as tax deductible expense. The criticism did not stop there. There was concern that law would put into play certain negative incentives whose ultimate effect might even be to make corruption worse. Given the competitive environment multinationals operate in, it was thought that the law would encourage less scrupulous companies to adopt more elaborate schemes to hide the outlawed practices. The law seemed to be just another example of a naïve attempt to reform common behavior, if not human nature itself. Like the earlier experience in the U.S. when the production of alcohol was prohibited, the critics predicted that the Act would run up against experience and eventually be repealed. As it turned out, the Foreign Corrupt Practices Act was not another failed attempt at reform—it was not a passing thought. It marked a fundamental change in thinking about the subject of corruption and set off a growing recognition of the problem. The existence of the ICGFM and our meeting here today is part of a movement that began back then. What is now a global alliance against 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 could not even have been imagined back then. It’s not that “corruption” was not discussed in the past. But then it was reviewed mostly as a local issue which often had a political focus. Charges and

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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 of life.” This was, more often than not, the attitude of businessmen. Policy-makers had a different perspective. During the Cold War, strategic considerations often overrode any concerns we might have had with certain allies and their practices. Academics, on their part, tended to view corruption as a “cultural” phenomenon, an outgrowth of informal, traditional societies operating within the structures of formal, modern political systems that were inherited from a colonial past. According to this theory, corruption stemmed from the dislocations that these societies suffered under imperialist rule. These academics tended to make corruption almost a taboo topic—a politically “incorrect” subject, if you will—while other circles either accepted or ignored it. All this has changed. Corruption is far from a taboo subject. It is now on the agenda of national, regional, and multinational policymaking bodies. It is the concern 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 the U.S. Foreign Corrupt Practices Act eventually inspired conventions broadly adopted 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-American Development Bank also recognize the importance of the provisions. In this regard, we second the World Bank in its support of the Extractive Industries Transparency Initiative (EITI), which recognizes the high stakes at play around the world, for both developed and developing countries, in helping to free oil, gas, and mining industries from control by corrupt elites. The efforts of the World Bank and various regional development banks are to be commended for tackling the issue. Moreover, corruption will be prominently featured in the June 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 development as well. As many of you know, the United States has established the Millennium Challenge Corporation. Since the enactment of the law, President Bush reiterated strongly that “good governance is an essential condition of development. So the Millennium Challenge Account will reward nations that root out corruption….” Therefore, a country’s position on corruption will be viewed as a major factor in determining eligibility for funding. In addition, the program will identify countries that have demonstrated an abiding commitment to democratic governance and market oriented economic policies and that can benefit from support in furthering such endeavors. This initiative is one of the most visionary development initiatives in a long while. It will provide the impetus for recipient countries to accelerate economic growth to the point where they can graduate from the group of countries requiring concessional assistance. Since the passing of the law, the MCA is already impacting on counties that may narrowly miss eligibility. It is encouraging those countries to stimulating reform efforts that will qualify them in later rounds. We in USAID consider the issue of fighting corruption central to our development mission. Administrator Natsios has commissioned an agency-wide anticorruption strategy which will incorporate anti-corruption elements into all appropriate facets of agency operations. We have supported Transparency

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International, one of the world’s premiere anti-corruption organizations, almost from its inception, and we fund a host of other NGO’s engaged in the common fight. The USG supported the Kimberly Process to end the trafficking in “blood diamonds.” USAID’s field Offices are engaged in legitimizing this industry so that the revenues derived from it can serve long-term development objectives. We are proud of our quarter century association with the International Consortium on Governmental Financial Management and the workshops it sponsors. Lastly, we continue to support the America’s Accountability and AntiCorruption Project, which some of you in the audience are actively involved in. This increased interest in tackling corruption can be explained by a number of factors. The end of the Cold War brought an end to ideologically driven foreign assistance. In the new era, trade is increasingly seen as key to launching countries on the path of development but that this can be undermined by corruption and rent-seeking government officials. With the globalization of trade and capital markets, businesses have faced ever tougher competition and have become more reluctant to tolerate the risk and expense associated with the in genuine practices of the past. At the other end of the trade process, countries with high levels of corruption find themselves unable to attract the outside investment their economies so desperately need. Political changes also enter the equation. The so-called “third wave” of democracy has brought to increasing numbers of the world’s citizens the power of the vote and the enjoyment of civil liberties, such as freedom of speech and the right to assemble. Popular pressure has prompted leaders and opposition figures to confront corruption and show a strong anti-corruption commitment. Though the financial costs of corruption cannot be precisely measured, its significance, by all estimates, is major. How can we put a price tag on the corrupt desires of a Charles Taylor of Liberia and the devastation he brought to his country? It is equally difficult to calculate the cumulative effects of petty corruption, the money that is slipped out of sight to a custom officer, bureaucrat, traffic officer, magistrate, or policeman. We see corruption as the serious development challenge it is. It can infect all the institutions of democratic governance and its formal processes. Corruption in elections and legislative bodies reduces accountability and short-circuits representative government. Judicial corruption suspends the rule of law and undermines the institution uniquely positioned to fight the problem. Corruption in public administration skews the provision of public services from intended beneficiaries to the well-connected and influential. It erodes the institutional capacity of government as formal proceedings are ignored, resources siphoned off, and officials hired and promoted without regard to competency or performance. Indeed, the recent gains in democracy are threatened where these governments do not bring corruption under effective control. Corruption also generates considerable economic distortions and inefficiencies that affect both the public and private sector. In the public sector, it typically diverts investment from education and projects that hold most development promise into capital projects that favor bribes and kickbacks. It lowers compliance with regulations. This all too often results in poor quality infrastructure, unsafe and poor construction, as well as environmental damage. In the shortterm, this puts additional budgetary pressures on the government, while the long-term effect reduces economic growth. The private sector has to deal with increased cost of bribes and extortion, the management costs of negotiating with corrupt officials, and operating in an atmosphere pervaded by risk and fear of crossing influential figures, not to mention criminal prosecution.

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Responding to the development challenges posed by corruption requires an understanding of its causes. From an institutional perspective, corruption arises when public authorities have wide discretion, little accountability, and perverse incentives. This means that the more activities public authorities control or regulate, the greater the opportunities for corruption. Furthermore, the lower the probability of detection, the greater the probability that corruption will take place. In addition, the incentives for pursuing self-serving ends lowers the rewards 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; and 3. Redesigning terms of public employment to improve incentives and increase professionalism. To limit official authority and its control over the economy, enlightened privatization schemes should be pursued, accompanied by adequate measures of transparency and legal frameworks that guard against merely converting public monopolies to private ones. State authority can be limited by eliminating tariffs, exchange rate restrictions, price controls, and permit requirements that encourage bribery. Encouraging competitive procurement practices as well as competition in the provision of public services also has a substantial impact. Accountability can be enhanced by open budget process and decentralization, through freedom of information legislation and financial disclosure requirements. It is here where organizations like ICGFM are particularly relevant. Measures to modernize and professionalize financial management systems are key to our anti-corruption efforts. This includes the design of financial software, installation of hardware, and the training of professionalized accounting and auditing staffs. Additionally, hot lines and whistle blowing protections can be extended to witnesses of corrupt practices. Credible sanctions must be established through reform of penal codes and by fortifying the independence of judicial bodies. We must work to protect the integrity of elections so that we can effectively remove bad actors when warranted. Offices with a clear anti-corruption mandate can be established. We can work to promote ethical behavior in public service by tightening job requirements, establishing anti-nepotism regulations, and developing codes of ethics. Ways must be sought to improve compensation systems in order to attract and retain more qualified personnel. This might be financed through the elimination of “ghost workers,” redundant staff, and predatory officials in ways that frees resources while improving morale and professionalism. The experience of Ghana is a good example in that this Government reformed its critically important department of revenue through such methods. We can also work to change general attitudes toward corruption, mobilizing the political will to combat corruption by monitoring public relations campaigns and workshops, support civic advocacy organizations such as Transparency International (TI) and expand its national chapters, train journalists in the skills of investigative reporting, and bring bilateral and international pressure on the more serious offenders. I would just like to note that USAID has worked with many countries to establish “investor roadmaps”—surveys that lay out, step by step, 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, but one increasingly used by donor agencies in broader reform efforts to empower

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economically marginalized populations and improve a country’s business climate. I want to emphasize that the inventory of potential responses is large and varied, and covers reforms directed at government institutions as well as society at large. But the mix of incentives, the relative emphasis placed on them, and the sequence in which they should be pursued, will vary from time to time and from country to country. In the time remaining, I would like to highlight some of USAID’s anticorruption efforts in very different parts of the world. USAID/Colombia is finishing the first phase of a $6.8 million anti-corruption activity aimed at increasing transparency and accountability at both the national and municipal levels. The project has brought internal control mechanisms, based on international standards, to 21 local governments and 3 of Columbia’s major cities. Implementation manuals have been published and distributed to local and national entities. Over 2,000 local and national level controllers have been trained in the new accounting regulations. In addition, public ethics codes have been developed and adopted, with the necessary follow-on training. USAID has worked with a broad array of civil society organizations to enhance public participation in decision-making and monitoring projects. Over 100 small grants have been made to citizen groups for this purpose. USAID helped the Republic of Georgia launch a new administrative law that brings greater transparency and accountability to government operations, as well as delineating citizens’ rights as to information and the conduct of administrative proceedings. Georgia’s law requires government actions to be public and government information to be freely available. It has been instrumental in the rise of a more independent and vigorous press and has been called by a leading Georgian jurist as “the single most important Georgian law, after the 1995 constitution.” In Bangladesh, USAID has helped establish a local chapter of Transparency International. It has been engaged in widespread reporting and watchdog activities as well as general consciousness-raising within the country. School Management Committees also have been established—in some of the most underserved regions of the country—to monitor low-level corruption in the education sector. Illegal sub-contracting of teaching, unauthorized leave, and illegal payments demanded by teachers or other exploitative practices are all too 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 the developing world. In our own Agency, vulnerabilities have greatly increased in the past two years as we have undertaken major new programs in HIV/AIDS and, 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 projected to rise to $15 billion. The Office of the Inspector General is working to make sure 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. Our Inspector General’s office there is conducting performance audits and has issued 22 concurrent financial audit reports. “Concurrent” means that we aren’t waiting until the end of the year to do the audit but rather we are beginning the

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audit just as the project or activity being audited gets under way, with the auditors maintaining a presence throughout the year at the work sites and in the office of the grantees and contractor. The same approach is being used in Afghanistan through a contract with a public auditing firm supervised by the Inspector General. The Office is also spending considerable audit resources reviewing our $500 million infrastructure program, including the Kabul/Kandahar Road. The USAID Inspector General has also been selected as auditor for the Millennium Challenge Account. I should point out here that Agency management and the Inspector General’s office collaborate on establishing yearly objectives and standards for success that we can achieve together. Among these is our common endeavor to help improve management so that we can get the best value 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 totally free from corruption; however it is a goal that we can all share in trying to achieve it together. Thank you.

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Reforming Fiscal Institutions and Strengthening Government Accountability: Legislative Budget Oversight 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 the Johns 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 performance require adequately understanding the political economy of the budget process. The role of legislatures in budget policymaking is a key dimension of the governance of the budget. Legislatures authorise the executive to raise revenue and manage public expenditures, exercise oversight and ensure accountability. They help ensure government accountability in the management public finances, by approving budget allocations, overseeing budget execution and controlling budget performance. Enhancing legislative scrutiny of the budget and oversight of its execution is increasingly considered as a means to strengthen government accountability and curb corruption (OECD 2001). In many developing countries, however, the role of parliaments in budgeting is subdued and often dysfunctional, partly as a result of executive predominance, but also because of legislatures’ own deficiencies. The greatest challenge remains to strengthen democratic accountability while ensuring fiscal discipline. This study briefly reviews recent trends in the role and performance of parliaments in the budget process in Latin American emerging 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 first stage of economic reform and financial administration modernization. They nevertheless perform critical accountability functions (Morgenstern and Nacif 2002; Mainwaring and Welna 2003). Legislatures constitute central agencies of state self-restraint and external accountability in public finance management. They help enforcing the accountability cycle of public budgeting: ex ante accountability, ensuring that budget allocations adequately reflect policy priorities; concurrent accountability, overseeing the execution of the budget by the executive; and ex post accountability, holding government to account for performance and results. In practice, however, legislatures have often failed to adequately and responsibly perform their accountability functions. What then explains this disjuncture between the potential contribution of legislatures to public budgeting and their actual role?

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There is great controversy as to what the most appropriate role of parliaments ought to be in public budgeting. The prevailing economic orthodoxy posits that excessive legislative prerogatives in public budgeting tend to lead to fiscal disequilibria, greater budget deficits and public debt; overspending and under-taxation are likely results (Stein 1998; Alesina 1999). It thus warns against the dysfunctional fiscal effects of unrestrained legislative budgetary powers and consequently favors the insulation of economic policymaking within the executive branch. These problems can be minimized by assigning control over the budget to agents with incentives to internalize the costs of the programs the state finances. Consequently, it is argued, ’hierarchical’ budget systems that ’concentrate power in the finance minister, vis-à-vis other ministers, and in the executive vis-à-vis congress’ (Stein 1998:3) tend to provide stronger procedural incentives for promoting economic prudence. Such views, which have influenced economic policies in Latin America in the 1990s, counsel giving greater independence to the institutions of economic governance, in particular central banks, tax authorities and regulatory agencies. The 2000 Law of Fiscal Responsibility adopted in Brazil constitutes a more recent attempt at establishing numerical and procedural budget constraints. Nonetheless, there are important risks associated with hierarchical budgetary arrangements. They tend to allow for excessive executive discretion in public budgeting, especially in presidential systems of government. Often, unconstrained executives misuse their constitutional authority and delegated powers, left largely unchecked by amenable parliaments. Unfettered executive discretion, reflected in particular in the extensive and early use of executive decrees to re-allocate budget appropriations, hampers external scrutiny and hinders external accountability in governmental financial management. Henceforth, beyond weakening the mechanisms of democratic accountability in public finance, unconstrained executive discretion has often permitted corruption and state capture. Finding the most adequate balance between executive and legislative prerogatives in budget policymaking is a critical challenge for emerging economies struggling to consolidate their democratic institutions. Ultimately, the governance of the budget reflects a delicate balance between executive power and legislative 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 institutionalized mechanisms of accountability. Legislative budgeting can be defined by the scope of budget authority and the effectiveness of budget oversight. The legal framework for legislative budgeting only partly explains the actual performance of 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 budgeting is a recent development in the history of Latin American legislatures: the first budget formally approved by the Argentinean legislature was that of 1990. The contribution of legislatures to budget oversight remains inhibited by structural factors related both to the internal organization of parliamentary work and the broader external context of executive-legislative relations.

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The challenges of legislative budgeting are twofold: those related to the capacities of legislatures and the organization of parliamentary work, and those related to their incentives to exercise their budgetary powers effectively and responsibly. These two sets of factors interact in different ways along the different 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, as defined by constitutional rules, legislative norms and parliament’s internal rules. They essentially relate to organization, resources and capacity. • A second set of factors are external to the legislature, linked to the formal and informal rules shaping executive-legislative relations, the presidential nature of the political system, the over-reliance of executive decree authority, skewed electoral incentives, and a fragmented political party system.

IV. Legislative budget authority: legal framework Four 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 endowed with the required technical capacities, whether it possesses the necessary political will, 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 budget law and parliaments’ internal rules, are severely limited by the prerogatives of the executive. Constitutional provisions endow Latin American presidents with uncommon powers in public budgeting, both in absolute and relative terms, although important variations between countries. Assessing the budgetary powers of the executive in 23 presidential systems, Mathew Shugart and Stephan Haggard (2001) find that in seven of them presidents enjoy exclusive power over spending legislation and the legislature confronts severe constraints on emending presidential proposals. The executive has a predominant role in the drafting and formulation of the budget. The executive has the exclusive right to initiate the budget process, draft and propose the budget bill. The central budget offices of the finance ministries are responsible for coordinating the budget drafting process within the executive and overseeing its execution by spending agencies. Once approved by the government, the budget proposal is submitted for consideration and review to the legislature, which as a set period of time allocated for that task. Legislative amendment powers vary between presidential regimes. In five of the ten cases included in Table 1, the legislature is not allowed to create or increase public spending, except as it pertains to its own budget. If the budget is not approved by the set deadline, the current budget remains in effect in only four cases (Argentina, Costa Rica, Uruguay and Venezuela). In five other cases (Bolivia, Chile, Colombia, Ecuador, Peru), the executive’s proposal automatically becomes law, usually by legislative decree. These clauses give the executive extraordinary leverage over the legislature, as legislative inaction does not preclude the executive proposal from being adopted. They neutralize legislative obstruction and significantly diminish the leverage of legislatures in the budget bargaining process, as legislatures have no veto power over the executive’s budget proposal. While they help avoid deadlock over the budget, these

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provisions create a set of incentives that is not conducive to effective scrutiny and oversight. Legislative oversight of budget execution Constitutions give parliaments an important in the scrutiny of budget re-allocation, the oversight of budget execution, and the review of public accounts. In practice, however, legislative oversight of budget execution is still embryonic in most Latin American countries. Legislatures exercise only a limited monitoring of the government’s compliance with budget rules and procedures. Largely unable to monitor compliance with the approved budget, the legislature is even less able to monitor the performance of public expenditure management and enforce results-based budgeting. Nevertheless, parliaments possess a potentially powerful instrument to control budget execution and enforce ex post accountability: the annual certification of public accounts. The parliament’s public accounts committee informs its opinion with the audited report on public accounts prepared by the general audit office. The plenary subsequently considers the committee’s opinion and decides whether 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 public accounts committees and general audit offices is thus a key determinant to effective legislative budget oversight. Accountability is also constrained by the time, timing and sequencing of legislative scrutiny. As Table 2 shows, there is great variation in the time legislatures have to review the budget, ranging from 30 days in Mexico to up to 120 days in Honduras. Furthermore, there are important time lags and inconsistencies that adversely affect the accountability cycle of the budget process. For example, the review of public accounts and the evaluation of the auditor general’s report often take place at a time that does not always allow them to adequately feedback into the budget process.

