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Public Expenditure & Financial Accountability (PEFA)

Comments from ACCA
March 2004

Executive Summary

The Association of Chartered Certified Accountants (ACCA) is pleased to have this opportunity to comment on the PFM Performance Measurement Framework (the draft Framework). These comments have been prepared in consultation with members of ACCA's Public Sector Technical Issues Panel, a group of experienced accountants working in the public sector.

We consider that the draft Framework (dated 12 February 2004 ) provides a useful set of high-level public financial management and accountability indicators. We consider, however, that significant additional guidance material will have to be developed to underpin the indicators and explain clearly the basis for the four-point ordinal scale for each indicator. This will be necessary to ensure that each assessor who uses the Framework will undertake his or her assessment on a consistent and comparable basis. Such a manual would also facilitate the use of the Framework by external and internal auditors.

We also have some concern that this approach, and the possibility that it could be used to assign an overall numerical score to a country (or sector/entity within a country), will provide an unjustified impression of accuracy to the overall assessment process. Thus we consider that assessors using the Framework should be encouraged to use it as a guide or check-list and to consider their assessment against the following three questions:

• Is each aspect of public financial management and accountability currently adequate and appropriate for the government to undertake its functions properly and to address issues of poverty?
  
• If not, what changes should be introduced to ensure that such objectives are achieved in future?
  
• Would investment in such improvements be justified according to poverty reduction or other specified criteria?

We recognise that one of the objectives of the draft Framework is to identify a limited number of high-level indicators. We consider, however, that the inclusion of only three indicators on audit and accountability in the suite of 30 indicators may undermine the importance of the external audit process and result in indicators which lack clarity, due to an attempt to measure several different aspects of the audit and scrutiny process with one indicator.

Detailed Comments

Objectives of public financial management and accountability

1. We consider that the six critical objectives for public financial management and accountability identified in section three of the draft Framework place too much emphasis on minimising fiscal deficits and budgetary compliance. We suggest that this problem could be reduced if, for example, the first objective detailed in the draft Framework, on Budget Realism , were to be moved into second position below Comprehensive, Policy -based Budget. In addition, we consider that the following exhibit provides an improved exposition of the objectives:
   
   Table 1: Financial management goals and criteria
   
   GOALS
   Level 1 � fiscal management
   Flows � revenues, debt, transfers, capital and recurrent expenditures
   Balances � internal and external debt, assets
   Risk contingent liabilities
   Optimal resource allocation In accordance with government policy priorities
   Level 2� resource allocation
   Optimal resource allocation in accordance with government policy priorities
   Level 3 � value for money
   Management of public resources in order to achieve efficiency, economy and effectiveness in expenditure.
   
   CRITERIA
   Proper use of public resources
   In accordance with constitutional, legal and regulatory requirements
   Avoidance of corrupt practices
   Transparency
   Information for stakeholders in a format that facilitates understanding and analysis
   Accountability
   Those accountable for the use of public resources made accountable for their actions and stewardship.
   
2. We also consider that the auditing aspect of the objectives should be emphasised by adding the word �audited� after �information are produced, maintained� on the second line of the fourth of the current objectives. The fourth process in the budget cycle described in Diagram 1 of the draft Framework should be amended to read �External Audit and Accountability�. In addition, the PFM out-turns on this diagram of �Deficit� and �Financing� appear to be different ways of describing the same out-turn, thus one or other should be omitted from this Diagram.
   
   EMPHASIS ON BUDGETARY COMPLIANCE
   
3. The draft Framework's emphasis on successful budget management being measured by the extent of adherence to the original fixed budget appears to conflict with, for example, recent theoretical and practical work in the private sector on the benefits of flexible budgeting designed to respond to changing situations. The modern approach to flexible budgeting seeks to identify appropriate and inappropriate divergences from an original budget. For example, if there has been a major change in exchange or export prices, resultant changes to government income and expenditure should not be considered a failure of budget management. The measure of success of a budgetary assessment framework will depend on how well it can identify and segregate the impact of these external shocks from other factors.
   
4. The description of the objective on Budget Realism should for this reason be amended to: �The budget is realistic and implemented in a predictable manner with suitable adjustments which are explained as necessary.� In addition, further thought should be given to how the indicators and guidance should be amended to differentiate appropriate budgetary adjustments from those which arise from poor budgetary management.
   
5. The draft Framework should make clear that indicator 5 on the comprehensiveness of aggregate fiscal risk oversight does not require the production of consolidated accounts for the whole of the public sector or central government. The current wording at the bottom of page 3, referring to �aggregate fiscal management and reporting�, suggests that such consolidated accounts are required.
   
6. In addition, the guidance for indicator 17 should make the distinction between the release of funds being due to unpredictable external events and those which have resulted from poor cash management.
   
   AGGREGATE FISCAL DEFICIT
   
7. The guidance on the first indicator puts too much emphasis on avoidance of budget deficits rather than more general budgetary management. We consider that the objective for mid-year budgetary reviews should be given as enabling the government's objectives to be delivered rather than to maintain fiscal balance. We also consider that consideration should be given to relaxing the specific measures to allow greater deficits and to extending the scope of these measures to include unplanned budgetary surpluses as well as deficits.
   
   OUT-TURN AND ORIGINAL BUDGET
   
8. The guidance on the second indicator should suggest a level of disaggregation of the budget which should be reported rather than just referring to the �administrative or functional level�. For example, the Government Financial Statistics Manual has 10 headline functions and the 55 lower-level functions.
   
