Internal Control and Fraud Prevention

Internal Control and Fraud Prevention
by Normand Arsenault
This article was written in response to a crisis that developed in PADME, a microfinacne institution in Benin.
In March 2008, the Council of Ministers of the Government of Benin decided to intervene in the management and operations of PADME.
PADME is the second largest MFI in Benin with almost 30,000 active borrowers and an outstanding loan portfolio of US$31 million. The
Council of Ministers cited concerns with the financial and operational management of PADME and requested suspension of the Executive
Board and resignation of the Director Ren Azokli.
In response, PADME's board and management issued a lawsuit to prevent the Government's actions, and PADME's staff went on strike. In late
March, the Ministry of Microfinance installed Didier Djoi as interim Director and required staff to return to work.
The PADME situation raises issues of MFI management and supervision as well as political risk. Do governments have adequate tools and
procedures to manage such crises, and are they used appropriately? What is the appropriate role of the Government, Central Bank, donors and
investors in an MFI failure (or perceived failure)? How can MFIs and banks manage political risk?
Originally started through a microfinance project of the Government of Benin and the World Bank in 1993, PADME became a private
Association in 1997. Throughout its lifetime, PADME has received funding from USAID, World Bank, ADF, Oikocredit, and BOAD, amongst
others, and technical assistance from ACCION, Women's World Banking, Freedom from Hunger and other leading international organizations.
PADME has been preparing to transition from a private association to a share-capital non-bank financial institution, with potential investors
including IFC, Stichting Triodos Doen, Ecobank and ACCION Investments.
What could have been done to avoid fraud and embezzlement?

There are several procedures that could have aided PADME in the prevention or early detection of this loss.
1. Review of a sample of all

new loans issued
2. Visits to the clients
Missing documentation is one of the most important symptoms of

fraud.
A supervisor may regularly review a sample of all new loans issued

and determines that required documentation is present, and if not,
confirm missing information with third parties.
Make sure loan documentation is complete: guarantee titles,

insurance, or income verification.
Make sure to follow up on the exceptions noted. Be aware of

counterfeit collateral.
Fictitious loans could be made in the name of people taken from the
phone book or in the name of former borrowers.
The most effective way to mitigate the risk associated with frauds is
for the MFI to conduct client visits to some of its clients.
A supervisor may visit a sample of clients of all new loans issued

(for example, one client out of every 10 new loans) to verify the
authenticity of the loans.
3. Segregation of duties
This way a microfinance institution can also identify fraudulent

practices by loan officers or non adherence to new policies before
they are replicated on a wide scale.
In general, MFIs must audit a larger number of loans but a smaller

percentage of the overall portfolio than a traditional financial
institution would. To adequately assess risk, the key is for MFIs to
audit a large enough sample of loans to get a good overall picture of
the true quality of the loan portfolio.
MFIs generally employ a combination of two types of sampling:

random and selective sampling. Random sampling is a process by
which the auditor selects clients in a haphazard manner, with no
attempt to influence the list of clients to audit. Selective sampling is
a process by which the auditors attempt to create a list of clients to
visit based on predetermined criteria (higher risk clients).
For MFIs that use group lending methodologies, a supervisor may

attend a group meeting. The supervisor may verify that groups only
issue loans to group members, check the groups records to ensure
proper calculations and accurate reporting. For example, many
MFIs that target women-only report incidents of husbands
pressuring their wives to take out loans for them. Many MFIs that
use a group lending methodology allow the groups to select their
members but do not allow immediate relatives to be involved in the
same group.
The segregation of duties is the design in the job functions to

properly segregate tasks so that the same person does NOT record,
approve and do.
Combination of duties may allow a manager or supervisor to

approve the loans, set them up on the system, issue the checks, and
then cash them through a teller drawer.
No one should have full control of the loan process from beginning
to end.
Make sure that managers and supervisors dont know the tellers
passwords and make sure the tellers change their passwords
regularly.
Make sure returned monthly account statements are carefully

