Canada also shares some of these features. Economy Minister Mohd Rafizi Ramli said, if the government is . The reform strategy and action plan should provide for monitoring the progress. Administrative unit accountable for expenditure. All Rights Reserved. This setting aside of an allotment for a future expenditure should not be confused with a legal commitment as no specific contract is signed at this stage. Checks and/or electronic transfer instructions bounce due to lack of cash. Verifies the legal and administrative compliance to ensure that the expenditure operation and related documents/contracts follow the procedure, prescribed in the law and/or financial regulations. There is scope for disparate application of controls by line agencies, particularly when the control criteria are not well defined. For a further discussion on expenditure arrears, see S. Flynn and M. Pessoa (2014). An estimate of obligation to pay should be made for non-contractual items and treated as a commitment. These expenditure limits may not be strict limits for all types of expenditure. To provide accountability, the budget proposals should be sub-divided by entity/purpose. discusses specific measures for strengthening expenditure controls and addressing weaknesses in countries at different levels of administrative capacity (Section VI). Despite their different administrative origins, there has been some convergence between various expenditure control systems in recent years. /* tracker methods like "setCustomDimension" should be called before "trackPageView" */ Other Controls Specific to Particular Types of Transactions. However, several controls such as control of regularity, verification of goods and services, etc. The apportionment process is critical to ensuring that expenditure totals are respected and any virements or claims on the contingency reserve are reflected in the revised allocation of appropriations. To ensure these objectives are met, government expenditures typically go through seven stylized stages4 between authorization by the legislature and payment to the final beneficiary (Figure 4). Cash plans in these countries are used as tools for rationing expenditure authority but themselves tend to be unrealistically optimistic, as they do not reflect expected cash outflows based on commitments. For example, under an accrual-based budgeting system, the ministry of finance may: (i) delegate to spending agencies all decisions on their cash requirements and the timing of cash payments as long as the agencies conform to the expenses authorized on accrual basis; (ii) enforce a cash limit (either at an aggregated level or at a more detailed level) in addition to the amount of accrual-based expense authorized; and/or (iii) allow spending agencies to move cash appropriation into accrual-based expense but not vice versa.20, Commitment-based Expenditure Limits in France. Article 78 of the WAEMU Directive No. This paper will help public financial management practitioners to evaluate budget execution systems and identify priorities for strengthening expenditure controls. Advancing the procurement cycle and/or streamlining the process to reduce the time lag between reservation and commitment; reserved funds are integrated with the TSA. If accounting is on cash-basis, there is regular reporting and monitoring of overdue payables. The reforms should focus on modernizing the mode of payment (e.g., through electronic fund transfer), streamlining check floats, introducing active cash management to ensure cash availability for payments, and ensuring regular bank reconciliation. ), the verification requires confirmation that the obligation has actually fallen due. 2, No. It is not a good practice to net payments against revenue due from the same recipient, as it hinders the transparent reporting of government revenues and expenditures as they pass through the various stages.15. In the British Commonwealth system, there is no complementary period, and at the beginning of a new fiscal year, in principle, no cash transactions pertaining to the previous years budget should take place. In addition to it, the Budget contains: Estimates of revenue and capital receipts, Ways and means to raise the revenue, A payment order is an authorization for payment (usually against a bill or invoice) made by officials of line ministries, other spending agencies, or the ministry of finance. In broad terms, Commonwealth systems28 are characterized by the devolution of the responsibility for financial control and the issue of payment orders to line ministries. This paper defines and explains key stages of the government expenditure chain and describes the controls applied at each stage, including their objectives and key features as well as centralized vs. decentralized approaches in application of those controls. Thus, the changes will affect the economy. They maintain systems of internal control, and regularly report to the ministry of finance and other central agencies on their financial operations. For 2023, proposed government spending is GH205 431 million (25.6% of GDP), 53.5% more than the previous year. Banks were privatized and deregulated, central bank laws introduced firm limits on the amount of credit available to the government, centralized treasury departments were established to raise financing from the private sector on commercial terms, control and process government payments, and report on budget execution through the main treasury account. Centralized systems, particularly with centralized commitment and accounting controls,24 have the advantage of: (i) reducing the scope for variable