9. In the guidance on level c of indicator 4 of the draft Framework there is no explanation of what is meant by a �significant� reduction in expenditure arrears. We consider that it may also be appropriate to accept (for level c) a higher level of arrears (perhaps 15-20%) if this level has reduced by at least 10% in at least two of the last three years.
   
   Timeliness of audited financial Information
   
10. The timeliness of the publication of the audited financial information will depend, on the one hand, on the speed with which the financial statements are produced and, on the other hand, on the promptness with which the audit process is completed. For this reason we consider that it would be helpful if reference to the timeliness of financial information in indicator 10 were restricted to the production of the financial statements. All references to the publication of audited financial statements should be moved to an indicator in the section on External Accountability, Audit and Scrutiny. The accountant-general should be expected to produce the financial statements within 6 - 8 months of the financial year end and the auditor-general should then complete the audit process to allow the publication of the audited accounts within 3 - 4 months of receiving the draft accounts.
    
    PARTICIPATION IN THE BUDGET FORMULATION PROCESS
    
11. We welcome the reference to participation in the budget formulation process referred to in indicator 12. We note, however, that the guidance for this indicator only refers to participation by line ministries. Indicator 14 extends this to the role of the legislature. We believe, however, that good practice in budgetary formulation means that the wider public should be able to participate in an informed debate over the development of the budget priorities and the budget's formulation.
    
    Approval of new debts and guarantees
    
12. The guidance for indicator 16 on the approval and management of debt does not appear to be specific enough. Thus, for example, it does not detail:
    
13. the relative approval levels (which should depend on the significance of the proposed transaction) appropriate for officials in the ministry of finance, the minister of finance, the cabinet and the legislature to whom regular reports on government debts are to be provided.
    
14. In addition, this indicator appears to over-emphasise the distinction between a computerised debt management system and a spreadsheet. In practice there will be a complete spectrum between one approach and the other.
    
    Funds reaching local service units
    
15. The guidance for indicator 18 lacks clarity. The Public Expenditure Tracking Surveys (and other reviews) should compare the level of funds which have been released, or for which authority to spend has been given by the central ministry, to the level of funds or authority which has actually been received by the local service unit. The use of the phrase �intended resources� could suggest the budgetary amounts rather than the actual amount which was released and intended for use by the local service unit.
    
    Effectiveness of internal control and audit
    
16. The guidance to indicator 19 should indicate that internal audit, external audit or managers may undertake reviews of internal control. The reference to error rates here and in respect to the next indicator suggests that good quality internal audit should produce this information. In contrast, the main distinction between high and low-quality internal audit is on the extent to which internal audit undertakes reviews of internal controls rather than reviews of transactions or other substantive tests, which aim to estimate the level of errors which occur. High-quality modern internal audit will provide professional opinions on the soundness or otherwise of internal control systems rather than just the level of errors which occur.
    
17. The guidance to indicator 20 should emphasise this distinction. Thus, for level b internal audit, less than half of audit time should be spent on pre-audit or transaction testing. For level c, the proportion of audit time spent on systems reviews should exceed 20%.
    
    Bank reconciliations
    
18. Some aspects of the guidance on indicator 23 could be subject to misinterpretation. For example, on level c, it is suggested that �Not all differences are explained�. If this is the case, then the reconciliation has not been completed. It may be, however, that all the differences are not promptly cleared. We consider that the existence of balancing figures or unexplained differences would be suggestive of level d. In addition, the guidance on level a and b does not indicate what is meant by a �backlog�. We suggest that this may refer to how promptly the reconciliations are undertaken. We believe that for level a all reconciliations should be completed within two weeks of the period end.
    
    External audit
    
19. We consider that it would be more appropriate to refer directly to the auditing standards issued by the International Auditing and Assurance Standards Board (IAASB) (relevant for the audit of state-owned enterprises). Reference to the International Federation of Accountants (IFAC) could be interpreted as being to its Public Sector Committee which has only had a limited role in developing standards for auditing.
    
20. We believe that indicator 26 could usefully be split to cover the three important aspects of external audit: the scope of the work of the auditor-general, the nature of the work undertaken, and the relative independence of the auditor-general from the government and executive management.
    
21. Further guidance is needed to confirm the implication that level a of indicator 26 requires the scope of the auditor-general to include all major state-owned enterprises and local government and that, in contrast, level b can be achieved without the scope of the auditor-general including these two sectors.
    
22. This problem is repeated in indicator 27, where the following three aspects of the follow-up of audit reports appear to have been conflated:
    
    • the promptness of response from the executive to audit findings and recommendations included in draft audit reports
      
    • the presence of an established process to follow-up final audit reports (and those from the Public Accounts Committee) and to monitor the extent of implementation of agreed audit recommendations
      
      and
      
    • the promptness in which agreed audit recommendations are actually implemented (which for level a should be at least 80% of recommendations being implemented within three months of the target date).
      
      
    Donor funds
    
23. The guidance for indicators Donor 1 and Donor 2 could be refined to avoid possible confusion. For example, the guidance for Donor 1 suggests that level a will be achieved if actual funds are within +/- 90% of forecasts and the guidance on Donor 2 is not explicit about the view to be taken of donor funds which are disbursed through projects directly managed by the donors themselves.

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