V. Legislative budget oversight: actual performance Recent research on budget transparency in Latin America has revealed the gap between the quality of the legal framework for public budgeting and adherence to it (IBP 2003.) According to the survey data reproduced in Tables 3 and 4, while the quality of the legal framework for public budgeting in Argentina, Brazil, Chile, Mexico and Peru is generally sound, perceptions of budget transparency are poor, especially in Peru. Legislative oversight and external auditing are particularly 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 a result of constitutionally mandated expenditures, earmarking of tax revenues and mandatory expenditures. Hence, the type of public spending on which parliament could potentially have the greatest influence, capital expenditure, represents only a small fraction of public expenditures, albeit of strategic importance for building ad hoc political coalitions, as in the case of Brazilian system for executing budget appropriations (OECD 2003). • The gap between the approved and executed budgets further hinders legislative oversight. Optimistic assumptions on revenues, weak execution capacity of sector ministries and ad hoc changes in appropriations partly explain this gap. The resulting instability of budgetary institutions and fiscal rules hampers the consolidation of credible budget processes with predictable procedures and enduring structures.

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Internal factors Legislative budget institutions Deficient internal structures and procedures weaken the ability of parliaments to effectively and responsibly exercise their budgetary prerogatives. Three legislative budget institutions are particularly important. Legislative standing committees Legislative committees in consolidating democracies are generally weak and unstable and the organization of committee work lacks the kind of institutionalization that would allow specialized committees to effectively contribute to the budgetary process. The division of responsibilities between the different committees dealing with different facets of public finance (taxation, budgeting, oversight and control) remains unconsolidated. These shortcomings are particularly detrimental to budgetary work, given its increasing complexity. Furthermore, the internal composition of committees is proportional to that of parliament and chaired by the legislative majority, which sets their agendas and work-plans. This arrangement tends to lessen the incentives for legislative oversight of government, as parliaments tend to be dominated by the same party as government (Messick 2002). In parliamentary systems, public accounts committees are often chaired by the opposition. Reforms are gradually being introduced, such as in Chile in 2003 where the Special Joint Budget Committee 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 legislators sitting in the budget and public accounts committees carry out most of the advisory work. In fact, parliamentary committees, as such are seldom assigned permanent technical advisers. As a result, technical input in the budget review process lacks the sufficient technical substantiation required for impartial evaluation. The absence of a tenure-track civil service career for parliamentary staff is accentuated by the weaknesses of civil service careers in the public sector. Parliaments can only rely on the limited research and advisory services that are available to them through incipient legislative research offices and ill-equipped parliamentary libraries. Such resources exist or have been recently established in Brazil, Chile, Colombia and Peru. Technical budget capacity is also insufficient for effective legislative budget oversight. Budget and public accounts committees rely almost exclusively on the information that government agencies provide, which significantly constrains their ability to carry out independent budget reviews and adequately oversee budget execution. While financial constrains partly explain the lack of budget research capacity, there exist political reasons explaining why parliaments have generally not purposefully sought to build their capacities. Timely access to budget information is strategic in the sense that the opposition has the greatest incentives for independent budget analysis. This is gradually changing, however, as the contribution of legislative budget offices is increasingly acknowledged. Although not as powerful as the US Congressional Budget Office, incipient legislative budget offices are emerging, such as in Venezuela since 1997 or Mexico since 1998. It is indeed noticeable that a main impediment to legislative budgeting often resides in its incapacity to engage with the budget process, rather than the restraints put on its budgetary powers. Technical capacities are thus important considerations to take into account when assessing the effective role of legislatures in budget oversight.

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External factors Legislative 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 and reliable information on budget performance, generally provided by general audit offices, is key to the effectiveness of legislative oversight. Improving the functional linkages between public accounts committees and general audit offices is critical to anchor accountability in public finance and budget management (McGee 2002; SIGMA 2002). In turn, securing the political independence of general audit offices, which have been significantly undermined by executive interference and political meddling, is critical to guarantee effective external auditing of government finances (INTOSAI 2001.) Issues such as criteria guiding the nomination and removal of auditor generals and the length of their term in office, as well as the procedures regulating recruitment, promotion and dismissal of professional staff are critical determinants of the effective independence of general audit offices. Predictable financial resources are also a necessary, yet not sufficient for institutionalizing supreme audit institutions and insulating them from political meddling. Most Latin American countries are indeed seeking to strengthen their external auditing functions, with the support of international financial institutions (Santiso 2004). Important reforms have been introduced in recent years. In Mexico, a general audit office, the Auditoría Superior de la Federación, was established as an advisory body to the lower chamber of parliament 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 constrains imposed by the current institutional framework for legislative budgeting, the presidential nature of political systems, coupled with an over-reliance on executive decrees, has been particularly detrimental to the strengthening of the institutions of government accountability in public budgeting. The use of executive decrees in public budgeting is impressive both in absolute and relative terms in countries such as Argentina, Brazil or Peru. In practice, parliament exercises little oversight on presidential decrees. The frequent and early recourse to executive decrees to re-allocate budget appropriations not only undermines the legislative oversight, but also weakens the credibility of the budget as an instrument of economic governance and strategic planning. Political governance and legislative budgeting Legislative behavior and executive-legislative relations in public budgeting are necessarily intermediated by political parties and electoral rules. Stein et al. (1998) have indeed uncovered a statistically significant relationship between electoral systems and fiscal performance. Electoral systems characterized by a large degree of proportionality (i.e. large district magnitude) and political fragmentation (i.e. number of effective parties represented in parliament) tend to have larger governments, larger deficits and a more pro-cyclical response to the business cycle. Furthermore, the fragmentation and volatility of political party systems throughout Latin America has been detrimental to the effective exercise of legislative budget oversight, significantly shortening the time horizons of individual legislators. Parties lack the sort of internal coherence, cohesion and discipline that would allow them to act purposefully and consistently within parliament. Moreover, when the ruling party or coalition holds a disciplined majority position in parliament, as it is often the case in Latin America, there exists a possibility of control dilution: in such circumstances, presidential systems tend to have inoperative systems for enforcing government accountability (Messick 2002; Manning and Stapenhurst 2002).

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VI. The politics of public budgeting The analysis of legislative budgeting in Latin America illustrates the constraints to and conditions for enhancing the contribution of parliaments to budget oversight in presidential systems of government. The political economy of the budget process reveals that political and technical aspects interact in determining the effectiveness of legislative budget oversight. Ultimately, the effectiveness of the mechanisms of horizontal accountability depends on the effectiveness of the mechanisms of vertical accountability. The new patterns of divided government and executive-legislative relations emerging throughout Latin America are having a significant impact on economic governance and public 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 seldom use them effectively or responsibly. While capacity constraints partly explain why parliaments do not exercise their budgetary powers effectively, governance constraints explain why they sometimes do not exercise them responsibly. Parliament’s ability to establish their credibility as institutions of economic governance is thus contingent both on the strengthening their technical and advisory capacities to perform their budget functions, and the existence of an enabling governance environment that allows them to be exercised effectively and responsibly. The question of strategy then becomes whether legislative capacity should be build first, or should it emerge as a result of increased legislative activism. Sound public finance management and accountability requires finding an adequate balance between executive and legislative prerogatives in the different phases of the budget: While executive dominance in public expenditure management is more likely to ensure fiscal prudence, legislative oversight is critical to provide effective checks and balances and enforce accountability in the formulation, execution and control of the budget. Ultimately, the governance of the budget reflects a delicate balance between executive power and legislative oversight. The key challenge of legislative budgeting in Latin American presidential systems is to retain the advantages of strong executive authority required to ensure fiscal discipline while providing the institutional checks and balances that guarantee effective accountability. Strengthening the institutions of legislative budget oversight and the agencies of public finance integrity is undoubtedly a structural challenge for Latin American emerging economies. It is nevertheless a critical one. The views and opinions expressed in this essay are solely those of its author and should not be interpreted as reflecting those of the aforementioned organizations. This study draws on: Carlos Santiso (2004) ’Legislatures and Budget Oversight in Latin America: Strengthening Public Finance Accountability in Emerging Economies,’ OECD Journal on Budgeting (forthcoming).

Further Reading Alesina, 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 Five Latin American Countries: Argentina, Brazil, Chile, Mexico and Peru (Washington DC: IBP).

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International Organization of Supreme Audit Institutions (INTOSAI) (2001) Independence of Supreme Audit Institutions: Final Task Force Report (Vienna: INTOSAI General Secretariat.) Krafchik, Warren, and Joachim Wehner (1998) ’The Role of Parliament in the Budget Process,’ South African Journal of Economics 66(4):512-541. Mainwaring, Scott, and Christopher Welna, eds. (2003) Democratic Accountability in Latin America (Oxford: Oxford University Press.) Manning, Nick, and Rick Stapenhurst (2002) Strengthening Oversight by Legislatures (Washington DC: World Bank PREM Note 74.) McGee, David (2002) The Overseers: Public Accounts Committees and Public Spending (London: Pluto Press and Commonwealth Parliamentary Association.) Messick, Richard (2002) Strengthening Legislatures: Implications from Industrial Countries (Washington, DC: World Bank, PREM Note 63.) Morgenstern, Scott, and Benito Nacif, eds. (2002) Legislative Politics in Latin America (Cambridge: Cambridge University Press.) OECD (2003) Budgeting in Brazil (Paris: OECD Working Party of Senior Budget 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,’ CEPAL Review. Schick, Allen (2002) ’Can National Legislatures Regain an Effective Voice in Budget Policy,’ OECD Journal on Budgeting 1(3):15-42. SIGMA (2002) Relations Between Supreme Audit Institutions and Parliamentary Committees (Paris: OECD SIGMA Paper 33, CCNM/GOV/SIGMA(2002)1.) Stein, Ernesto, Erneto Talvi and Alejandro Grisanti (1998) Institutional Arrangements and Fiscal Performance: The Latin American Experience (Washington: IADB OCE Working Paper 367.) Wildavsky, Aaron (1992) “Political Implications of Budget Reform: A Retrospective,” Public Administration Review 52:594-599 ______________ (1964) The Politics of the Budgetary Process (Boston: Little, Brown.)

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TABLE 1: Constitutional Restrictions on Legislative Budget Authority in Latin America Country Year of constitution (amendment) Only the President can propose the budget

Argentina Bolivia Brazil 1994 1967 1988 1994 1999 Yes Yes Yes Article Article Article 100.6 147 61(1)II (b) Congress cannot No No Yes increase the budget with for any item or loopcreate new hole budgetary Article categories 166 If no new budget is Yes No No passed, current Implicit budget remains in effect OR President’s No Yes No proposal takes Article effect 147 Country Year of constitution (amendment) Only the President can propose the budget Congress cannot increase the budget for any item or create new budgetary categories If no new budget is passed, current budget remains in effect OR President’s proposal takes effect

Chile 1980 1989 Yes Article 64

Columbia Costa Rica 1991 1949 1997 1997 Yes Yes Article Article 364 178

Yes with loophole Article 64 No

Yes Article 351

No

No

Yes Implicit

Yes Yes Article Article 64 348

Equador 1998

Peru 1993

Uruguay 1997

Venezuela 1999

Yes Article 258 No

Yes Article 78 Yes Article 79

Yes Article 215 Yes Article 215

Yes Article 313 No

No

No

Yes Implicit

Yes Article 313

Yes Article 258

Yes Article 80

No

No

No

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

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TABLE 2: Time for Budget Review in Latin America Country

Parliamentary structure

Budget approval authority

Number of days allocated for reviewing budget proposal n.a. 60 100 90 60 90 Max 90

Argentina Bicameral Both chambers Bolivia Bicameral Both chambers Brazil Bicameral Both chambers Colombia Bicameral Both chambers Chile Bicameral Both chambers Paraguay Bicameral Both chambers Dominican Bicameral Both chambers Republic Uruguay Bicameral Both chambers 90 Venezuela Bicameral Both chambers n.a. Mexico Bicameral Chamber of Deputies 30 Costa Rica Unicameral Legislative Assembly 90 Ecuador Unicameral National Congress 90 El Salvador Unicameral Legislative Assembly 90 Guatemala Unicameral Congress of the Republic 120 Honduras Unicameral National Congress 105-120 Nicaragua Unicameral National Assembly n.a. Panama Unicameral Legislative Assembly 90 Peru Unicameral Congress of the Republic 90 Source: Gutiérrez, Gerónomo, Alonso Lujambio and Diego Valadés (2001) El proceso presupuestario y las relaciones entre los órganos del poder (México: Instituto de 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 10 points Argentina 700 7.0 5.1 6.1 Brazil 636 6.4 5.1 5.8 Chile 733 7.3 5.9 6.6 Mexico 507 5.1 5.0 5.1 Peru 598 6.0 3.7 4.9 Source: 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 to transparent.

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TABLE 4: Budget Transparency in Latin America (Disaggregate Index) Phases of the budget Average score of 1 to 5 Most transparent Formulation Chile Mexico Average 3.36 2.67 Approval Chile Argentina Average 2.80 2.79 Execution Chile Argentina Average 3.16 2.71 Oversight and auditing Chile Brazil Average 3.07 2.31 Economic Information Chile Argentina Average 3.53 3.15 Source: Based on IBP 2003:3.

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Least transparent Brazil 2.47 Peru 2.39 Mexico 2.36

Argentina 2.57 Brazil 2.63 Brazil 2.40

Peru 2.47 Mexico 2.44 Peru 2.38

Mexico 2.27

Argentina Peru 2.19 1.89

Brazil 3.15

Mexico Peru 2.75 2.66

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The Challenges of Good Governance: A View from Bangladesh Md. Nurul Momen Lecturer, Department of Public Administration, University of Rajshahi, Rajshahi-6205, Bangladesh E-mail: [email protected] and Mst. Marzina Begum M.Phil Researcher, Institute of Environmental Science University of Rajshahi, Rajshahi-6205, Bangladesh E-mail: [email protected]

Abstract This article focuses on challenges, experiences and strategies for good governance in Bangladesh. It explores what capacities states need to develop to meet the demands and how to strengthen governance institutions, including electoral management bodies, parliaments and judicial systems in Bangladesh.

Introduction Good Governance is important for countries at all stages of development. Bangladesh has recently gone through major changes that are conducive to the development of transparent, accountable governance. These changes were as follows: well organized and transparent general elections held in October, 2001 with the highest ever turn out of voters; emergence of an independent role for the Election Commission; adequate access of all candidates to the media during the election campaign; and the decision by the present government to activate the parliamentary committees and to broadcast part of the proceedings of the parliament to promote accountability (G. Shabbir Cheema: 1996). Despite the above achievement, Bangladesh continues to face major problems in governance for sustainable growth and equity. There is no tier of elected local government above the union parishad, which were abolished a few years ago. The present procedures and processes through which the members of the parliament work hinder their effective role in ensuring the accountability of the executive branch. These include non-functioning committees and inadequate facilities for MPs, as well as lack of adequate opportunities for MPs to review and discuss policy issues and options in a rational manner instead of in an environment of political polarization. Systems of financial accountability need to be reformed. Other immediate issues of governance that require a government response include the need to enhance the capacity and independence of the Judicial system, to improve access to the media, to eradicate corruption, and to develop a coherent policy formulation process. These would enable the involvement of all segments of the society leading to consensus building on major issues of national concern.

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Conceptual Framework Good governance is participatory, transparent and accountable. It is also effective and efficient. It promotes the rule of law and equal justice under the law. Good governance ensures that political, social and economic priorities are based on broad consensus in society and the voices of the poorest and most vulnerable are heard in decision-making. We can take it for granted that sustainable human development will not be realized without it. To be sure, we must not forget that Bangladesh accomplished a great deal in the past few decades, against all odds and ordeals. There have been striking reductions in fertility and infant morality rates. Gone are the days of routine famines, with the rise in agricultural productivity and more efficient food production. 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 primary schools. More children are immunized, and diseases such as polio are banished from the land. We even see a steady pace of economic growth and a downward trend in poverty. The poor people of Bangladesh have surely benefited from these gains. Good governance means all taxes due are collected and deposited to the treasury. It means the same amount of Taka (name of Bangladesh currency) goes much further in financing development projects because public procurement is transparent and efficient. It means all public spending are accounted for as intended, and audited currently. Good governance requires an efficient executive, a functioning legislature, an independent Judiciary and the effective separation and balance of powers; all constituent elements of a democratic regime. Consequently, Good governance is not sustainable without effective democratic institutions. This article explains, as simply as possible, what “Good governance” in Bangladesh means.

Data Sources The paper is based on secondary information that includes recent publications, Journals, books, research reports and other documents. The key elements of good governance as defined by UNDP are listed below: Participation: All men and women should have a voice in decision-making either directly or through legitimate intermediate institutions that represent their interests. Such broad participation is built on freedom of association and speech, as will as capacities to participate constructively. Rule of Law: Legal frameworks should be fair and enforced impartially, particularly the laws on human rights. Transparency: Transparency is built on the free flow of information. Processes, institutions and information are directly accessible to those concerned with them, and enough information is provided to understand and monitor them. Responsiveness: Good governance requires that institutions and processes try to serve all stakeholders within a reasonable timeframe. Consensus orientation: There are several actors and as many viewpoints in a given society. Good governance requires mediation of the different interests in society to reach a broad consensus in society on what is in the best interest of the whole community and how this can be achieved.