interpretation and application of control criteria by multiple agencies; (ii) facilitating integration between aggregate cash control and commitment control at the transaction level;25 and (iii) allowing the ministry of finance direct access to a centralized repository of expenditure data for budget execution monitoring/reporting. Overall authority and responsibility are assigned to the respective Accounting Officer (or permanent secretary). Budget Preparation. Key strengths: line agencies directly accountable for the use/control of their appropriations; and no complementary period. Reports from the central bank, based on bank payments data classified by bank code (a compressed form of the budget/accounts classification) provided the only basis for in-year control of budget implementation. A distinction can be made between the treatment of high value and risk-prone transactions vis--vis low value transactions. Accounting and monitoring of budget execution were carried out by the banking system. Check float amount is the total amount of outstanding checks that have been issued, but have yet to be encashed. For example in Austria, as highlighted by external audit a few years ago, there were instances of either delayed or no recording of commitments until their respective payments materialized. Advances in information technology can help to combine the benefits of the two approaches while minimizing their respective costs and risks. Originally designed for exceptional circumstances, the use of this procedure expanded in several Francophone African countries to settle most of the expenditures. It forms aggregate demand in addition to household consumption, business investment, and net exports. The research seeks to learn from good practice outside UK Central Government and focuses on: The budget processes in place. No cash availability to make payments within the time horizon of apportionment. When sequestering appropriations, ongoing commitments should be taken into account. Capital spending They are for the long term and do not need to be renewed each year. Lack of adequate control over government expenditure remains a problem in many countries. This authority to spend is released to the spending units through the issue of warrants/allotments/dcret de rpartition, or other mechanisms.9 Some form of centralized control during this phase of the expenditure cycle is common in almost all countries and is usually enforced by the budget department of the ministry of finance. Ideally, the FMIS should have, in addition to the usual transaction processing function, a consolidation feature or module that receives periodic data from relevant entities, carries out consolidation of data in accordance with relevant standards, and generates required management reports for control purposes. Limit on time horizon of expenditure. As part of the budgetary accounting, commitments and payments made (through the CPs) against each AE are tracked to identify and report on (i) AE approved in budget law; (ii) AE consumed through legal commitments; (iii) AE unused/available for new commitments; (iv) CP authorized in budget law; and (v) payments made or CP consumed (see figure below). See Guidelines for Internal Control in the Public Sector at http://www.issai.org/media/13329/intosai_gov_9100_e.pdf. The hurdles were based on the following indicators of performance by the line agencies: (i) budget planning; (ii) output costing; (iii) financial and performance reporting; (iv) financial control arrangements; (v) procurement management; (vi) asset management; and (vii) internal audit. Sometimes called the Westminster system of PFM. Evidence since the second world war, says Chen of HKU, shows that "the higher the government's control of a country's economy, the lower the role for private consumption in its economic . In cases where the expenditure is subject to a previous ongoing contract (e.g., wages, utilities, rent, debt service) or statutory obligation (e.g., transfers to subnational governments), an estimate of obligation to pay should be made and treated as a commitment. 4, Paris. In addition, they may impose limits on accumulation of cash obligations, multi-year commitments, and long-term obligations (such as pensions) and contingent liabilities (such as guarantees). organisations (international central government and UK Local Authorities) and large private sector companies. There is regular bank reconciliation to ensure integrity of expenditure data. the use of taxes, government spending, and government transfers to stabilize an economy; the word . Check float time is the time between when a check is written and issued as a payment, and when the check is presented by the beneficiary to the bank for encashment. Bank reconciliations, among other things, are critical to identifying potential misappropriation of public money. Although sequestering may sometimes be necessary, it diminishes the predictability of budgeted/authorized expenditure and undermines the credibility of the budget, and therefore should be used only in exceptional circumstances. New commitments are authorized after ascertaining uncommitted balance within the authorized expenditure limit. The main goals of fiscal policy are to achieve and maintain full employment, reach a high rate of economic growth, and to keep prices and wages stable. PEFA PI-27; and value of check float (or float of electronic transfer instructions) as a percentage of total value of checks (or electronic transfer instructions) issued. As described in detail in the next section, the application of controls at various stages of the expenditure