monitored.
People on vacation or on maternity leave should not be allowed to

keep their office keys. These people can visit the branch after hours
to process loan advances and make payments under other
employees' teller codes.
4. Supervisory
committee/internal audit
department
In smaller MFIs, the supervisory committee often oversees the

internal controls, while in larger MFIs, the controls are often
monitored by the internal audit department.
5. Policies
Make sure to have clear board approved policies for lending.
Make sure to have mandatory vacation policy policies that require

managers and employees to take at least one and preferably two
weeks' vacation (not a day here and there) to reduce the risk of
embezzlements (embezzlements usually require the embezzler's
ongoing attention).
Inaccurate or incomplete records are often used to hide fraud.
To keep the loans current, the employee may make the monthly
payments in a variety of ways. In some cases, he/she would take an
advance from one loan and use it to make payments on several other
loans via journal-voucher transfers. At other times, he/she would
take a loan advance in cash and make cash payments on the loans
coming due. He /she can also purchase bank money orders with
stolen funds and mail payments to different branch offices of the
MFI to ensure that other employees processed transactions on the
accounts.
7. Weak software
Weak software can be used to hide fraud. One software I know is

particularly weak on internal control because the programmers who
did conceive the software received no directions from experts in
internal control as to what internal control principles or procedures
to integrate into the software (for example, segregation of duties).
8. MIS
Risk management and internal control are closely linked with the
MFI management information system. A review and evaluation of
the MIS by outside experts can reveal flaws in risk management and
internal control.
9. Resistance to improve the

MIS from the management
or some employees
What I have seen in some cases is a manager of the MFI or some

employees resisting efforts to modify or improve the MIS. There
areghosts and skeletons which some managers or employees do
not want to bring out.
6. Record keeping
10. In-transit or suspense

accounts
11. Bank reconcilements
12. Reports
13. Audit trails
Review of general ledger in-transit or suspense accounts is very

important. I would say that the second most frequent category of
frauds (fictitious loans being first) are done using general ledger
suspense accounts or in-transit accounts. General ledger suspense
accounts generally are used to temporarily "store" a transaction until
all necessary information is available, but can also be used to hide
an unauthorized transaction.
General ledger suspense accounts or in-transit accounts should be

reconciled and checked weekly by a supervisor.
Process of reconciling the accounts is important. May hide

problems.
Bank accounts should be reconciled and checked weekly by a

supervisor.
MIS reports should contain proper information for review by

management for internal control purposes.
Management should regularly review MIS reports.
Investigate yield on loans (as shown in MIS reports) far less than
stated loan rate.
Review maintenance reports showing loan due date changes unwarranted changes to loan due dates may disguise a fictitious
loan or loans not receiving regular payments.
Review reports showing loans by interest rate - reveals unusually

low loan rates.
Review loans in arrears. These reports should regularly be

investigated by supervisors who may visit a sample of clients
having loans in arrears.
Review reports for new loans disbursed.
Review rescheduled loans reports.
Aberrations and exceptions in any report should be investigated
Make sure to maintain adequate audit trails. Audit trails enable the
tracing of any given item through the MFI's books.
14. Auditing
15. Integration with RM and

CRM
Software should also have a thorough audit trail built in. The
application should log and report the user name and event date/time
of all entry and deletion of transactions and also for creating,
editing, and deleting clients, loans, and schedules of instalments,
and loan product definitions.
Audits (required at least annually) and verifications (required at

least every two years) must be performed in a timely manner, under
controlled conditions, and independent of MFI management and
staff.
Although fraud may be uncovered, the annual audit and regulatory

examination are not intended to detect fraud.
An example of infraction to reviewing the loans is when the

auditors select their sample from the new-loan listings and fax the
list to each branch manager before coming to the branch to review
loan files. This seemingly minor infraction may provide the
embezzler with notice of when his/her fictitious loans are about to
be reviewed and give him/her ample time to create loan files-complete with altered documentation from legitimate loan files.
The auditor should pull all loan files him/herself. The auditor should
keep in mind that any person he/she is asking to assist could be a
thief. The auditor should verify every explanation that an employee
offers. In some cases, the auditor should contact the loan recipient.
Internal control mechanisms can be integrated into a larger risk