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Equity: All men and women have opportunities to improve or maintain their well-being. Effectiveness and efficiency: Good governance means that processes and institutions produce results that meet the needs of society while making the best use of resources at their disposal. Strategic Vision: Leaders and the public have a broad and long-term perspective on good governance and human development, along with a sense of what is needed for such development. There is also an understanding of the historical, 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 the last three decades since her independence, Bangladesh has witnessed several political hiccups including assassination of two presidents, two army coups and two major political movements that caused the downfall of political regimes. Bangladesh has had three general elections during the past decade, all of which were believed to have been generally free and fair. Yet democracy seems to be floundering.

Parliamentary System An effective parliamentary system is a vital element for improving good governance. Parliament is the key institution in the national system of accountability. As an elected body, it is the organization that empowers the Government and grants it legitimacy. Parliament scrutinizes the activities of the executive branch and holds it accountable to the citizens of the country. However, in Bangladesh experience of parliamentary government has been far from satisfactory. The first four parliaments proved to be largely ineffective due to a prolonged boycott by the main opposition parties; the sixth parliament merits a mention in the Guinness Book of Records for its unexpectedly short existence. The eighth parliament is now in session. Both the people of Bangladesh and the donor community, which are working to improve good governance in Bangladesh, have high expectations that the current parliament will be more effective. The need for the parliament to perform its role as specified in the constitution is recognized. However the performance of MPs is affected by several factors: The interruption of the democratic process during the past two decades (1971-1990), non-functioning committees of the parliament, lack of support facilities and services for MPs, and an environment of political polarization. As a result, critical issues of public policy are not adequately discussed and the executive branch continues to make major policy decisions without adequate input from the opposition. A major achievement of parliament has been to activate its committee structure. The Government has announced that the parliamentary committees will not be chaired by ministers as has been the case in the past. A private member can be the chairman of such a committee, known as the select Committee and the relevant departmental minister only sits as a member. In addition, a prime minister’s hour to answer questions has been introduced. The Government has asked for UNDP Support and donors are happy for UNDP to take a lead in providing support to the parliament.

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Democratization Process Good Governance is the heart of democratization process. Democratization has been a rewarding experience for us in Bangladesh. Bangladesh government has made serious and sincere efforts to strengthen democratic institutions and promote good governance institutions and promote good governance. They have, in this, always had peoples support. We have put in place the non-party caretaker government, unique in the world, which assumes the responsibilities for holding parliamentary elections on completion of normal tenure of an elected government. Already successive three changeovers took place under this system. The present government led by Prime Minister Begum Khaleda Zia was voted into office through such an election in October 2001. The election was a celebration of Bangladesh’s democratic values.

Corruption In Bangladesh corruption has existed a long time. This parasitic problem has grown distinctly since the independence of Bangladesh. The government corruption has been ignited in every echelon (either public or private sector). Corruption has long deteriorated Bangladesh society and caused political turmoil. According to a survey (2003) developed by Transparency International, Bangladesh ranks among the most corrupted nation in the world in the Corruption Perception Index. Good governance can lessen, if not eliminate, all forms of corruption and corrupt practices. There is little debate concerning the negative impact of corruption in Bangladesh. The factors that allow corruption to take place include: weakness in public financial management; low salaries and lack of incentive structures in the civil service; complex regulatory rules and procedures; weak public procurement systems; limits to judicial independence; closed-door practices in policy development, legislative drafting, and public decision-making; and a culture of secrecy in public administration. The government has made progress in some areas including enactment of an Anti Corruption Commission (ACC) ACT.

Freedom of Expression and Speech Bangladesh constitution speaks of participatory process and accountability of government’s actions and transparency of decision-making. Freedom of media is guaranteed. But Bangladesh has experienced severe discourtesy to freedom of expression and especially to the print media. No newspaper was banned; yet government continued to exercise control through distribution and sales quotas of newsprint and government advertisements to newspapers and periodicals. The Bangladesh newspapers are enjoying freedom of press; newsprint quotas and distribution of advertisements apparently controls the freedom of expression of the print media.

Human Rights and Security Good governance requires human rights: freedom from discrimination and violence, equal opportunity, due process, freedom of expression and organization, and transparent, accountable government. Fundamental rights are guaranteed by the constitution of Bangladesh. Human rights is a much neglected issue in Bangladesh since the country started its journey in 1971.Violation of human rights was practiced by the rulers of this country in the past and present and we

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can surely forecast that this situation will remain unchanged if something is not done about it in the future. For decades, successive governments in Bangladesh have failed to curb serious human rights violations arising from the use of legislation and widespread practices in the law-enforcement and justice systems that violate international human rights standards. Hence the government should urgently address factors that contribute to human rights violations, such as a national human rights commission, to investigate human rights violations. Civil society in Bangladesh would welcome the creation of such a body with appropriate power to investigate, and forward their information to the prosecutors so that they undertake prosecution of offenders. Such a body should, in collaboration with the Bangladesh law commission, review all laws that allow for impunity.

Law and Order, Safety and Security of the Citizens What 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 the land. Gun battles, murders and acid throwing, robbery, oppression of women, issuing of fatwa (religious edict), blackmail, campus violence etc, have become everyday 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, injuring hundreds of people, some critically. Over 130 people were sentenced to death. Two men were executed. Harassment of human rights defenders continued. Rape and other violence against women were widely reported (Amnesty International report, 2004). Police torture is increasing day by day people are continually being battered by the police and law enforcing agents. The police’s role in maintaining people’s security is very disheartening. The people’s saviors have become a reason for terror in the minds of the people. The jail situation in the country is beyond description. Laws and regulations are violated often. The jail codes and regulation of the eighteenth century are still in practice. Although an independent state has emerged, its jail code and regulations have not changed. Therefore, human rights are frequently violated.

Rule of Law One 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 and freedom, equality and justice-political, economic and social will be secured for all citizens.” By upholding the rule of law judiciary protects the rights of individuals to live, work and enjoy without fear or favor. The promotion of good governance 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 in Bangladesh. Civil society is highlighting in particular its concerns with regard to two specific laws that facilitate endemic human rights violations in Bangladesh: the Special Powers Act (SPA) which allows arbitrary detention for long periods of time without charge, and Section 54 of the Code of Criminal Procedure which facilitates torture in police or army custody. Calls for the repeal of the SPA has come from the Bangladesh legal community and human rights organizations. It has also come from political parties but only when they are in opposition. When in government, they have defended the use of the SPA and maintained it.

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Independence of Judiciary The constitution of Bangladesh in its original form devised a scheme of a completely independent Judiciary. Good governance depends on good and efficient judiciary. To attain that, the nation must make due investments in the judiciary. “A sound and independent judiciary is the sine qua non of a healthy society” (Halim, 1998). But it should be mentioned that the independent character of judiciary has been upheld and a bill is underway in the parliament to ensure its full independence.

Openness and Availability of Information The free flow of information is crucial for accountability. Transparency is built on the free flow of information. In Bangladesh the press is enjoying adequate freedom with the establishment of parliamentary democracy. We have also anti-hopping law under the official secrecy Act 1935; a bureaucrat may conceal any sort of information. Unfortunately in Bangladesh a large number of activities remain outside public scrutiny. However, secrecy not only reduces the efficiency and quality of decision making, it also compromises democracy.

A Road to Good Governance In contemporary Bangladesh anyone who criticizes the government or indeed the opposition is branded as a political and, even personal, enemy. This uninterrupted tradition of official hostility to criticism has, however, been of little service to the government since it has proved to be seriously detrimental to good governance in Bangladesh. Successive governments have convinced themselves that those who criticize any failings of policy or aspect of governance are hostiles, even enemies and probably in collusion with their political opponents. The concept of this objective criticism thus appears to have become unacceptable within the prevailing culture and those criticized are always inclined to pose a question. What is the intent? This question implies that the critic is motivated by some private agenda; searching for career advancement, patronage or publicity; is in league with one’s political opponents; or is trying to undermine some particular person for personal and/or political reasons. Everyone knows that to create a congenial environment an all-out concerted effort of both the government and the opposition parties is a must. In Bangladesh, it is designed to conceal information rather than share it. This lack of transparency in governance does not limit itself to official dealings with the public but is even more prevalent within the government. Years of concealing information has meant that mechanisms of information gathering, storage and retrieval have fallen into disuse so that any effort to access information devolves into a major administrative exercise. In the absence of any system of bottom-up reporting from the field and top-down supervision, systems of accountability within a ministry remain virtually non-existent. As a result, there is no basis on which to hold anyone accountable if anything goes wrong within any part of the government. Our crisis of governance is thus inherent in the system of non-accountable administration. Such a milieu of information blackout and lack of accountability is aggravated by the fact that ministers and secretaries rarely visit the field to elicit first hand information. Rare field visits tend to degenerate into ceremonial exercises carefully managed to conceal damaging information that reflects poorly on the local or project officials. Such

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management of information is, in many cases, designed to conceal serious inefficiencies as well as corrupt practices of people along the administrative chain. Within such an administrative culture of concealment, if a government is genuinely committed to good governance, any person who brings to light particular wrongdoings within the government is doing them an enormous favor. Such critics may help to reveal information, which has been kept concealed from the policy 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 within their domain they should move to view their critics as their allies in the pursuit of good governance. To this end every minister should employ a full time special assistant whose job would be to go through the newspapers, including those in conspicuous opposition to the government, and to keep track of seminars where papers are presented with a view to take note of comments of the limitation of governance in particular areas. Obviously some of these criticisms will be uninformed, misinformed, weakly argued and even downright tendentious, often with political motive. But even such criticisms may carry a kernel of truth worth retrieving. Even patently motivated and malicious criticism, originating from known political enemies, should not be dismissed since such criticisms need not always be incorrect. More to the point, even criticism can serve to alert a government to issues that are agitating the minds of their opponents since such issues could escalate into a political mobilization against the government. Such issues need to be confronted at an early stage where it is presented as an argument on paper, either through remedial governance or by political debate. Such efforts, including criticism of official actions, should be encouraged and even rewarded. Ministers should invite their academic critics to share their information and analysis with them so as to test the validity of their facts and the logic of their criticism. In such an environment a government widens its knowledge base, often beneficially, because it obtains information not at its disposal and may even derive useful ideas about corrective action. Even where no such positive outcomes emerges from such exchanges, a government which exposes itself to public debate, generates confidence in its openness and builds an image of being receptive to outside ideas. Each minister should thus hold periodic exchanges with a cross section of their critics rather than to limit themselves to token exchanges with their political friends and personal admirers. All these observations should apply particularly to the highest office of the Prime Minister and also the leader of the opposition. Looking at the behavior of Bangladesh politicians, it seems that they consider the country as just a piece of land. They forget that all their activities are being reported in the world media and people are watching. They have constantly failed to understand that the question of survival in politics does not depend on patronizing 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 protective circle and throw open their windows to the world by exposing themselves to independent opinion, including encounters with their harshest critics. Out leaders should publicly face such critics and challenge them either by a superiortruth or assimilate their criticisms by putting it to positive use in improving the quality of governance. Acknowledging error is no sign of weakness but a measure of political strength and maturity. Such a self-exposure to criticism by our leaders, thus, presumes that they recognize that their critics could also be their friends and play a politically benefi-

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

Concluding Remarks We would like to conclude by recognizing that improving governance is challenging because there are powerful vested interests which benefit from the status quo and resist change. Courageous political leadership and vigilant citizens who demand change are essential. Good governance initiatives need to recognize the importance of a conducive political economy and domestic ownership to sustainable reforms.Bangladesh achieved nothing because of political instability. The people of Bangladesh, nevertheless, shows a remarkable resilience in the face of adversity, often live on hopes. No wonder that a successful transition to a democratic government on the threshold of third decade of the nation’s existence in 1991. In this situation the spirit of the concept of good governance is essential for Bangladesh.Good governance is a fragile plant that will need sustained nourishing. It will require a fundamental change in mentality and social expectations that will change only gradually.

References 1. 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) in Bangladesh” 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), “Electoral Participation in Bangladesh: Explaining Regional variations,” Commonwealth and Comparative Politics, Vol. 39, No.1, 2001 6. Kamal, Ahmed (2000) Governance-south Asian Perspective, Dhaka: UPL 7. Kamal, Ahmed (2000) Democracy and poverty: a missing link? AAB Paper, May 2000 8. 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, 1995 10. Hasanuzzaman, Al Masud, “Parliamentary Committee System in Bangladesh,” in Regional Studies, Vol. XII, No. 1 Winter 1994-64, pp.31-39 11. The Public Administration Reform Commission, Dhaka 1998 12. www.aedsb.org/RS-critic.htm 13. 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.

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15. Dubey, Muchkund (1998).”Good governance and economic development” paper presented at a seminar on “Bangladesh Beyond 2000” organized by the American 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, August 2001).

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August 2004 49

Which Financial Reports in the Public Sector Should be Subject to External Attestation By: Dr. Jesse Hughes, CPA, CIA, CGFM Professor Emeritus of Accounting Old Dominion University Norfolk, VA 23664 [email protected] and Wayne Cameron, FCPA, FCA, FIPPA Auditor-General Victorian Auditor-General’s Office Melbourne Victoria 3000 [email protected]

Introduction The 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 on quality control, auditing, assurance, and related services.1 Included within the Preface referenced in the footnote below, is the structure of the IAASB’s technical pronouncements.2 An adaptation of this structure is reflected in Appendix A. In the application of the international standards for assurance engagements, by and large no distinction is made between the private and public sector. “Public sector” refers to national governments, regional (state, provincial, territorial) governments, local (city, town) governments and related governmental entities (agencies, boards, commissions and enterprises). In circumstances where specific basic principles, essential procedures or guidance contained in an ISA are not applicable in a public sector environment, or when additional guidance is appropriate in such an environment the Public Sector Committee (PSC) of IFAC so states in a Public Sector Perspective (PSP) at the end of the International Standard on 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 written to engagements in the public sector. The distinction between the private and public sector relative to accounting standards is that International Accounting Standards (IASs)3 only apply to the private sector. To fill the void in the public sector, the PSC has been established as the authoritative body to develop International Public Sector Accounting Standards (IPSASs). The core set of accrual IPSASs are drawn primarily from the IASs with the IASs

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revised by the PSC, where appropriate, for application to the public sector.4 Additional IPSASs are presently being developed that go beyond those IASs published for the private sector. An example is the Cash Basis IPSAS that is effective for annual financial statements covering periods beginning on or after January 1, 2004.5 This paper briefly reviews accounting standards applicable to the public sector throughout the world. In addition, the types of public sector financial reports (including budgetary reports) are discussed. Further, guidelines are suggested for application of the ISAs, ISREs, and ISAEs approved by the IAASB to the general purpose financial reports prepared by the public sector in accordance with the IASs and IPSASs. In addition, other public sector financial reports (i.e., budget and statistical reports) not presently required by the IPSASs are considered in the paper.

Public Sector Financial Reports The public sector is comprised of a wide range of different entities that apply the IASs and the IPSASs. It is important to distinguish between Government Business 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 Accounting Standards Committee. The Public Sector Committee’s Guideline No. 1 ’Financial Reporting by Government Business Enterprises’ notes that IASs are relevant to all business enterprises, regardless of whether they are in the private or public sector. Accordingly, Guideline No. 1 recommends that GBEs should present financial statements that conform, in all material respects, to IASs.”6 A GBE has the following characteristics: has power to contract in their own name, is assigned financial and operational authority to carry on a business, can sell goods or services to other entities at a profit or full cost recovery, is not reliant on continuing government funding to be a going concern, and is controlled by a public sector entity. The International Accounting Standards Committee referenced earlier has been renamed the International Accounting Standards Board and the IASs have been renamed the International Financial Reporting Standards (IFRSs). In accordance with the IFRSs, all GBEs (and all private sector entities) would issue the following financial statements using the accrual basis of accounting: Balance Sheet, Income Statement, Statement of Changes in Equity, and Statement of Cash Flows8 as well as a summary of significant accounting policies and related notes. Many public sector entities (other than GBEs) throughout the world will use a cash basis of accounting to account for government operations at all levels of government since the cash information is more readily available (and some would argue, more readily understandable). Further, it is simple to implement and costs are low due to the lower level of accounting skills required. Consequently, as mentioned earlier, the PSC has issued a Cash Basis IPSAS that requires a Statement of Cash Receipts and Payments. In addition, the Cash Basis IPSAS encourages entities using the cash basis of accounting to disclose additional 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 accounting for application to government operations or are in the process of implementing the accrual basis. These entities would apply the accrual IPSASs (1 through 20).