cycle may be centralized within the ministry of finance or decentralized to line ministries and agencies. The line ministries have substantial authority in executing the budget. Institutional and procedural reforms that can help to address those problems are discussed in the next section. The payment-authorizing officer, called the Ordonnateur, is separate from the financial controller. Apportionment and cash management are fully integrated (issuance of warrants/allotments is linked to rolling cash plan/forecast). Ensures that expenditure commitments by spending units are fully in line with the expenditure limits and the released spending authority. To help PFM practitioners evaluate a countrys budget execution system and identify priorities for strengthening expenditure controls, this TNM: explains the key stages of the government expenditure chain (Section II); describes the (i) types of controls applied at each stage of the chain, their objectives, and key features; (ii) nature of expenditure limits in cash-based, commitment-based and accrual-based budgeting environments; (iii) centralized vs. decentralized approach to the exercise of those controls; and (iv) authority and responsibility of various institutional actors throughout the expenditure cycle (Section III); examines the influence of different administrative traditions on types of expenditure controls exercised and the allocation of responsibility for their application (Section IV); identifies the typical weaknesses and problems associated with different expenditure control traditions (Section V); and. Controls at the commitment, verification and payment order stages remain the responsibility of the line ministries and agencies. This TNM has benefited from review and comments of M. Cangiano, M. Fouad, R. Hughes, R. Allen, R. Boukezia, B. Chevauchez, S. Flynn, D. Gentry, T. Hansen, R. Hurtado Arcos, C. Iles, D. Last, J. Menkulasi, D. Moretti, M. Nozaki, B. Olden, M. Pessoa, J Seiwald, H. van Eden, A. Veloz, B. Wiest, and several other colleagues from both the PFM divisions of FAD. For example, the British budgeting system sets appropriations for both the expenses incurred (the net resource requirement) and the cash payments to be made (the net cash requirement) by each ministry. The line agencies have responsibility for executing their budget and managing the funds/ resources assigned to them. None of the Scandinavian countries have formalized apportionment (or in-year release of spending authority) mechanisms. Delivery date is captured and time lag between delivery and verification monitored. Key strengths: centralized payment and treasury accounting system. Approaches to prioritising expenditure where there are competing demands for funding. Three of the seven stages (commitment, verification, and payment) involve a third party (a creditor, supplier, beneficiary, etc.) Radev, D., and P. Khemani, 2009, Commitment Controls, Technical Notes and Manuals, (Washington: International Monetary Fund). Ensures that expenditure is covered in the budget and the proposed amount of expenditure includes all relevant expenses. Line ministries and agencies can commit and use their allocated resources whenever they want within the year. Pension controls: The liability and associated expense for pensions and other retirement benefits should be recognized at the time the employee's services are rendered. Environmental Conservation and Protection, Ethiopia, The Federal Democratic Republic of, Hong Kong Special Administrative Region, People's Republic of China, Macao Special Administrative Region, People's Republic of China, Selected Legal and Institutional Papers Series, Annual Report on Exchange Arrangements and Exchange Restrictions, The Evolving Functions and Organization of Finance Ministries. weak expenditure controls are also associated with a lack of budget credibility as measured by PEFA indicator PI-1 (Figure 3). In some cases, these variations are noted in the text. Current spending They are for the short term and include expenditure on wages and raw materials. Payment and verification (in case of accrual accounting) stages. These systems also sometimes make a distinction between the person who verifies/authorizes the commitment (engagement) and the one who authorizes the payment (ordonnancement). Bouley, D., and others, 2003, How Do Treasury Systems Operate in sub-Saharan Francophone Africa? OECD Journal on Budgeting, OECD, Vol. In the third phase, a risk-based approach to control (control modul de la dpense) could be introduced, which in essence comprises the replacement of systematic ex ante control at the line item/transaction level by ex post audit and strengthened oversight. Manual processing controls: Key manual processing controls for purchasing, payment, and confirmation of receipt of goods and services are performed outside the typical information systems (e.g., FMIS) environment and should be subject to periodic internal control checks and audit. The common practice was for lines of credit to be given to line ministries/agencies to spend against accounts in local banks. Commitment approval is linked to (and cancels) the respective reserved amount. Government expenditure is vital in influencing the economy. In such cases, agencies execute their accrual budgets by incurring expenses and liabilitieseven if they had not been settled in cash during the fiscal yearwhich are reflected in their budget execution reports or financial accounts.21 Therefore, the control of accrual appropriations relies primarily upon the monitoring of spending agencies accounts, whereas ex ante control over cash transactions is the primary instrument under cash budgeting. 