management (RM) and customer relationship management (CRM)
framework. By linking internal control to RM and CRM, the MFI
can proactively identify fraud and other risk exposures, but also
continuously learn from its experiences, and make product
development and operational improvements as necessary.
The MFI can use the information collected using internal control
procedures to improve the loan product and procedures to reduce
risk in the future. During client visits, the MFI may solicit feedback
on how to enhance customer satisfaction The MFI can improve
relations with employees by supporting changes to policies that
have become outdated or have negative consequences.
During Mibancos client visits in Peru, for example, the internal

auditor initiates the conversation by explaining that the purpose of
the visit is to ensure the customers satisfaction with Mibancos
services and to make sure that staff handled all transactions
properly. This approach puts the client at ease and facilitates a more
frank and open discussion about the clients business and
experiences with the financial institution. The auditor records the
notes from the conversation and reports key findings to
management, including commonly suggested improvements to

customer service or changes in product features. This approach does
not undermine the auditors relationships with branch staff because
the auditors only communicate general findings to management and
avoid naming staff, unless fraud is suspected. ***
In addition, Mibancos auditors treat client visits as a component

of Mibancos customer service orientation. By posing audit
questions in a way that suggests that the auditors are concerned
about the clients satisfaction with past products and services,
clients are more likely to give honest and thorough responses. The
auditors ability to make suggestions for improvements to
management further reinforces the internal audit departments link
to customer satisfaction. ***
16. Technical assistance
MFIs can benefit from outside experts to help them set up and
make improvements to their internal control systems. It is often
easier for an impartial third party to identify shortcomings in the
internal control system than for operational staff to objectively
evaluate its effectiveness. An internal control assessment should
determine the appropriate ongoing controls and checks to the
system to be conducted by the MFIs operational or audit staff in the
future.***
17. Donor role
Donors should require MFIs to have some type of internal control

mechanism, appropriate to the MFIs level of development as
discussed in Chapter 4. Donors should encourage MFIs to develop
an operations manual and to conduct client visits as part of its
regular operations. Donors can facilitate the development of internal
control mechanisms by providing funds for the initial risk
assessment and implementation of internal controls but should
avoid developing dependencies for ongoing operational support. For
example, donors could provide support for the initial development
of operational control manuals contingent upon the MFIs
commitment to adding to and updating the manuals in the future. In
addition, donors can support microfinance NGOs in their efforts to
test new ways to mitigate old risks through new products, such as
microinsurance, or operational control tools, such as internal audit
software. Furthermore, donors should discourage MFIs from relying
too heavily on donor audits to identify control issues since these,
like other external audits, usually are conducted infrequently and
lack the depth of a thorough internal audit.***
18. Regulatory requirements
Regulators should become familiar with microfinance and

possibly adjust their requirements to suit the nature of microfinance
operations. It is reasonable for regulators to require that MFIs have
at least one dedicated internal auditor or risk manager to oversee the
effectiveness of the internal control system. However, requiring an
audit of all loan clients each year is a much greater burden for a
microfinance institution than a traditional financial institution, since
a microfinance portfolio is made up of many small short-term loans.
Regulators should provide clear guidance on how to fulfill internal
control requirements for a newly licensed microfinance institution
and allow a reasonable amount of time for the MFI to implement
these changes. In addition, regulators should compile and use
historical data and other tools to assess the soundness of
microfinance institutions.***
The ultimate tests of the effectiveness of an MFIs internal control