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IPSAS 1 stipulates the following financial statements: Statement of Financial Position, Statement of Financial Performance, Statement of Changes in Net Assets/Equity, and Cash Flow Statement as well as a summary of significant accounting policies and related notes. In addition to the IPSAS approved by the PSC, the International Monetary Fund (IMF) has published the Government Finance Statistics Manual (GFSM)9 that identifies statements required for statistical reporting purposes. These statistical statements also require reporting on the accrual basis and are as follows: Balance Sheet, Statement of Government Operations, Statement of Sources and Uses of Cash, and Statement of Other Economic Flows. Although there are some key differences between the IPSASs (e.g. historical cost is encouraged as the benchmark treatment) and the GFSM (e.g. current cost is required), the PSC has a project underway to eliminate these differences to the maximum extent possible. In addition to the general purpose financial reports required by the IPSASs and the statistical statements required by the IMF, most governments will issue budget reports at the beginning of the fiscal period. Many would consider these budget reports as the most important financial statements issued by governments since they are usually published and frequently commented upon in the mass media. In many cases, these budget reports are on a cash basis of accounting and would include the legally adopted, annual or biennial budgets and the three- to five-year prospective budgetary reports. (Some governments do prepare accrual budgets—but in almost all cases these budgets are prepared on a GFS, i.e. statistical, basis). These budget reports are referred to as ex-ante budget 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 World Bank since they have been provided to Parliament to support Appropriation Bills.10 In addition to the ex-ante budget reports, most governments will prepare budget to actual comparative statements at the end of the accounting period. These are referred to as ex-post budget reports to inform the electorate about the degree of adherence to the budget for accountability purposes. Although this comparative report is not required, preparation and publication is encouraged by the PSC11, as well as the IMF and the World Bank referenced earlier. If the 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 differences between the two systems. Budget reports usually only cover the General Government sector whereas accrual ex-post accounting statements comprise the consolidated whole-of-government accounting statements. One might have thought comparison between the two reports would have been made easier because the latter document will include segment information enabling comparisons to be made back to the budget papers; however, comparative analysis is frequently made difficult with the budget being prepared on a GFS (statistical) basis and the segmental data derived from GAAP.

Assurance Engagements To implement the structure of technical pronouncements, the IAASB has established an International Framework for Assurance Engagements. Critical definitions from that framework are included below:12

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Assurance engagement—an engagement in which a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria (p. 4). The elements of an assurance engagement are as follows: a three party relationship involving a practitioner, a responsible party, and intended users; appropriate subject matter; suitable criteria (may include International Financial Reporting Standards or International Public Sector Accounting Standards-p. 12); sufficient appropriate evidence; and a written assurance report in the form appropriate to a reasonable assurance engagement or a limited assurance engagement (p. 8). Reasonable assurance—reduction in risk to an acceptably low level in the circumstances of the engagement as the basis for a positive form of expression of the practitioner’s conclusion (p. 5). For reasonable assurance engagements regarding 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 circumstances of the engagement, but where that risk is greater than a reasonable assurance engagement, as the basis for a negative form of expression of the practitioner’s conclusion (p. 5). For limited assurance engagements regarding historical financial information, these engagements are called reviews (Footnote 2, p. 3). In a reasonable assurance engagement (including an audit of historical financial information), the auditor must accumulate enough evidence to be in a position to express a conclusion in the positive form. An example of the positive form follows: “In our opinion the financial statements are fairly stated, in all material respects, based on (the criteria used)”. Gathering sufficient appropriate evidence is part of an iterative, systematic process that involves obtaining an understanding of internal control and determining the degree of compliance with laws and regulations as well as evaluating the sufficiency and appropriateness of the evidence. Procedures used would include inspections, observations, confirmations, analytical procedures and inquiries. Where applicable, substantive procedures would be used to obtain corroborating information from sources independent of the responsible party. In addition, for most subject matters, tests of the operating effectiveness of internal controls would be performed where relied on. For instance, if you can prove a number (e.g. interest) analytically, one wouldn’t test internal controls in that area. The same is often the case for Payroll. In a limited assurance engagement (including a review of historical financial information), the auditor must accumulate enough evidence to be in a position to express a conclusion in the negative form. An example of the negative form follows: “Based on our work described in this report, nothing has come to our attention that causes us to believe that the financial statements are not fairly stated, in all material respects, based on (the criteria used).” Sufficient appropriate evidence for reviews of financial statements is obtained primarily through analytical procedures and inquiries. An unqualified conclusion is not appropriate for either type of assurance engagement if there is a material limitation on the scope of the auditor’s work or 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.

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As identified in the Structure of the IAASB’s Technical Pronouncements (see Appendix A), the international framework for assurance engagements comprises 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 current ISAs 210-799. ISREs 2000-2699 will apply to international standards for review engagements and be compiled from current ISA 910. A project is underway to more clearly define the coverage in Special Purpose Audit Engagements (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; and 4. Reports on Summarized Financial Statements. The Structure further specifies Assurance Engagements on Subject Matters Other than Historical Financial Information. An international standard has been issued to apply to such assurance reports dated on or after January 1, 2005.14 One aspect of these assurance engagements pertains to the examination of prospective financial information as spelled out in ISAE 3400.15 When reporting on the reasonableness of management’s assumptions, the auditor provides only a limited level of assurance with a conclusion in the negative form. However, when in the auditor’s judgment, an appropriate level of satisfaction has been obtained, the auditor is not precluded from expressing a conclusion in the positive form regarding the assumptions.16

Applicability of Assurance Engagements to Public Sector Financial Reports Year 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 for the private sector. That is, the annual financial statements published by the GBEs would be expected to be subject to an audit with a positive form of conclusion expressed by the auditor. If interim financial statements are issued, a review (or audit in some jurisdictions) would be performed by the auditor. Public Entities using the Accrual IPSASs. General purpose financial statements issued by all levels of government using the accrual IPSASs (1-20) would be subject to the full range of ISAs 200-720. That is, an audit would be performed and an audit report with a positive form of conclusion would be issued by the auditor. Public Entities using the Cash Basis IPSAS. Most governments throughout the world currently prepare their financial reports on the cash or near cash basis. Although the current ISA 800 identifies the “cash receipts and disbursements basis of accounting” as other than a comprehensive basis specified by IASs, the Cash Basis IPSAS identifies these statements as general purpose

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financial statements. Thus, financial reports by governments using the Cash Basis IPSAS would be subject to audit as a regular audit engagement under ISA 200-799 with reasonable assurance expressed by the auditor. GFS Manual 2001. Although these reports are not considered general purpose financial statements, data is extracted from the general purpose financial statements prepared by the accounting system and reformatted into the statistical report format desired by the IMF and the United Nations. Yet, these reports are not presently subject to external attestation. These reports could be considered special purpose reports subject to the ISAs. As such, any examination would include forecast data, non-financial data, and non-complying financial statements. If such attestation is requested, it should be considered a special purpose audit engagement (ISA 800) with a positive conclusion expressed by the auditor. Particular care will be required in preparing an audit report to ensure that the auditor is not appearing to confirm that both the GAAP based financial statements and the GFS based financial statements represent fairly the general purpose financial statements of the entity. However, a review could be performed under ISRE 2400 if a higher level of risk is acceptable. In that case, a negative conclusion would be expressed by the auditor. Comparative Budget to Actual Financial Statement. For accountability purposes, many governments prepare comparative budget to actual financial statements at the end of the fiscal period. Even though these statements are often not subject to external attestation, the actual data will be audited as part of the general purpose financial statement audit since the auditor is required to ensure financial data elsewhere in the report is not inconsistent with the audited numbers. If external attestation is desired, these statements should be subject to audit as a special purpose audit engagement (ISA 800) with reasonable assurance provided by the auditor. However, a review could apply under ISRE 2400 if 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 comparative information be presented in schedules as part of required supplemental information. Or, if desired, this information could be presented in a budgetary comparison statement as part of the basic financial statements. This comparative information is also required in New Zealand and desired in Australia. When external attestation is desired, schedules would be subject to a review while statements 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 purpose financial statements. That leaves at large the question of consistency of accounting 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 about future conditions and events that may or may not occur. The quality of the information will be dependent largely on the appropriateness of these assumptions. At least one country (New Zealand18) suggests that an independent third party 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 to examine the compilation of the ex-ante Estimated Financial Statements published by the government, the reasonableness of the assumptions applied, and the consistency of the application of those assumptions with the budget information.

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Legally Approved Budgets. For transparency purposes, governments are encouraged to publish their legally approved budgets (generally, one year forecasts). Yet, these budgets are not subject to external attestation. If such attestation is requested by the legislative body to assure that the assumptions are reasonable and the presentation is fair/accurate, these budget reports should be subject to a review under current ISAE 3400 with limited assurance provided by the auditor. Projected Financial Statements or Schedules. Governments are encouraged to provide budgetary projections (generally for 3-5 years) as a component of the Medium Term Fiscal Framework or other projected financial requirements. Yet, these reports are not presently subject to external attestation. If such attestation is requested, these statements should be subject to a review under ISAE 3400 with limited assurance provided by the auditor. A breakout, by type of report, on these conclusions is provided below: Nature of Engagement Regular Special Audit Purpose Audit Government XX Business Enterprises Government Operations: Accrual IPSAS XX Cash IPSAS XX Budget to Actual XX Comparative Statement Government XX Finance Statistics Manual 2001 Legally Approved Budget Projected Budget

Review

Or XX

Current International Standards ISA 200-799

ISA 200-799 ISA 200-799 ISA 800 or ISRE 2400

Or XX

ISA 800 or ISRE 2400

XX

ISAE 3400

XX

ISAE 3400

Conclusion Many financial reports are prepared and published by public entities. Yet, only selected year-end historical reports are subject to external attestation. It is sometimes unclear which level of assurance that an auditor is expected to apply for financial reports that are not considered general purpose financial statements. This paper has examined the existing ISAs, ISREs, and ISAEs. It has suggested which public sector financial reports should be subject to external attestation and the level of assurance that should be provided. The table below summarizes the conclusions:

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Framework for Assurance Engagements and Related Services In the Public Sector Assurance Engagement Related Services Nature of Service

Historical Financial Information (includes year-end) IPSAS and IMF reports)

Other Than Historical Financial Information (includes ex-ante budget reports

Agreed-upon Procedures

Level of Assurance Provided by the Auditor

Reasonable or limited, but not absolute, assurance

Reasonable or No assurance limited, but not absolute, assurance

No assurance

Report Provided

Positive or negative assurances on assertion(s)

Positive or negative assurances on assertion(s)

Identification of information compiled

Factual findings of procedures

Compilation

As an independent body, the Supreme Audit Institution or other independent audit body in each country is responsible for the audit or review of public sector financial reports at the appropriate tier of government. The organization that represents the Supreme Audit Offices is the International Organization of Supreme Audit Institutions (INTOSAI). The Ministry of Finance (or equivalent) in each country is generally responsible for the preparation and publication of applicable public sector financial reports. The organization that represents the Ministries of Finance is the International Consortium of Government Financial Managers (ICGFM).19 The application of the guidelines identified in this paper to the Structure of IAASB’s Technical Pronouncements is identified in Appendix B. Although these are not authoritative guidelines, they hopefully will provide a basis for debate and research to ensure that reliable and verifiable information is provided to the public in the form of governmental financial reports.

Acronyms The 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)

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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 Notes 1. 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 this paper 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 Ethics Pronouncements; 2004 Edition). 14. International Standard on Assurance Engagements 3000, “Assurance Engagements Other Than Audits or Reviews of Historical Financial Information” (IFAC, December 2003). 15. Pp. 926-935, ISAE 3400, The Examination of Prospective Financial Information (IFAC Handbook of International Auditing, Assurance, and Ethics Pronouncements; 2004 Edition). 16. Ibid, p. 928. 17. Budgetary Comparison Schedules-Perspective Differences, Governmental Accounting Standards Board Statement No. 41, May 2003.

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18. Par. 5.18, Financial Reporting Standard No. 29, Prospective Financial Information (April 1996). This Standard applies to the Crown and all departments, 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

International Framework for Assurance Engagements

Audits and Reviews of Historical Financial Information

ISAs 100 -999 International Standards On Auditing

IAPSs 1000 - 1999 International Auditing Practice Statem ents

Related Services Framework

Assurance Engagements Other Than Audits or Reviews of H istorical Financial Information

ISREs 2000 - 2699 International Standards On Review Engagements

ISAEs 3000 -3699 International Standards On Assurance Engagements

ISRSs 4000 -4699 International Standards On Related Services

IREPSs 2700 - 2999 Reserved for International Review Engagement Practice

IAEPSs 3700 - 3999 Reserved for International Assurance Engagement Practice Statements

IR SPSs 4700 -4999 Reserved for International R elated 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

International Framework for Assurance Engagements

Aud its and Reviews of Historical Financial Information

ISAs 100 - 999 International Standards On Auditing

IAPSs 1000 -1999 International Auditing Practice Statem ents

Accru al Standards ( IFRSs & IPSASs)

Related Services Framework

Assurance Engagements Other Than Au dits o r Reviews of Historical Financial Information

ISR Es 2000 -2699 International Standar ds On Review Engagem ents

ISAEs 3000 -3699 International Standards On Assurance Engagem ents

ISRSs 4000 - 4699 International Standards On Related Services

IREPSs 2700 -2999 R eserved for International Review Engagement Practice

IAEPSs 3700 -3999 Reserved for International Assurance Engagement Practice Statements

IR SPSs 4700 -4999 Reserved for International Related Services Practice Statements

IPSA S Bu dget to Actu al IMF Cash Comp arative Statistical Standard Schedule Statemen ts

Leg ally Approved Bud get

Pro jected Bud getary Info rmatio n

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Promoting Government Accountability: Critical Elements in Establishing or Enhancing Audit Legislation Linda L. Weeks, CGFM Executive Director-ICGFM Email: [email protected] “Financial accountability is a necessary condition for efficient public management and hence for the management of funds in favor of poverty reduction, health and education, a clean environment, and peace.”1 James D. Wolfensohn, President, The World Bank Group Institutions supporting and promoting development initiatives around the globe are increasingly focusing attention on accountability as an essential element for sustainable development, and there is growing recognition that an effective national audit office is crucial to ensuring accountability. As a consequence, donor organizations are more critically examining national audit offices, also known as supreme audit institutions (SAIs), in recipient countries. In many cases, as part of an overall sustainable development strategy, projects have been initiated to enhance and strengthen SAIs. Because a carefully crafted audit law is an essential underpinning for an effective national audit office, many SAI-related projects concentrate on audit legislation. As new audit laws are being developed and existing audit laws are being revised, certain critical elements and the general principles and practices that define them should be considered. This paper was originally developed for the Inter-American Development Bank in conjunction with a project to revise the national audit act in the Co-operative Republic of Guyana, but the guiding tenets cited can be applied in any effort to draft or revise audit legislation.

Independence—The Most Critical Factor SAI independence, with the challenges related to establishing and maintaining 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 in countries that belong to the United Nations or its specialized agencies. Since its founding in 1953, INTOSAI has supported its member organizations and their governments in improving financial management, enhancing good governance, and ensuring accountability. Through its specialized committees and its regional working groups, INTOSAI supports its members in establishing standards, sharing expertise, training staff, and developing methodology. SAI independence has 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

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INTOSAI directs significant attention to the issues and challenges influencing audit office independence. The Lima Declaration of Guidelines on Auditing Precepts, adopted by INTOSAI in 1977 and republished in 1995, is recognized globally as the primary document defining an SAI. The basic principles included in the Lima Declaration are timeless, and they are consistently applied in international discussions, standards, guidelines, and reports. The Lima Declaration directs attention to several key elements related to establishing and maintaining SAI independence. The Lima Declaration states that: “Supreme Audit Institutions can accomplish their tasks objectively and effectively only if they are independent of the audited entity and are protected against outside influence.” “ Although state institutions cannot be absolutely independent because they are part of the state as a whole, Supreme Audit Institutions shall have the functional and organizational independence required to accomplish their tasks.” “In particular, adequate legal protection by a Supreme Court against any interference with a Supreme Audit Institution’s independence and audit mandate 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 must not be influenced by the audited organizations and must not be dependent on such organizations.” “Supreme Audit Institutions shall be provided with the financial means to enable 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 national budget.” “Supreme Audit Institutions shall be entitled to use the funds allotted to them 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 that they need to discharge their responsibilities be set out clearly in the constitution and/or legislation. This is required if SAIs are to be in a position to fulfill their mandate, independent from undue direction or interference from government.”3 L. Denis Desautels, FCA, Auditor General of Canada, Chair of the INTOSAI Task Force on the Independence of SAIs The INTOSAI Task Force on the Independence of SAIs was established in 1999 to examine the state of independence of member institutions and make recommendations on ways and means to bring about realistic improvements. They conducted an extensive survey of SAIs, reviewed current literature, consulted with selected SAIs, and met with international financial institutions and technical co-operation agencies. They circulated a draft of their report to the members of INTOSAI’s Governing Board, modified the draft, and presented their final report at the INTOSAI Congress in 2001. Recommendations in the final report identified several “core principles of SAI independence” generally recognized as “essential requirements of proper public 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.