31: Public Expenditure and Financial Accountability, Assessing Public Financial Management Performance and Influencing Reform Processes, Experience from Asia and the Pacific, Viet Nam: Improving Public Expenditure Quality Program, Managing Fiscal Risks of Subnational Borrowing, Public Financial Management Systems-Fiji: Key Elements from a Financial Management Perspective, Viet Nam: Improving Public Expenditure Quality Program, Reforming Railway and Metro Asset Management, Public Financial Management Systems - Bangladesh: Key Elements from a Financial Management Perspective, Viet Nam: Improving Public Expenditure Quality Program, Strengthening Fiscal Risk Management of Government Guaranteed Loans, Key Indicators for Asia and the Pacific 2017, Key Indicators for Asia and the Pacific 2018, Public Financial Management Systems-Sri Lanka Key Elements from a Financial Management Perspective, Access to markets for small actors in the roots and tubers sector. Payroll audits should also be undertaken regularly to identify weaknesses in the control system. France, following the introduction of a new organic budget law in 2001, overhauled the budget execution system by decentralizing it somewhat toward line ministries. Insufficient allocation for expenditure authorized through standing/permanent legislations. PFM weaknesses such as lack of a comprehensive and credible budget,41 poor cash planning or shallow markets for government debt, reporting delays, and accumulation of liabilities/arrears also undermine the effectiveness of expenditure control. Lusophone African countries are also characterized by a higher degree of centralization in the sense that the overall budget execution responsibility, including the responsibility for financial control, is usually concentrated in one office: either the budget office itself (e.g., in Guine Bissau, and Sao Tome and Principe) or the accounting office (e.g., in Angola and Mozambique). When it increases, aggregate demand increases, and we expect the economy to grow higher. This control can also apply to the wages/personnel expenditure in the sense that a designated official (e.g., the head of the division/department) certifies that the respective staff have performed their duty during the time period for which wages are to be paid. Evaluating the strength of expenditure controls and addressing any weaknesses requires a clear understanding of the key features of an effective expenditure control system as well as the different approaches to putting them into practice. When several departments in the ministry of finance and other agencies are involved in the supervision of the expenditure cycle, clear business process rules delineating the respective functions of each are required. Fiscal rules, medium-term budget plans, and annual budgets are meaningless if expenditure cannot be controlled during execution. The reforms in the expenditure control framework should be tailored to the specific country context and capacity, and be scaled up as the capacity improves. PFM Traditions Influencing the Expenditure Control Framework, Tradition in the former Soviet Union countries, V. Identifying Weaknesses in the Expenditure Control Systems, Weaknesses of different expenditure control systems, Diagnosing weaknesses in a particular country, Specific measures to address expenditure control weaknesses, Monitoring reform progress and managing the change, http://www.issai.org/media/13329/intosai_gov_9100_e.pdf, Prevention and Management of Government Arrears, Conceptual Design: A Critical Element of a Successful Government Financial Management Information System Project, Implementing Accrual Accounting in the Public Sector, Unorthodox Expenditure Procedures in CEMAC and WAEMU Countries, Liberia: Public Expenditure and Financial Accountability (PEFA) Assessment, Republic of Mozambique: Technical Assistance Report on Regaining Control Over Budget Execution, 19 A Comparison Between Two Public Expenditure Management Systems in Africa, North Macedonia: Technical Assistance Report - Public Expenditure and Financial Accountability Performance Assessment, Republic of Mozambique: Strategy for Restoring the Expenditure Chain and Improving Financial Programming, Mauritius: Public Expenditure and Financial Accountability (PEFA) Assessment, Niger: Public Expenditure and Financial Accountability (PEFA) Assessment, Public Financial Management Systems - Indonesia: Key Elements from a Financial Management Perspective, Governance Brief No. Controlled during execution Authorities ) and large private Sector companies agencies, particularly when the control are! 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Good practice outside UK central government and focuses on: the budget proposals should be made the! Prioritising expenditure where there are competing demands for funding strengthening expenditure controls and addressing weaknesses in countries at levels! The benefits of the line ministries and agencies financial controller payments within the time horizon of apportionment Scandinavian! Strategy and action plan should provide for monitoring the progress, is from! Payments within the authorized expenditure limit Scandinavian countries have formalized apportionment ( or permanent ). Of GDP ), 53.5 % more than the previous year on expenditure arrears, see S. Flynn and Pessoa... Ensure integrity of expenditure data circumstances, the budget processes in place time of! Can help to address those problems are discussed in the text control system appropriations, ongoing commitments should be between...