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2. The independence of the SAI Head and “Members” (in collegial organizations), 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 Practices As international and regional financial institutions and technical cooperation agencies have studied national audit offices, they too have identified independence as a critical factor. Jack Titsworth and Rick Stapenhurst published a World Bank 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 upon appointment 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 acknowledged in tradition. The AG’s autonomy is essential, given the need to report directly to Parliament without interference from other government branches. The SAI and its leader’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 of SAI mandates, it organized the document around four major attributes—independence and administrative powers were two of them. Within the framework, independence includes mode of appointment, qualification, tenure, removal and conditions of service for the auditor general; administrative powers include budget allocation and appointment of staff.6 An examination of selected SAI mandates included in the compendium offers an array of strategies that have been adopted to provide SAIs with the requisite independence in different political 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 elements must 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 guarantee that the head of the audit office is free from political and/or financial pressure and influence. (a) It is essential that the appointment process be as free as possible from political influence. This may depend upon identifying candidates through a collaborative process involving various political groups, professional organizations, and/or governmental entities. Although approaches vary, these systems generally rely upon one party, organization or entity proposing one or more candidates and then another party or entity selecting the candidate(s) for a final review and confirmation process. The intent is to assure that a well-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 from country to country, it should be long enough to protect the head of the SAI from political influence or pressure. A lifetime appointment or an appointment until a mandatory retirement age is one way to meet this condition. Another option is to establish a lengthy fixed term, exceeding the terms for most elected officials, which does not permit a reappointment. For example, in the U.S., the Comptroller General serves for 15 years—the maximum time a President could serve is eight years, and although they can be re-elected, a Senator’s term is six years and a Representative’s term is two years. Other countries have established “lengthy” terms ranging from seven to 12 years. The determination of the range for a “long” term must be developed in the context of the country’s overall government structure. (c) Salary, benefits, and the retirement allowance must be sufficient to assure that the Auditor General is reasonably free from personal financial pressure. The salary and benefits for the Auditor General are often set at a level commensurate with cabinet level positions or Supreme Court justices. In many cases retirement benefits are also set at a relatively high rate, and in some instances the head of the audit office may retire at full salary for life. Often the 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 office should also be set forth in the audit legislation. Generally these would be comparable to the conditions and procedures that would be used to remove Supreme Court justices or the highest elected officials. 2. Budget: Recognizing that the SAI is part of government, it is still important to establish its financial autonomy. An audit office that audits the ministry that in turn can control the SAI’s budget is seriously handicapped. The SAI’s budget approval process should not be subject to review and modification by any other government entity other than the authority approving the budget. Likewise, the allocation and disbursement of funds should not require additional action by an intermediary government agency. The most desirable approach is to have the budget request go directly from the SAI to the authorizing authority (usually the legislature). If it is necessary to put the budget through a finance or treasury ministry so that it can be incorporated in the larger national budget, there should be stipulation that the request is “passed through” without any changes to the request. Under no circumstances 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 as the budget, and in establishing or revamping an audit office, it is important to consider strategies and systems related to SAI personnel. Staff must be independent; they must be well qualified and well trained; they must be adequately compensated, and they must be held to the highest ethical standards. They cannot effectively audit a government department that has the authority to hire, promote, reward, discipline, or dismiss them. Although the provisions of the SAI’s personnel system may almost exactly mirror those of the rest of government, it is important to recognize that they should be treated separately from the rest of the civil service. Therefore, a separate human capital or personnel system should be established in the audit legislation,

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although details of policies and procedures may be handled in subsequent regulations. 4. Public Reporting: Audit legislation should establish clear procedures and the timeframes and processes for issuing audit reports to the public. If the SAI is to be effective in assuring public accountability, its reports cannot languish in the office of a minister, a legislator, or a committee chair. The SAI, through the government audit standards, can detail the process for conducting its work and preparing its reports, but the audit law should specify how reports should be handled once they are complete. The law should prescribe a reasonable timeframe clearly delineating how long a minister, a committee, or the legislature may hold a report before it becomes available to the public.

Standards and Audit Responsibilities—Additional Major Considerations Adequate attention must be given to the SAI’s role in establishing standards and the delineation of its audit responsibilities. Although this may be secondary to the attention devoted to independence issues, they should nonetheless be considered in preparing audit legislation. Standards Recognizing that government is different from the private sector, international and national private sector standards must be created, or adapted and modified, 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 conducting audits of government activities) should act in accordance with documented policies and procedures that are usually described as the “generally accepted government auditing standards.” These policies and procedures provide the framework within which audit engagements are planned and implemented, and they provide the criteria against which the quality of the completed audits may be measured. INTOSAI and other international and national standard setting bodies have developed public sector audit standards and guidelines that may be used in creating specific national standards for government auditing. While the auditing standards are not generally included in the audit legislation, it is important to note that the audit law should clearly state that the SAI is the government entity charged with the responsibility for developing, introducing, applying (or evaluating other’s application of) the government’s auditing standards. While other departments, ministries, institutions, or organizations may be responsible for establishing the standards for government accounting and/or for conducting government investigations the SAI should also be part of those developmental processes. Ideally the SAI should be included as these accounting and investigative standards are being written—at a minimum the SAI should be involved in reviewing and commenting on such standards before they are adopted. This is important because the accounting and investigation standards will be used in conjunction with the auditing standards. Mention of the SAI’s role in these activities should be included in the audit law or in other legislation. Audit Responsibilities The audit law should include a statement or statements about the scope of the SAI’s audit responsibilities.

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INTOSAI’s guidelines describe a range of audit activities. The Lima Declaration and the subsequently issued INTOSAI Auditing Standards discuss the SAI’s responsibilities for conducting financial and performance audits. The Lima Declaration also goes on to describe many specific types of audits. The SAI’s obligation to examine and report on internal (or management) controls is highlighted in INTOSAI’s Auditing Standards and its Internal Control Guidelines. INTOSAI has also issued guidance on conducting audits related to information systems, public debt, privatization, and the environment. Generally audit legislation includes the SAI’s responsibility for conducting financial, performance, and internal/management control audits, although some countries do include language about other more specific types of audits (i.e., information systems). Some audit laws use very broad principles to describe the audit mandate for the SAI (and then rely upon the SAI’s auditing standards to provide more specific descriptions of the work performed) while other audit laws include very specific requirements. In drafting an audit law it is important to identify the approach most appropriate to the SAI’s political and cultural environment. For example, the Budget and Accounting Act of 1921, establishing the U.S. General Accounting Office, says that “The Comptroller General shall investigate, at the seat of government or elsewhere, all matters relating to the receipt, disbursement, and application of public funds…” The U.S. Government Auditing Standards, promulgated by GAO, describe in more detail the types of audit engagements they perform, but the law and the standards do not include a specific list of agencies or programs to be audited. This general language enabled the SAI to easily prioritize, adapt, and modify its work to meet changing needs and requirements. However, in situations where the concept of government accountability is less generally accepted or where access to information or records can be difficult, it may be necessary to specifically identify the areas subject to SAI oversight. Increasingly international and regional banks, development agencies and national governments are advocating the application of INTOSAI principles and practices in efforts to combat corruption. In an editorial for the INTOSAI Journal, James Wolfensohn, President of The World Bank wrote about the importance of battling corruption which, “erodes development assistance to governments, jeopardizes private sector investment, hinders growth and imposes heavy 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 have on limiting opportunities for corruption. During the congress, participants discussed reporting on fraud and corruption, procedures for referring those involved to the proper authorities for prosecution, and the role SAIs may play in preventing fraud by examining and reporting on internal management controls. Clearly, the SAI’s role in combating corruption, conducting investigations, and reporting fraud should be considered in drafting audit legislation.

Concluding Comments While this paper captures significant aspects for consideration in crafting an audit law, it is not all-inclusive. The issues of independence, standards, and audit roles and responsibilities must be dealt with, but a comprehensive audit law will also address many other factors. For example, given local circumstances and systems, a new or revised audit law may need to focus special

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attention on access to information, follow-up on recommendations, the use of contractors, or an array of additional areas. Keeping the political structure, societal attitudes, and size of the country in mind is crucial to developing effective audit legislation. When examining other audit laws or “models” it is important to recognize where there are fundamental differences and where there are similarities, and how these differences and similarities 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-fit audit legislation.8 Crafting “the best” audit law remains a goal that may forever be just over the horizon. Government priorities change, and practices in national and international financial management systems are evolving. In evaluating existing audit legislation and developing new or revised audit laws, examining the “better practices” of other SAIs, sharing experiences among colleagues, and co-operating across borders is necessary to ensure progress toward that “best” audit law.

End Notes 1. 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 Audit Institutions. (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 of India. www.intosai.org) 7. James D. Wolfensohn. “Corruption Impedes Development and Hurts the Poor.” 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 Development Program/Programme for Accountability and Transparency, published by the Office of the Comptroller and Auditor General of India.

Additional Resources and References International Organization of Supreme Audit Institutions (INTOSAI) Code of Ethics and Auditing Standards. INTOSAI Auditing Standards Committee. (2001 edition—prepared by the INTOSAI Auditing Standards Committee, 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 at www.intosai.org

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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. (January 1999). 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 of Supreme 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 Sources Public Audit Law: Key Developments and Considerations. H. D. Myland, C.B. Chartered Institute of Public Finance and Accountancy (UK: 1992)

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Current Situation and Perspectives of Development for Financial Control In the Republic of Macedonia Mito Naumoski Assistant General State Auditor State Audit Office (SAO) Republic of Macedonia

I. Short History of the Country and SAO 1. The Republic of Macedonia The Republic of Macedonia is situated in the central part of the Balkan Peninsula and covers an area of 25.713 square kilometres. The total population in the country is about 2 million. Neighbouring countries: Serbia and Montenegro to the North, Bulgaria to the East, Albania to the West and Greece to the South. Skopje, population 500,000, is the political, financial and cultural center of the country. The roots of the Macedonian state date back to the times of ancient Macedonia. The territory of Macedonia has witnessed many events and has been subject to many conquests throughout this period. The new history of Macedonia begins with the Krushevo Republic from August 1903 and Federal Republic of Macedonia from August 1944. The Republic of Macedonia was constituted as an independent, sovereign state in 1991, with the September 8 Referendum and the new Constitution of November 17, 1992. Before that period Macedonia was one of the six constitutional federal republics of the former Socialist Federal Republic of Yugoslavia. The Republic of Macedonia is a unitary, civil and democratic state. There are 124 local self-government units. The state power consist of: Parliament with 120 elected representatives; President of the Republic; Government of the Republic; and Judiciary and Public Prosecutor. 2. SAO— Status The first government auditing bodies were established after the Second World War. Through the years they have undergone many reforms. Finally the State Audit Office was established as the Supreme Audit Institution in 1997 by the 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 one encompasses issues relating to the audit mandate over public sector entities and annual programme audit planning criteria (the potential risk of entities, mode of publicizing of audit results etc.). The SAO started its operation in early 1999, with NINE employees, all of them coming from the Audit Department within the former institution— Payment Operation Service. The General State Auditor (GSA) and a deputy manage 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,

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independent, and professional institution based in Skopje. The SAO is comprised of 7 organizational units with 68 employees, as of June 30, 2004. Among the employees, 95 percent have a university degree, mainly in economics and law. 3. Subject of Audit Main audit areas: the budget of the Republic of Macedonia; the budgets of the units of the local self-government; the budgets of the Funds; budget funds beneficiaries and their unit beneficiaries; state-owned enterprises; the National Bank of the Republic of Macedonia; legal entities in which the state is major shareholder; political parties funded by the budget funds; agencies and other institutions established by law; other institutions financed from the public funds; and beneficiaries of the EU funds and other organisations. State audit, in terms of the law, represents: examination of documents, papers and reports on performed internal controls and internal audits; accounting and financial procedures and other records assessing whether the financial statements present truthfully and fairly the financial position and the results of the financial activities, in accordance with the adopted accounting policies, accounting standards and INTOSAI auditing standards; examining the financial transactions, representing government expenditures, regarding their legal and authorized spending; giving an assessment to what extent the funds are spent economically, efficiently and effectively. 4. Audit Scope The audit is carried out according to the SAO annual program, but mandatory at least once a year for: the budgets; beneficiaries of the budget of the Republic of Macedonia and the budgets of units of the local self-government; state-owned enterprises founded by the Republic of Macedonia; and political parties funded by the budget. For the remaining entities according to the SAL, the audit is carried out in accordance with the annual work program adopted by GSA. The auditees included in the annual programme have been selected on the basis of size, amount of public funds engaged, potential risk, assessments of possible deviations, and request made by Parliament bodies. The total number of the entities/accounts subject to audit is about 2,000 at all levels. As the SAO is still in the process of development, it audits an average of less than 10 percent of the total number of entities it is responsible for. Expressed in monetary units the percentage of audit coverage is about 40 percent of the total amount of public expenditure. 5. How Does the SAO Work The government auditing is carried out in compliance with the SAL provisions, the INTOSAI auditing standards and other legislation prescribed in the Republic of Macedonia. During the audit procedure, the auditors have free access to the official premises and property, to look into all documents and other records, to demand explanations from representatives of the audited entities for all important matters, relating to the audit performance. The audits are carried out by audit teams consisting of different number of auditors (depending on the size and the complexity of the entities under audit) under the leadership of a team manager who must possess certification as a state auditor. Upon the completion of the audit, the authorized state auditor issues a preliminary report, which is delivered to the legal representative of the audited entity and the managing key official of the audited entity for the period being audited and to the entity’s governing body. The auditee may, within 15 days from the day of the receipt, submit written comments against the findings of the

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audit. The authorized state auditor issues and signs the final report, which is delivered to the legal representative of the audited entity, to the ministries or funds supervising the audited entity operations, and the managing key official of the audited entity for the period being audited. The legal representative of the audited entity may lodge a complaint against the final report within 30 days. Upon the complaint, the General State Auditor issues a resolution, stating the acceptance or the refusal of the complaint. Based on personal judgement, the authorized state auditor may issue a report to the management of the audited entity. The authorized body to supervise the operation of the audited entity is obliged to notify the SAO for the measures undertaken relating to the findings in the audit report, no later than 90 days from the receipt of the final report. In cases, where the authorized state auditor during the course of the audit determines that there is reasonable ground to believe that an offence or a criminal act has been committed, the competent authorities are informed in order to initiate an appropriate procedure. 6. Publicity, Financing, Organizational Structure The SAO submits an annual report on the conducted audits and its operation activities to Parliament, no later than seven months after the deadline for submitting the annual financial statements (September 30 in the current year for the previous year audits). Audit reports on the Budget of the Republic of Macedonia, the ministries, the budgets and funds and state owned enterprises established by law are submitted to the Parliament. The audit reports containing 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 the State Audit Office. The General State Auditor promulgates the final audit reports and the written decisions on the complaints against the final audit reports in the SAO’s Bulletin. The General State Auditor when necessary shall hold press conferences or otherwise communicate with the media in order to inform the public about the work of the State Audit Office and the results of the performed audits. Funds for financing the SAO operation are provided from the budget of the Republic (for budget users and beneficiaries of the EU funds and other international funds). Charges from the rest of the legal entities where audit is performed, 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 of Supreme Audit Institutions (INTOSAI) since March 29, 2001, (after the Public Revenue Office withdrew its membership which it had held since 1994) and the European Organization of Supreme Audit Institutions (EUROSAI) since May 31, 2002. Since joining the above mentioned organizations, representatives from the SAO have participated in the XVII Congress of INTOSAI in Seoul, Strategic Planning Workshop—EUROSAI/IDI Long Term Regional Training Programme (LTRTP) in Zagreb, meeting of the INTOSAI Working Group on Environmental Auditing in Warsaw, and other seminars organized by these organizations. The State Audit Office maintains multilateral and bilateral relationships and co-operation with other SAIs and other international organizations and institutions for the purpose of exchanging experiences and acquiring new knowledge in 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 some of them.

II. Current Activity And Main Achievements The SAO continually tries to increase the number of conducted audits of the entities subject to audit. Increasing coverage is closely connected with sufficient staff for the performing the SAO task. The government restriction imposed on new employment in the public sector represents an obstacle for SAO. Recruiting professional and highly qualified staff is of great significance for the SAO. Only 60 percent of the assessed SAO staff needs have been meet. The SAO currently is developing a financial audit manual. The World Bank SAO development project, funded by Dutch government, is under way. Realization of the project is carried out according to the plan of activities. The project includes analysis of organizational issues, training needs analysis, preparation of performance audit manual, and improving audit reporting. The training covers areas like financial audit, performance audit, accounting standards, and audit techniques. The project also funds study tours abroad, where the SAO staff have the opportunity to exchange experiences with and learn from other SAI. Activities also include taking part in courses, seminars, workshops and working meetings organized by INTOSAI, EUROSAI, other SAIs and other organizations. Currently, SAO representatives are participating in the IDIEUROSAI Course Design and Development Workshop in Sofia as part of the IDI-EUROSAI Long Term Regional Training Programme. The cooperation agreements signed with Bulgarian, Romanian and Hungarian SAIs will promote the exchange of audit experiences, professional training, joint research and audits and other key audit issues. We had also a very productive visit to European Court of Auditors where we have exchanged experiences especially in the context of audits of users of EU funds. SAO also cooperates with EU organisations and the World Bank concerning recommendations and commitments resulting from the documents issued by these organisations (Stabilisation and Association Report of the European Commission, World Bank Country Financial Accountability Assessment and Mission Aide Memoire). The SAL was recently amended to respond to some World Bank recommendation.

III. The Prospects of Further Development of State Financial Control In The Near Future Development of financial control in Republic of Macedonia is beginning to move quickly. During 2004, Parliament passed legislation establishing internal audit units in most of the Ministries and expanding the central internal audit unit in the Ministry of Finance. Plans are in the first phase to establish internal audit capabilities within 18 budget users. In the second phase (to the end of 2005) internal audit shall be included in other government institutions, and in the third phase (up to 2010) in unit users. To assist in the development of the internal audit function, the World Bank sponsored a project that resulted in the development and publication of an internal auditing handbook to guide the work of internal auditors, supplemented with a two-week training course for internal auditors.

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The audit work and coverage of the SAO will be greatly facilitated by the establishment of internal audit offices. Once these offices are fully functioning and carrying out audit work in accordance with auditing standards, the SAO can begin to rely on their work. By relying on the work of internal auditors, the SAO can greatly expand its audit coverage. The SAO is hiring more staff during 2004 that will enable it to increase its audit coverage of government activities. Further, as a result of the current World Bank project, SAO staff will be provided comprehensive training to enhance and improve their auditing skills. A performance audit manual is currently under development and SAO staff will be trained in how to conduct performance auditing. 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 year we plan on developing systems and processes that will enable us to better identify systemic weaknesses disclosed by SAO audits. Also, we plan to develop a recommendation tracking system so that we know at any one time what actions are being taken to implement our recommendations and which entities have not been responsive. We plan to look into ways to publicize our audit reports. We will include a list of audit reports on our web page and also a short summary of the report, noting significant audit findings and recommendations. These improvements will help the Macedonia public become more aware of the SAO’s work, put additional pressures on Government organizations to improve their operations, and allow the SAO to focus its audit efforts on more systemic-type issues. As part of the European Commission CARDS—Long-term Indicative Programme 2005-2006, the SAO intends to emphasize its need for further development of government auditing. The SAO plans to address development issues by working closely (through the Twinning Project) with another EU member SAI. The main goal of this Project would be to enhance the external audit provided 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 issues relating to financial and performance audit), joint pilot audits, modernising the methodological approach, improvement of the audit manuals, and guidelines for conducting audits of different types of auditees and areas. The other issues will result from the needs and the program of the European Commission in agreement with the potential SAO partner. Emphasize will be given to the completion of the tasks, that were initially planned to be covered by the World Bank SAO Development project (that is under way) and, which due to lack of sufficient funds were dropped, conducting IT audits using auditing software. The SAO audits will identify areas susceptible to corruption and at the same time promote and support establishing internal controls. Thus, audits will help prevent corruption. SAO operations will include analysis of its audit reports in different audit areas like health, environment, etc. These analyses will identify the most important trends, recurring problems and changes in these areas and their cause. The SAO will identify areas that present increased risks of corruption where, primarily by performing audits that promote and support the operation of internal control mechanism, these audits will help force back corruption. Another new task is auditing the reliability of operation of information technology systems.

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IV. Proposals on the Further Development of International Cooperation Between SAIs in Europe The SAO of Macedonia is extremely interested in finding ways to cooperate and work with other SAIs in Europe. We are looking for opportunities to work with and learn from other SAIs and, under our current World Bank project, are considering study tours and exchange programs to other SAIs to learn about their operations and practices. For example, we consider sending one or more staff members to another SAI in Europe to learn first hand about that SAI’s quality assurance program so that the information and practices could be considered for possible adoption by SAO. We believe it would be useful if EUROSAI could publish or make known what expertise or particular specialties may be available in specific European SAIs. For example, some SAIs in Europe may have a well-developed training curriculum for their staff and have instructors who could give certain type training at other SAIs. Knowing what expertise and specialties are available in other SAIs would help developing SAIs, such as the Macedonia SAO, in finding expert assistance that they could possibly draw upon to enhance and improve their operations and practices. Another area where we could benefit is learning which SAIs may have done audits in certain areas, such as procurement. Procurement is a particular vulnerable and high-risk area and it would be good to know the experiences and practices of other SAIs. We could then either request the assistance of the SAI or possibly send staff to observe first hand how the SAI goes about conducting a procurement audit. We envision future cooperation between the European SAIs (including the European Court of Auditors) in conducting joint audits on different projects that are of common interest, audit of the use of the EU funds, etc. Another aspect of this cooperation would be taking part in congresses, meetings, seminars, and conferences as well as being active in the work of the permanent committees and working groups of INTOSAI and EUROSAI. This will enable efficient transfer of knowledge between SAIs. The substantial support provided by IDI in supporting the initiatives for professional development and building the training capabilities of a SAI is deemed especially important. In order to keep abreast of the latest development in auditing, the SAO plans to be active in the international audit community.

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Public Financial Management Performance Measurement Framework Revised Consultative Draft, February 12, 2004 [With Amendment Regarding Procurement1] 1. Introduction and Background This note presents a preliminary draft Public Financial Management (PFM) Performance Measurement Framework, on which comments from a wide range of stakeholders are sought. The framework identifies a set of critical objectives of a PFM system, and a standard set of high-level PFM indicators to assess performance against those objectives. This note has been prepared following initial comments received on a preliminary draft of the framework dated October 16, 2003. The preliminary draft PFM Performance Measurement Framework has been developed by a working group involving staff from the World Bank, IMF and the Public Expenditure and Financial Accountability (PEFA2) Secretariat. The Framework is currently a consultative draft proposal and has not been endorsed by the World Bank, IMF or PEFA partners. The working group is seeking to identify and develop approaches to public expenditure and PFM work that support greater country ownership, reduce transactions costs, improve donor harmonization, better meet developmental and fiduciary concerns, and lead to improved impact on the reform of country systems.3 The PFM Performance Measurement Framework is one element of the proposed new approach, and specifically is to contribute to an integrated, standard PFM assessment that is under development. The need for such a framework was also identified in the OECD-DAC Donor Harmonization Task Force Good Practice Reference Paper on Measuring Performance in Public Financial Management (2003). The PFM Performance Measurement Framework is designed to measure PFM performance of countries across a wide range of development. This incorporates systems of fiscal and debt management, budget formulation, budget execution, internal controls procurement, accounting and reporting, auditing, transparency and external scrutiny. It draws upon the 16 HIPC expenditure tracking 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 Framework The primary purpose of the PFM Performance Measurement Framework is to provide a standard set of high level indicators that will enable the performance of country PFM systems to be regularly monitored, by domestic and international stakeholders. In so doing it should allow progress over time to be

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demonstrated, while noting that a set of high level indicators necessarily will not be able to detect small improvements in performance. In addition, the PFM Performance Measurement Framework is intended to provide a standard set of indicators that is applied in a consistent and objective manner for all countries assessed, and that can be readily understood by international and national stakeholders. It is also intended to focus attention on capacity building in core PFM areas. Cross-country comparison is an additional expected benefit. In order to meet these objectives, it is necessary that a standard high level set of core PFM indicators are monitored over time and across different countries. The PFM Performance Measurement Framework presents this standard, high level set, which are considered to be relevant in all country circumstances. In addition, this Framework recognizes that these may not cover all the core PFM issues relevant to a particular country. It is understood, therefore, that individual countries may add some further indicators that meet their specific country circumstances. The standard set plus the country specific additions would then provide a high level set of indicators that the government and donors could agree as the means of measuring overall PFM performance. The standard set should have wide international acceptability so as to facilitate harmonization, and have a clearly defined system of calibration to ensure consistency 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 the operation of every individual part of the system or the factors that affect PFM performance. The nature of the high level indicators will mean that they can only provide limited information. The intention is that the high level indicators in this framework will be supplemented by “second level” indicators which support diagnosis and detailed analysis of specific areas. An example is the set of procurement indicators, which is currently being developed by the World Bank and OECDDAC.

3. Critical objectives of the PFM system measured by the framework A good PFM system is an essential tool of government in the implementation of policy and achievement of developmental objectives. Specifically, the goal of a PFM system is to support the achievement of aggregate fiscal discipline, strategic allocation of funds, value for money, and probity in the use of public funds. Ultimately, we are concerned as to whether these budgetary outcomes are achieved, but it has not been possible identify indicators that directly capture outcomes that are not country specific and that would not require detailed data analysis. This set of high level PFM indicators, therefore, focuses on the operational performance of the systems, processes and institutions of PFM, and seek to assess 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-level indicators to address, and are as follows:

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1. Budget Realism: The budget is realistic and implemented as intended in a predictable manner. 2. Comprehensive, Policy-based Budget: The budget captures relevant fiscal transactions, and is prepared with due regard to government policy. 3. Fiscal Management: Aggregate fiscal position and risk are monitored and managed. 4. Information: Adequate fiscal, revenue, expenditure, procurement, and accounting records and information are produced, maintained and disseminated to meet decision-making, control, management and reporting purposes. 5. Control: Arrangements are in place for the exercise of control and stewardship in the use of public funds, including on procurement. 6. Accountability and Transparency: Arrangements for external transparency and 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 or achieving other policy objectives, or whether there is value for money achieved in service delivery. In addition, the critical objectives listed above do not include the results/performance orientation of the PFM system.5

4. Structure and coverage of the indicator set The 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 are assessed by comparison to the original approved budget. These provide, in particular, a measure of the realism of the budget and the extent to which the budget is an authoritative tool of government policy. B. Key cross cutting features of the PFM system: This category of indicators captures two key features of the quality of the PFM system that are important as 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-national governments) is captured in aggregate fiscal oversight, and (ii) the scope, content and classification of fiscal and budget information produced across the 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 broad measures of the performance of the key systems, processes and institutions within the budget cycle of central government; these are planning and budgeting, budget execution, accounting and reporting, external scrutiny and accountability. Procurement has been integrated into each part of the cycle as it features in all of them. Where possible, an output (such as funds flow to a spending ministry, or audited financial statements) is measured, in order to capture the performance of a chain of systems, processes and institutional interactions.7 The structure and coverage of the set of high level indicators that has been developed is illustrated in this diagram.

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Aspects of the PFM system measured by the indicators C. Budget Cycle

A. PFM Out-turns

Planning and Budgeting Revenues Revenues

External Scrutiny and Accountability

B. Key cross-cutting features Comprehensiveness

Budget Execution

Expenditures Expenditures

Transparency Deficit Deficit

Accounting and Reporting

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

5. The selection criteria Drawing on the OECD-DAC Good Practices Reference Paper and other relevant sources, the criteria identified for selecting individual indicators are shown in Box 1 below. Some indicators initially identified have been removed on the basis of these criteria, such as those related to the performance orientation of the system. 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 6 below, the Public Expenditure Working Group has developed a standard set of

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high-level indicators for testing and for consultation. These are organized in the structure shown in Diagram 1, and are listed in the Table 1 below. Table 1: A revised set of high-level PFM performance indicators A. PFM OUT-TURNS 1. 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 AND TRANSPARENCY 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 CYCLE C(i) Medium term planning and budget formulation 11. Extent of multi-year perspective in fiscal planning, expenditure policymaking 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 execution 15. 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 that provides for competition, value for money and effective controls.

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C(iii) Accounting and reporting 23. 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 scrutiny 26. 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 also includes two indicators of donor practices which impact country PFM systems. Through these indicators it is proposed that donor performance, and the extent of the negative impact of donor practices, are also measured. Indicators of donor practices Donor 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 indicators The calibration of the high level indicators is related to the six critical PFM objectives, of budget realism, comprehensive and policy-based budget, fiscal management, information, control, and accountability and transparency, as these have been defined in section 3 above. Together these objectives define the nature and quality of the core elements of a PFM system that are necessary to achieve open and orderly management of public finances. Each indicator seeks to measure performance of a core PFM element, against the critical PFM objective relevant to that core PFM element. Each indicator is measured against a four point ordinal scale A-D.9 Standard levels have been applied across the indicators as far as possible. A score of A. is warranted for an individual indicator if the core PFM element meets the relevant objective in a complete, 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, intermediate scores will be allowed (designated by C+, for example).11 Consideration is also being given to adding an arrow to the score to allow direction of change to be captured. The four point ordinal scale was selected to allow a greater range of performance to be differentiated than the HIPC expenditure tracking benchmarks were designed to do, while at the same time being sufficiently limited in number 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, additional quantified data that can be utilized to support or supplement those scores will also be recorded and monitored within the PFM Performance Measurement Framework. This additional data is identified alongside the list of indicators in Annex 1.

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8. Testing and applying the new framework The next step in developing the indicators involves pilot testing. Pilot tests are planned to determine the relevance of the indicators in specific country circumstances. PEFA funding is being used to support the process of testing the indicators in Cambodia, Madagascar, Uganda and Chad. How the scores from the indicators are interpreted is an important consideration. The PFM Performance Measurement Framework has been designed as a contribution to a fuller, standard PFM diagnostic assessment, that is currently under development as part of the new approach to PE/PFM work. The indicators feed into the fuller analysis but, given the limitations of what the indicators are able to measure, cannot alone provide the whole picture. They require careful interpretation on a country-by-country basis. The standard assessment is the subject of a separate working group paper and this will address, inter alia, issues such as how the standard assessment, incorporating the indicators, will be applied (by whom, how data will be collected, how frequent etc). The manner in which the indicators are recorded can also help to avoid overinterpretation of the scores. In addition to the scores themselves, the reporting should including explanatory information and a justification of the score, specific reference to the evidence used to determine the score, and the cardinal data available to support or supplement the score. A standard format in which to record the scores and the supporting information, such as that indicated in the table below, will also help to ensure accessibility to different stakeholders and allow different users greater assurance about the basis on which scores were determined. Indicator Score Given Commentary Justification/ Cardinal data Evidence used

8. Consultation A major process of consultation regarding the strengthened approach to PE/PFM work is in process by the working group, involving stakeholders from developing countries, the donor community, academics and practitioners. This revised note has been prepared to facilitate the consultation on the PFM performance 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 Performance Measurement Framework. Public Expenditure Working Group February 12, 2004 Nicola Smithers Public Expenditure and Financial Accountability Secretariat Room MC4-579, World Bank offices 1818 H Street, NW Washington, DC 20433, USA Tel: +(1) 202 473 1912 • Fax: +(1) 202 522 7132 • [email protected]

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Consultative Draft—PFM Performance Indicators ANNEX 1 A. 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. Guidance The aggregate fiscal deficit is a “bottom line” measure of budget out-turn. If the deficit out-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 macroeconomic situations. [The appropriate definition of the deficit for each country will depend on the IMF article IV consultation reports]. Good budgetary practice includes budget monitoring and review processes. A mid-year review process will involve updating the revenue forecast and making an adjustment to expenditure 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 budgeted 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 budgeted 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 budgeted deficit 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 administrative classification over the preceding four years: policy change is reflected by change in percentage share in the budget) Where the composition of expenditure regularly varies considerably from the original budget, that budget will not be a useful ex ante statement of intent. Guidance Measurement against this indicator requires an empirical assessment of expenditure out-turns (excluding expenditures on donor-funded projects) against budget at a subaggregate level. As budgets are usually adopted and managed on an administrative (ministry/agency) basis, then the administrative basis is preferred for assessment. A functional 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 10 percent variance at administrative or functional level in at least two of the three years.

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(excluding interest on debt), and no more than 10 percent variance on an economic basis 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 at least two of the three years (excluding interest on debt), and no more than 15% variance 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 of budgeted and actual revenue provides an overall indication of the quality of forecasting and revenue administration. External shocks may however occur, that could not have been forecast and do not reflect inadequacies in administration, and the variance noted below 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 been below 95% of total budgeted domestic revenue. b. In no more than one out of the three years has domestic revenue out-turn been below 92% of total budgeted domestic revenues. c. In no more than two out of the last three years has domestic revenue out-turn been below 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 of the employee, supplier, contractor or creditor is overdue, and are a form of non-transparent financing. A high level of arrears can indicate a number of different problems such as inadequate 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 of arrears, and the extent to which the systemic problem is being brought under control and addressed. 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.

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c. It is estimated that there is a significant stock of expenditure arrears (5%-10% of total expenditure), though the information available may be incomplete. The accumulation of new arrears slowed down in the last year. This score will also apply if the estimated expenditure arrears are between 10% and 15%, but there has been a significant reduction in the level in the last year, and the accumulation of new arrears has slowed down in 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 been reduced 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 activities, and fiscal risks that will impact nationally that arise from activities of parastatals and state-owned enterprises (SOEs), including state -owned commercial banks, and from activities of sub-national levels of government. (i) Central government should require and receive quarterly financial statements and audited year end statements from parastatals and SOEs, and monitor performance against financial targets. (ii) Where sub-national governments can generate fiscal liabilities for central 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 action to manage fiscal risks arising from the actions of parastatals, SOEs and sub-national governments, in a manner consistent with transparency, governance and accountability arrangements, and the relative responsibilities of government and the rest of the public sector. a. (i) Well-established procedures are in operation for monitoring all major parastatals and SOEs on a quarterly basis, and reports are published on the full aggregate fiscal position annually (ii) Either sub-national governments cannot generate fiscal liabilities for central government, or where they can central government monitors the net fiscal positions of sub-national governments on an annual basis (iii) The central government takes 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 fiscal risks 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 and SOEs. (ii) Central government monitors the net fiscal positions of the major tier of subnational government on an annual basis (where they can generate liabilities for central government), (iii) Some mechanisms are available to central government to take corrective action to manage fiscal risks arising from actions of parastatals, SOEs and subnational governments, and these are utilized from time to time. Government provides reports including major fiscal risks arising from parastatals/SOEs and sub-national government. c. (i) Parastatals and SOEs are monitored on an annual basis. (ii) Major fiscal risks arising from sub-national governments are monitored. d. The fiscal risks arising from parastatals, SOEs and sub-national governments are not routinely monitored.

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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 other fiscal reports for the public) should cover all budgetary and extra-budgetary activities of central government to allow a complete picture of central government revenue, expenditures 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 as those funded through extra-budgetary funds, are insignificant. However, even if there are significant, it is still possible to obtain a complete picture if the expenditures on extrabudgetary activities are included in fiscal reports. This guidance has drawn from the IMF’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 (below 1% of total spending). Alternatively, the level is somewhat higher (up to 10% of total spending) but fiscal reports include complete information on these expenditures. All major donor-funded expenditures on government activities are captured in annual budget documents. b. The level of extra-budgetary activities of central government is below 10% to total spending and some fiscal reports cover the majority of these expenditures; alternatively extra-budgetary activities may be as high as 15%, but fiscal reports provide complete information on these expenditures. The majority of donor-funded expenditures on government activities are captured in the annual budget documents. c. The level of extra-budgetary activities of central government is less than 10% of total spending, but fiscal reports provide limited or no information on these expenditures; alternatively, extra-budgetary activities are higher than 10% and the majority of these expenditures are reported. Some donor-funded expenditures on government activities are captured in annual budget documents. d. The level of extra-budgetary activities of central government is more than 10% of total spending and fiscal reports provide limited or no information on these expenditures. Little or no donor-funded expenditures on government activities are captured in annual budget documents. Indicator 7. Adequacy of information on fiscal projections, budget and out-turns provided in budget documentation Guidance Annual budget documentation, (the annual budget and budget supporting documents) should allow a complete picture of central government fiscal forecasts, budget and outturns. As well as revenues, expenditures, financing, it should include debt level and composition, financial assets, and the fiscal impact of contingent liabilities. It should also provide information comparable to the budget for the out-turns for the two preceding fiscal years, 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 financial assets, some information on contingent liabilities, and comparable information on prior year out-turns and future year projections. b. Annual budget documentation includes information on the debt level and comparable information to the out-turn of the prior year.

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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 comparable information 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 dimensions: administrative unit, economic, functional and program. Where standard international 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), which is the functional classification applied in GFS, there are ten main functions at the highest level 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 of implementing government poverty reduction strategies through the budget and in reallocating resources. Ideally, the classification system will be sufficiently comprehensive to identify poverty reducing expenditures. If not, specific appropriations in the budget can be tagged as poverty reduction—this has been named a “virtual fund” as it involves no separate institutional, governance, or execution devises from those used generally. They may involve the application of a special poverty-reducing code within a consolidated and reliably depicted line item budget. The use of institutional poverty funds is generally considered to be poor practice as it tends to reflect considerable weaknesses in current classification and 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-existing comprehensive 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 classification of 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.

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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 fiscal plans, position and performance of the government. The key fiscal information provided by 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 performance of the government are the external audit reports, provided by the Supreme Audit Institution. Transparency will depend on whether key fiscal information and external audit reports are published in a timely manner, can be accessed by the public (eg. whether information is provided on websites which the public is able to access, or in mainstream press), and it is in a clear, readable format (eg. understandable structure/layout, appropriately summarized). a. There is comprehensive, timely publication of key fiscal information and external audit reports, 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 major delays, and the format is understandable. c. Some key fiscal information and external audit reports are published, but not on a timely 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 and budgeting. Guidance Policy decisions have multi-year implications, and therefore multi-year fiscal forecasts and estimates of forward expenditures (including expenditures both of a recurring nature and those involving multi-year investment commitments) are required to determine whether current 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 estimates. 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 economic and sectoral breakdown) are prepared on a rolling annual basis, costed statements of national and major sector strategies exist, and there is a strong direction provided in the budget circular (or equivalent) regarding the multi-year forecasts to be adhered to in budget submissions.

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b. Multi-year aggregate fiscal forecasts and forward expenditure estimates (based on an economic breakdown) are prepared on a rolling annual basis, statements of national strategy and sectoral strategy exist, and the budget circular (or equivalent) makes a link between the annual and multi-year forecasts and the national strategy. c. Multi-year aggregate fiscal forecasts are updated annually but no forward estimates of expenditure 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 equivalent). Alternatively, fiscal forecasts cover the budget year only but the budget circular makes clear reference to national strategy. d. The fiscal forecasts cover the budget year only. No linkage is made between the annual budget 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 budget reflects fiscal and sectoral policies. This requires an integrated top-down and bottom-up budgeting process, involving central agencies, spending agencies and political leadership in an orderly and timely manner, in accordance with a pre-determined budget formulation calendar. Clear guidance on the budget process should be provided in the budget circular and budget formulation manual. Negotiations on allocations should be transparent and systematic. a. Spending ministries are given clear guidance for the preparation of budget submissions, including indicative ceilings that are informed by specific agreement at the political level on the relative spending priorities across sectors. Ministries adhere to the budget calendar and are generally able to fulfill the requirements of the budget calendar, including ceilings and data submissions. Negotiations with ministry of finance are open and transparent; line ministries know their final allocation at the conclusion of such negotiations. b. Spending ministries are given clear guidance for the preparation of budget submissions, and indicative ceilings are informed by general guidance from the political level concerning relative spending priorities. Ministries adhere to the budget calendar and circular requirements in most cases. Negotiations between ministry of finance and line ministries are rather opaque, and there may be a delay in line ministries learning the outcome of negotiations. c. There are occasional delays in the budget calendar and budget submissions from line ministries may be incomplete or lack the detail requested by ministry of finance. The political level is involved in reviewing and approving the estimates only after they have been prepared by ministry of finance, thereby constraining their ability to make adjustments. Budget conferences between ministry of finance and line ministries are highly restricted, with final outcomes reflecting the will of ministry of finance. d. Although a budget calendar and budget instructions may exist, they are generally not adhered to. Budget submissions are often late and if indicative ceilings are given, they are normally exceeded by line ministries. The political leadership generally only gets involved prior to the budget being submitted to the legislature, at which time little opportunity for adjustment exists. Ministry of finance prepares the budget with little input from line ministries, and the latter may only learn of their budget allocations when the budget is submitted to the legislature.

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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 recurring nature and budgeting for multi-year investment projects. This means that decisions about the investment and recurrent funding for a particular sector or ministry are taken independently and may be inconsistent. In addition, the recurrent implications of investment expenditure are not considered when making the decision to invest. a. There is a single budget process, based on a single calendar and circular, that fully coordinates the budgeting for investment and recurrent expenditures at the central, ministry/agency and sub-functional/program levels. Recurrent implications of investment decisions are budgeted. b. Linkages between the processes for budgeting for investment and for recurrent expenditures are made at key points, for the central and ministry/agency levels. The budgets are documented together at the central and ministry/agency levels. c. The budgets for investment and recurrent expenditure are only brought together towards the end of the budget process. d. The budgeting for investment and recurrent expenditures are separate processes and produce 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 is exercised through the passing of the annual budget law. If the legislature does not rigorously examine and debate the law, that power is not being effectively exercised and will undermine the accountability of the government to the electorate. Assessing the legislative scrutiny and debate of the annual budget law will be informed by consideration of several factors : I. (i) The scope of the legislature’s review in particular the extent to which it covers fiscal policies and medium term fiscal framework, in advance of the review of details of expenditure 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 approved expenditures 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 year commences.

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c. I. Legislative scrutiny covers the details of expenditure and revenue, only budget estimates are provided, some procedures exist and are partially followed. II. The budget is generally 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 financial year. Budget execution Indicator 15. Effectiveness of cash flow planning, management and monitoring. The objectives of cash flow planning, monitoring and management are (i) orderly execution of the budget, (ii) borrowing synchronized with cash inflows and outflows, (iii) avoidance of idle cash balances resulting in unnecessary interest payments. This requires regular calculation and consolidation of cash balances (including those for extra-budgetary funds), and regular and reliable forecasts of cash inflows and outflows which are linked to the budget implementation and procurement plan, and borrowing plan. Guidance Calculation and consolidation is facilitated where there exists a single Treasury account or where all accounts are centralized. In order to achieve regular consolidation of multiple bank accounts not held centrally, timely electronic clearing and payment banking arrangements 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 updated monthly, based on revenue forecasts and budget implementation and procurement plans. Borrowing is planned on the basis of cash flow forecasts. b. There is daily calculation and consolidation of government cash balances, though some transactions such as those from extra-budgetary funds may remain outside the cash planning and consolidation arrangements. Cash flow forecasts are prepared for the fiscal year and updated monthly. c. The calculation of most government cash balances takes place regularly, though some accounts are not included in the cash planning arrangements. The system used does not allow for daily consolidation of bank accounts. Cash flow forecasts are updated periodically. d. The calculation of cash balances takes place irregularly, or cash flow planning is not undertaken. 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 of government guarantees are often major elements of overall fiscal management. Poor management of debt and guarantees can create unnecessarily high debt service costs and can create significant fiscal risks. Critical aspects of debt management performance include the proper recording and reporting of debt and guarantees, the approval of all guarantees by the ministry of finance, and regular analysis of debt sustainability. a. Domestic and foreign debt records are maintained on an single computerized debt management system and produce comprehensive reports for government routinely. Debt sustainability analysis is undertaken regularly. The issue of government

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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 management systems, or, in cases where debt levels are low, using spreadsheet records which have been demonstrated to be accurate and robust. These produce regular reports. Debt sustainability analysis is undertaken from time to time. All guarantees are approved by the ministry of finance, and a limit is placed on the total that may be issued. c. Spreadsheet or manual records are maintained on debt, and reports on debt stock and service 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 expenditures in accordance with original/revised budgets. Guidance Efficient use of resources requires that managers know the level of resources they can utilize (meaning here the point at which they can incur expenditure commitments) and the timing, and that the timing meets the operational requirements of the ministries This is particularly so for seasonal expenditures and major procurement contracts. In some systems, funds (or authority to spend) are released by the ministry of finance within the budget year. In others, the passing of the annual budget law grants the full authority to spend 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 cash flow problems arising. Poor predictability in being able to utilize funds prevents managers from planning and may mean that funds are available at the wrong time. Governments often need to make within-year adjustments to allocations in the light of unanticipated events impacting revenues and/or expenditures. The impact on predictability and on the integrity of original budget allocations is minimized by specifying, in advance, an adjustment mechanism that relates adjustment to the budget priorities in a systematic and transparent manner. In contrast, adjustments can take place without clear rules/guidelines or can be undertaken informally (eg. through imposing delays on new commitments). a. Spending ministries and agencies are able to commit expenditures (eg. sign contracts with contractors and suppliers) in an orderly manner throughout the year, broadly in accordance with cash flow forecasts (agreed with finance ministry) and with the budget. Adjustment to the allocations takes place only once during the year and is done in a predictable, transparent way. b. Spending ministries and agencies have reliable information about the resources available/to be provided for a given quarter, and adjustments to budget allocations are transparent and occur only a limited number of times each year. c. Spending ministries and agencies have reliable information about the resources available/to be provided for a given quarter or more, but adjustments are not undertaken in a systematic and transparent manner. Alternatively, spending ministries and agencies have reliable information about the resources available/ to be provided for a given month, and the variation in the non-salary resources available to individual line ministries on a month-to- month basis is limited.

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d. Spending ministries and agencies have information about resources available for a month or less, and there is significant variation in the non-salary resources available to individual 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 the community level in obtaining resources that were intended for their use (as reflected in the original or revised approved budgets/estimates), or in obtaining the delegation to commit expenditures (in the Francophone system). Leakages may arise in respect of funds and in respect of the procurement and distribution of goods, at different levels within the system, and there may be significant delays. Information about the receipt of resources by service units is often lacking. The accounting system, if sufficiently extensive, reliable and timely, should provide this but frequently information on expenditures in the field is incomplete and unreliable. Public Expenditure Tracking Surveys, audits (either by the external auditor or by donor-funded consultants) or other assessments, may provide alternative sources. In addition, availability of this information to the local community provides a means for ensuring that the funds received are used as intended. a. There is reliable accounting and/or survey information available periodically, and this demonstrates that service delivery units obtain the vast majority of resources intended, in a timely manner. Communities have routine access to information about resources received by local service units. b. Information is available from time to time, and this indicates that service delivery units receive, 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 several key sectors. c. Only limited information is available and this indicates that some leakages exist and that delays can be significant. There is a system, partially operating, to make information available to communities about receipts. d. The information available provides an indication that leakages can exceed 50% of intended resources, and that there are major delays in receipt of resources by service delivery units. Alternatively, very little or no information is available regarding the resources 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 one that is relevant (ie based on an assessment of risks and the controls required to manage the risks), incorporates a comprehensive and generally cost effective set of controls (which address compliance with rules in procurement and other expenditure processes, prevention and detection of mistakes and fraud, safeguard of information and assets, and quality and timeliness of accounting and reporting) which are widely understood and complied

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with, is circumvented only for genuine emergency reasons, and for which top management takes full responsibility. Evidence of the effectiveness of the internal control system should come from regular audits. a. The internal control system is relevant, incorporates a comprehensive and generally cost effective set of controls which are widely understood, the rate at which rules are not complied with is very low (no more that 3% error rate in routine financial procedures, as demonstrated by audit), the controls are only rarely bypassed, and top management 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 generally understood and which audit indicates are complied with (no more than 5% error rate in routine financial procedures). Emergency procedures are utilized on occasion, but in a deliberate and controlled manner. c. The internal control system consists of a basic set of rules for the processing and recording of transactions, which are well understood by those directly involved in their application, and which audit indicates are observed in a significant majority of transactions. Emergency procedures are utilized in non-emergency situations from time to time. d. The core set of rules is not complied with on a routine and widespread basis due to direct 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 the internal control systems, through an internal audit function (or other systems monitoring function) that is appropriately structured, has adequate independence, breadth of the mandate, and power to report, utilizes appropriate professional standards, and reports on significant systemic issues. Specific evidence of an effective internal audit (or systems monitoring) function would also include assessment and monitoring of error rates in procurement and expenditure transactions, a focus on high risk areas, reporting on correction rates, use by the SAI of the internal audit reports, and action by management on internal audit findings. a. An effective internal audit (or systems monitoring) function, as defined above, is in operation. 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 of follow 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 susceptible 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 verified against the approved establishment list. The link between the payroll and the nominal roll is a key control. Any amendments required to the nominal roll should be processed in a timely 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, and control weaknesses. In addition, in order that the wagebill is adequately monitored, the ministry of finance should have full access to payroll information a. Payroll records and nominal roll are directly linked through a computerized information system to which the ministry of finance has easy access, authority to change the payroll 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 timely way. There is a strong system of payroll audit to identify control weaknesses and/or ghost workers. b. Payroll data is supported by the nominal roll records. The authority and basis for changes to the payroll database are clear. Some delays exist in processing changes to the nominal roll and payroll database. The routine controls are complemented, from time to time, by payroll audits to identify weaknesses and/or ghost workers. Payroll information is regularly provided to the ministry of finance. c. The nominal roll, which supports the payroll data, is not fully maintained. Controls exist over changes to the nominal roll and payroll database but these are not adequate to ensure full integrity of the system. There may be significant delays in processing of payroll changes. Aggregate payroll information only is provided to the ministry of finance. 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 overall PFM system which is supported by a clear regulatory framework that provides for competition, 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 efficiency and economy of expenditures and also contributes to the budget formulation and expenditure management process. Assessment against this indicator will depend on the adequacy of the regulatory framework in promoting competition, transparency and value for money and the extent to which the system has effective control, remedy and feedback mechanisms. Evidence of the performance of the system against these requirements include the percentage of contracts subject to competitive bidding, the regular publication of opportunities and outcomes of public contracts, the absence of major delays in the processing and payment of contracts, the comparability of prices paid by the public sector to pricing of items available in the marketplace and the ability of the system to provide timely information on the cost of goods, works and services to support budget formulation, execution and expenditure management. a. The system is defined by a clear regulatory framework which is consistently implemented under the oversight of both internal and external control systems. Contracts are awarded on the basis of competition, in accordance with rules, or justified when other methods are employed. There is regular advertisement of opportunities and publication of data on public contracts. There are few unexplained delays in awarding contracts and in making payments. The system provides for timely feedback of cost data 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 is regular advertisement of opportunities but little publication of information on public

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contracts. Control mechanisms and linkages to the overall PFM system are not well established leading to budgeting issues and delays in contract award and payments. c. The system is defined by an outdated regulatory framework which enables inconsistent and poorly controlled implementation. Lack of competition as the basis for contract awards is evidenced by poor comparison between prices paid in the public sector when compared to market prices. Delays in award of contracts and payments are frequent. Disclosure of information is poor leading to a lack of transparency and confidence in the system. d. There is a lack of definition and clarity in the regulatory framework with inconsistent implementation evidenced by a lack of competition in the award of contracts and little disclosure of information. Control systems are weak or non-existent. Delays in awards and in payments are common and contribute to overall lack of efficiency in the system and 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 of the recording practices of accountants—this is an important part of internal control and a foundation for good quality information for management and for external reports. Timely and frequent reconciliation of data from different sources is fundamental for data reliability. Two critical types of reconciliation are (i) reconciliation of fiscal data, held in the government’s books, with government bank account data held by central and commercial banks. High quality bank reconciliation requires that large differences are not left unexplained (ii) reconciliation of suspense accounts, and advances. In addition, balance should be cleared out of suspense and advance accounts on a regular basis. a. High quality bank reconciliation is undertaken at aggregated and detailed levels at least monthly, with very little backlog. Suspense accounts are routinely reconciled and cleared quarterly, and advances accounts are reconciled quarterly. Few suspense and advance accounts have old, brought-forward balances. b. High quality bank reconciliation is undertaken monthly for bank accounts through which revenues are collected and expenditures made, with no major backlog. There is no major backlog in the annual reconciliation of suspense and advances accounts, and in the annual clearing of the suspense account balances. There are old, brought-forward balances in some suspense and advances accounts. c. Bank reconciliation is undertaken quarterly for bank accounts through which revenues are collected and expenditures made, with no major backlog. Not all differences are explained. Reconciliation of suspense and advances accounts generally takes place annually, though there are a significant number of accounts with old, brought-forward balances. d. There is a major backlog in quarterly bank reconciliation, and in annual reconciliation of 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 the government

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Guidance The ability to “bring in” the budget requires timely and regular information on actual budget performance to be available both to the ministry of finance, to monitor performance and if necessary to identify new actions to get the budget back on track, and to the line ministries for managing their own affairs for which they are accountable. The division of responsibility between the ministry of finance and line ministries in the preparation of the reports will depend on the type of accounting and payment system in operation. The role of the ministry of finance may simply to consolidate reports provided by line ministries from their accounting records; in other cases the ministry of finance may undertake the data entry and accounting for transactions in which case the role of the line ministry is reduced, perhaps to reconciling ministry of finance data with their own records. The important requirement is that there be a two way flow of information between the ministry of finance and the line ministries. a. Budget reports, with classification that allows direct comparison to the budget and which incorporate expenditure, revenue and debt information, are disseminated within government within four weeks of month and quarter end. There are no material concerns about the quality of the information. b. Budget reports, with classification that allows comparison to the budget at some levels and which incorporate expenditure and revenue information, are disseminated within government within four weeks of quarter end. Where there is some information that is lacking this is recognized and adequately reflected in the reports, and there may be some limited concerns about accuracy, but these shortcomings do not fundamentally compromise the overall consistency and usefulness of the reports. c. Budget reports are prepared within six weeks of quarter end, but major gaps exist in the information and the manner of compilation allows for a significant level of inaccuracy. 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 the system. In addition, the ability to prepare year end financial statements in a timely fashion is a key indicator of how well the accounting system is operating, and the quality of records maintained. Validation is required through certification of the financial statements by the external auditor. In addition, in order to be useful and to contribute to transparency, financial statements must be understandable to the reader, and deal with transactions, assets and liabilities in a transparent, consistent manner. This is the purpose of financial reporting standards. Some countries have their own public sector financial reporting standards, set by government or another authorized body. In addition, there are the Government Finance Statistics (GFS) standards, and the International Federation of Accountants’ International Public Sector Accounting Standards (IPSASs), some relevant for countries that adopt accrual based accounting, 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 statements are presented in accordance with IPSASs, GFS or an acceptable national standard.

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b. A complete set of financial statements was presented to the legislature within 12 months 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 is some 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 the use of public funds. Key elements of quality include whether external audit (i) is adequately empowered—ie authority exists to obtain necessary information and the scope covers 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) covers the full range of financial audit—reliability of financial statements, regularity of transactions 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 in its 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 systemic issues as well as irregular transactions. c. 80% or more of central government expenditures are covered by the external audit. The SAI has authority to obtain information and reports identify significant issues. Audit work 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 basic information 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 general there should be direct follow up of the audit findings by the executive, which may include 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 in uncleared findings, and the provision by the executive or audited entity a formal written response 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 takes place. 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 that it approved. A common way in which this is done is through a legislative committee/commission that examines the external audit reports and questions responsible parties about the findings of the reports. The operation of the committee will depend on adequate financial and technical resources, and on adequate time being allocated to keep up-to-date on reviewing audit 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 on key findings within one year of the report’s issue and within two years of the end of the relevant period. Follow up actions are recommended to the executive, and are generally acted upon. b. A committee examines the external audit reports and completes hearings within 18 months 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 30 months of the report’s issue. Follow up actions may be recommended but are rarely acted 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 PRACTICES Donor 1. Actual donor flows are close to donor forecasts, and donor information provided to 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 captures two key aspects of donor practices: (i) the extent to which donors provide adequate information to the government about the funds that are to be provided, and on the funds or other forms of development assistance that have been provided, and (ii) how close the actual funds/resources provided are to the forecasts given by donors. a. Financial information is provided by donors on all significant funding/assistance in a timely 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 provided. Actual funds provided by donors in the last two years have been within 75% of forecasts provided. c. Financial information is given by donors for the majority of funds/resources provided.

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d. The financial information provided on actual funds provided is substantially incomplete. Actual funds provided by donors bear little relation to the forecasts provided, or no 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 of aid funds diverts capacity away from managing the national systems. This is compounded when different donors have different requirements. Conversely, the use of national systems by donors can help to focus effort on strengthening, and complying with, the national procedures. The use of national procedures need not mean that donor funds cannot be kept 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 donor arrangements. 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 on February 12, 2004, except that the procurement indicator (no.22) has been amended and procurement issues has been better reflected in the other indicators. This document does not represent a full revision of the document issued on February 12; other comments that has been received in respect of the document issued on February 12 will be fed into the next full revision that is to take place following further consultation and testing of the indicators. 2. PEFA is a partnership program of the European Commission, World Bank, the IMF and the governments of France, Switzerland, Norway and UK. The Secretariat is located in the World Bank offices in Washington. 3. The new approach is consistent with the principles contained in the paper Bank/Fund Collaboration on Public Expenditure Issues, (Washington, DC: The World Bank and International Monetary Fund, February 14, 2003). See www.imf.org/external/np/fad/pubexpen/2003/021403.htm. 4. See Actions to Strengthen the Tracking of Poverty-Reducing Public Spending in Heavily Indebted Poor Countries (HIPCs), (Washington, DC: The World Bank and International Monetary Fund, March 22, 2002). See www.worldbank.org/hipc/hipc-review/tracking.pdf. Since that paper was prepared, a benchmark capturing performance of the procurement system has 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 the processes involved in exercising external accountability could be more adequately captured 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 to support orderly cash flow management and budget execution. Coverage of the subnational government and the parastatal/SOE sectors are limited to the monitoring of and reporting on the impact of these sectors on aggregate fiscal position and risk. 9. This is compatible with the IDA Country Policy and Institutional Assessment rating system, which includes an indicator on budgetary management. 10. A score of B. indicates that the core PFM element is generally operating in an orderly and timely manner but lacks completeness, coordination, compliance and/or accuracy in some limited respects. C. indicates the core PFM element is working at a rudimentary level, but there are some significant weaknesses in terms of completeness, coordination, compliance, accuracy, and/or timeliness. D. indicates there are very substantial weaknesses 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, and some of those specified for a B score.

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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 for PSC meetings are made available on the PSC page of the IFAC web site before the meeting. In conjunction with this meeting, the PSC met with members of its Consultative Group and held a round table meeting with representatives from the United Nations on International Public Sector Accounting Standards (IPSASs) and reform of financial reporting in the United Nations. The Chair of the US Governmental Accounting Standards Board (GASB) also joined the PSC for 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 IPSAS 21 Impairment of Non-Cash-Generating Asset, subject to final review of editorial revisions by a sub-committee of the PSC and approval by the Chair, and confirmation of the application date of this IPSAS. Because of the linkages between this IPSAS and the IPSASs being revised as part of the PSC’s improvements project (see below), the PSC intends to co-ordinate the application date of this IPSAS and the improved IPSASs. The PSC noted that respondents to ED 23 had agreed that the impairment of cash-generating assets should be dealt with in accordance with IAS 36 Impairment of Assets. Accordingly, the PSC agreed to develop an IPSAS Impairment of Cash-Generating Assets reflecting the requirements 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 was chaired by Sir Andrew Likierman, former Head of the UK Accountancy Service of HM Treasury. Members discussed each recommendation in detail, noting that: they supported the majority of recommendations and were of the view that the report was comprehensive and balanced; and that the survey results generated as part of the review process were very supportive of the PSC’s standards setting activities. Members also discussed the PSC’s work program and agreed that the PSC should address the public sector specific issues on its work program as its first priority, that convergence with IFRSs/IASs would be its second priority and convergence with statistical reporting models its third priority. The Chair attended the IFAC Board meeting following the PSC meeting and presented the PSC views on each recommendation. It is anticipated that the IFAC Board will consider an action plan for implementing the Panel’s Recommendations 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 Treaty Organization (NATO) and USA, including the Executive Director of the Financial Accounting Standards Advisory Board (FASAB) in the USA. The Consultative Group noted the PSC’s proposed work program, noting that guidance on key public sector issues should be a priority but that there was also a need 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 sector accountants in developing countries. The Consultative Group then discussed: • the PSC’s strategy for convergence of IPSASs with IASs/IFRSs where appropriate, noting that the convergence strategy agreed at this meeting appeared appropriate (see below for a discussion of that strategy); and • the Research Report Budget Reporting, noting support for the development of an IPSAS on the comparisons of actual to budget as a priority. The Consultative Group also noted that developing an IPSAS on ex-ante reporting of budget information was a longer term project which could benefit from further research including consideration of the role of a management discussion 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. The Report which can be downloaded free of charge from the PSC page of the IFAC web site represents the views of Dr. Jesse Hughes, the consultant who had prepared the Report, and not necessarily the PSC. The PSC discussed the process for the ongoing development of this project and agreed that it should be developed in two components as follows: • The development of an IPSAS on the comparison of budget and actual (“expost” budget reporting) should be actioned as a priority project. A first draft of an Exposure Draft (ED) is to be prepared for consideration by the PSC at its next meeting; and • The development of an ED on the “ex-ante” reporting of budget information at the time the budget is approved is a longer term project and should be progressed after the PSC has considered a detailed project brief which outlines specific matters to be addressed. It is anticipated that project brief will be 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 that the draft ED had been circulated to PAP members, that responses received to date were included in the PSC’s Agenda and identified key issues raised in those and an additional response. Members reviewed the draft ED focusing on issues raised by the PAP, particularly in respect of: key definitions; whether the scope of the project should be extended to deal with external assistance, what separate disclosures should be required; and practical issues related to the availability of information to satisfy the disclosure requirements. Members noted

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that Mr. Coe would make a presentation on the draft ED to a meeting of the OECD Joint Venture on Public Financial Management, which comprises all OECD countries, developing countries, and the Multi-lateral Development Banks (MDBs). Mr. Coe advised that the ED would be further developed following 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’s IAS/IFRS convergence program. Major features of the proposed strategy included establishment of a stable platform of IPSASs for the medium term, adopting without change key IASs/IFRSs for which there were no public sector reasons to depart, developing new IPSASs where the requirements of an IAS/IFRS needed amendment for application to the public sector, and issuing English, French and Spanish versions of the second generation IPSASs at the same time. To ensure the PSC’s due process was complied with, and that linkages with the PSC’s public sector specific projects were recognized, the paper proposed that the full suite of “second generation” IPSASs would not be on issue 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 encouraging disclosure of information about the General Government Sector in wholeof-government general purpose financial statements. The PSC discussed key features of the project brief and directed staff to further develop the project brief following input from the Project Advisory Panel. An updated project brief is to be presented to the PSC’s next meeting. The PSC noted that staff was developing a project brief for the development of an IPSAS on a comprehensive report of financial performance that distinguished between transactions and other economic flows. The PSC confirmed that the project brief should be developed after 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, Moore Stephens, United Kingdom. ARGENTINA—Carmen Palladino, Consultant InterAmerican Development Bank. AUSTRALIA—Wayne Cameron, AuditorGeneral, State of Victoria. CANADA—Rick Neville, Vice-President and Chief Financial 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 Pérez Saavedra, Subdirector de control de Calidad, Petroleos Mexicano. NETHERLANDS—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, PwC Norway. SOUTH AFRICA—Terence Nombembe, Deputy Auditor-General of South Africa and CEO of the Office of the Auditor-General of South Africa.

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UNITED STATES OF AMERICA—Ron Points, Manager, Financial Management 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 on Accounting Standards (INTOSAI-CAS), Organisation For Economic CoOperation And Development (OECD), United Nations/United Nations Development 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 considerations for the presentation of financial statements, guidance for the structure of those statements and minimum requirements for their content under the accrual basis of accounting. IPSAS 2 Cash Flow Statements requires the provision of information about the changes in cash and cash equivalents during the period from operating, investing and financing activities. IPSAS 3 Net Surplus or Deficit for the Period, Fundamental Errors and Changes in Accounting Policies specifies the accounting treatment for changes in accounting estimates, changes in accounting policies and the correction of fundamental errors, defines extraordinary items and requires the separate disclosure of certain items in the financial statements. IPSAS 4 The Effects of Changes in Foreign Exchange Rates deals with accounting for foreign currency transactions and foreign operations. IPSAS 4 sets out the requirements for determining which exchange rate to use for the recognition of certain transactions and balances and how to recognize in the financial statements the financial effect of changes in exchange rates. IPSAS 5 Borrowing Costs prescribes the accounting treatment for borrowing costs and requires either the immediate expensing of borrowing costs or, as an allowed alternative treatment, the capitalization of borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset. IPSAS 6 Consolidated Financial Statements and Accounting for Controlled Entities requires all controlling entities to prepare consolidated financial statements which consolidate all controlled entities on a line by line basis. The Standard also contains a detailed discussion of the concept of control as it applies in the public sector and guidance on determining whether control exists for financial reporting purposes. IPSAS 7 Accounting for Investments in Associates requires all investments in associates to be accounted for in the consolidated financial statements using the equity method of accounting, except when the investment is acquired and held exclusively with a view to its disposal in the near future in which case the cost method is required. IPSAS 8 Financial Reporting of Interests in Joint Ventures requires proportionate consolidation to be adopted as the benchmark treatment for accounting for such joint venturers entered into by public sector entities. However, IPSAS 8

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also permits—as an allowed alternative—joint ventures to be accounted for using the equity method of accounting. IPSAS 9 Revenue from Exchange Transactions establishes the conditions for the recognition of revenue arising from exchange transactions, requires such revenue to be measured at the fair value of the consideration received or receivable and includes disclosure requirements. IPSAS 10 Financial Reporting in Hyperinflationary Economies describes the characteristics of a hyperinflationary economy and requires financial statements of entities which operate in such economies to be restated. IPSAS 11 Construction Contracts defines construction contracts, establishes requirements for the recognition of revenues and expenses arising from such contracts and identifies certain disclosure requirements. IPSAS 12 Inventories defines inventories, establishes measurement requirements for inventories (including those inventories which are held for distribution at no or nominal charge) under the historical cost system and includes disclosure 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 the treatment of certain events that occur after the reporting date, and distinguishes between adjusting and non-adjusting events. IPSAS 15 Financial Instruments: Disclosure and Presentation establishes requirements for the presentation of on-balance-sheet financial instruments and identifies 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 related disclosures, for investment property. It provides for application of either a fair value or historical cost model. IPSAS 17 Property, Plant and Equipment establishes the accounting treatment for property, plant and equipment, including the basis and timing of their initial recognition, and the determination of their ongoing carrying amounts and related depreciation. It does not require or prohibit the recognition of heritage assets. IPSAS 18 Segment Reporting establishes requirements for the disclosure of financial statement information about distinguishable activities of reporting entities. IPSAS 19 Provisions, Contingent Liabilities and Contingent Assets establishes requirements for the recognition of provisions, and the disclosure of contingent liabilities and contingent assets. IPSAS 20 Related Party Disclosures establishes requirements for the disclosure of transactions with parties that are related to the reporting entity including Ministers, senior management, and their close family members. IPSAS 21 Impairment of Non-Cash-Generating Assets establishes requirements for determining whether an asset is impaired, for the recognition and reversal of impairment losses, and for the disclosures to be made in respect of impaired assets. (The application date is still to be finalized) Glossary of Defined Terms (IPSAS 1-IPSAS 20) identifies the terms defined in IPSASs 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 Accounting is a comprehensive IPSAS on financial reporting under the cash basis. It establishes requirements for the preparation and presentation of a statement of cash receipts and payments and supporting accounting policy notes. It also includes encouraged disclosures which enhance the cash basis report. IFAC PSC Study 14 Transition to the Accrual Basis of Accounting: Guidance for Governments and Government Entities 2nd Edition (December 2003): identifies key issues to be addressed and alternate approaches that can be adopted in implementing the accrual basis of accounting in an efficient and effective manner in the public sector.

INVITATIONS TO COMMENT (Issued January 2004) ITC Accounting for Social Policies of Governments deals with accounting for social policies of governments. The ITC proposes a conceptual model for the recognition and measurement of social policy obligations derived from concepts implicit in existing IPSASs, particularly IPSAS 19. This conceptual model is then applied to a variety of social policy obligations, including the provision of health care, education, social welfare benefits and aged pensions. The ITC also proposes disclosure requirements for social policy obligations. The comment period closed 30 June 2004. ITC Revenue from Non-Exchange Transactions (Including Taxes and Transfers) deals with the recognition and measurement of revenue from non-exchange transactions including taxes of various kinds, and transfers including grants, appropriations, gifts, bequests and fines. The ITC proposes an “assets and liabilities” model for the recognition of revenue from non-exchange transactions based 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 views expressed in this document may not necessarily reflect the final views of the Committee or of individual members. Next PSC Meeting: New Delhi, India, November 1–4, 2004. For further information please contact: Paul Sutcliffe, PSC Technical Director, [email protected] or Matthew Bohun, PSC Technical Manager, [email protected].

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International Consortium on Governmental Financial Management Membership Application 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. 1. Enclosed are dues for calendar year _______. These dues are in payment for membership 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 organization member):

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 transition 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.

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ICGFM Officers and Directors Members of the Board of Directors Members for the ICGFM Board of Directors serve a two-year term. Each Sustaining Organization is represented on the Board. The Nominating Committee solicits nominations to select six Organization Members and six Individual Members to fill remaining Board seats. ICGFM Board of Directors as of July 31, 2004 Sustaining Members: Association of Government Accountants (USA) Casals and Associates CPA Australia Free Balance Graduate School, USDA-Government Audit Training Institute (GATI) Grant Thornton Inter-American Development Bank—Auditor General International Business and Technical Consultants, Inc Institute of Internal Auditors National Association of State Auditors, Comptrollers and Treasurers (USA) Organization of American States—Inspector General US Agency for International Development—Inspector General US General Accounting Office The World Bank—Auditor General Organization Members Cameroon—State Audit Office Hungary—State Audit Office India - Office of the Comptroller and Auditor General International Monetary Fund Pakistan—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)

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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 on input from the ICGFM members. ICGFM Officers as of July 31, 2004 President: 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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The International Consortium on Governmental Financial Management 444 North Capitol Street, Suite 234 Washington, DC 20001 USA www.icgfm.org