systems will be time and investor interest. Unfortunately, some
MFIs will suffer serious losses before discovering the weaknesses
inherent in their internal control systems. MFIs that become
complacent, assuming that what works well today will work well
tomorrow, will be at the greatest risk of unforeseeable financial loss.
MFIs that proactively apply the principles of risk management and
implement an effective feedback loop will be able to uncover and
address risk exposures and succeed the test of time. MFIs that prove
their ability to manage and mitigate risk will be more likely to
demonstrate consistent profits, the primary objective of private
investors. In addition, MFIs that implement effective internal
control systems that aid in the risk management process will be
most effective in fulfilling the social mission to provide financial
services to low income sectors over the long-term.***
Furthermore, MFIs that mobilize client savings can apply risk

management strategies to ensure adequate protection of client
assets, the primary concern of financial regulators.***
The lack of effective internal controls is one of the remaining

impediments to the development of a sustainable microfinance
industry; MFIs, technical assistance providers, donors, practitioner
networks and regulators all have a role in overcoming this
obstacle.***
19. References
*** Campion, Anita. "Improving Internal Control: A Practical Guide for Microfinance Institutions". Washington, D.C.:
Microfinance Network and GTZ, 2000
Churchill, Craig, and Dan Coster. "CARE Microfinance Risk Management Handbook". Washington, D.C.: CARE and
Pact Publications, Inc., 2001
"External Audit of Microfinance Institutions: A Handbook". CGAP Technical Tool No. 3. Washington, D.C.: CGAP, 1998
20. Courses
CGAP's course: Operational Risk Management
See participant course materials
- Assessing operational risk
- Designing and implementing internal control processes against fraud and other risks
- Designing monitoring processes including internal control and external audit

Ateneo de Manila University
Course: Risk Management and Internal Controls
This course helps microfinance institutions develop and improve the quality of their risk management processes. It
focuses on problem prevention, early problem identification and control. The course provides guidelines for establishing
operational activities that assist the MFI in identifying vulnerabilities, designing and implementing controls and
monitoring the effectiveness of controls. The risk management and internal control is linked with the MFI management
information system. It also highlights problem resolution as a means for risk management and internal control. The
course also offers how internal and external audit could be used to the advantage of the MFI.
21. Conclusion
Internal control includes the prevention of potential problems as well as the early detection and correction of actual
problems should they occur. The most common type of fraud by employees is fictitious loans. Other common forms of
fraud are the use of in-transit or suspense accounts and kickbacks.
Good internal controls provide a working environment in which good employees are not tempted to do something they
would not ordinarily do.
Contact the author:
Normand Arsenault
Consultant
Qubec, Canada
1 819 843 7719
Skype : sirdarana
INTERNAL CONTROL SYSTEM, MANAGERIAL COMPETENCE AND

MANAGEMENT OF PUBLIC FUNDS IN NATIONAL SOCIAL SECURITY
FUND
By
Wilbrod Birabwa
2009/HD10/17250U
A research dissertation report submitted to the school of graduate studies in
partial fulfillment for the award of a Master of Science in Accounting and
Finance Degree of Makerere University
August 2011
i
DECLARATION
I, Wilbrod Birabwa declare that this research report is my original work and it has never been
submitted to any University, college or School for any academic award.
Signature:..
Wilbrod Birabwa
2009/HD10/17250U
Date:..
ii
APPROVAL
This Research Dissertation Report has been under our supervision as University Supervisors. This is
therefore to approve its submission for examination as a partial fulfillment for the award of a Master of
Science Degree in Accounting and Finance of Makerere University.
Signed:.......... ........................................................
Dr. Nixon Kamukama Dr. Isaac Kayongo
Date:.
iii
DEDICATION
This work is dedicated to my parents, siblings and my dear children
iv
ACKNOWLEDGEMENTS
I thank God for giving me life, wisdom, energy and courage, all of which have enabled me to
successfully finish this report.
Similarly, I extend my sincere appreciation to my supervisors Dr Nixon Kamukama and Dr.
Isaac Kayongo for their professional guidance and for showing me the way. May God reward
them abundantly.
In addition, I thank my parents for giving me an educational foundation and always sending me
their prayers to achieve my targets.
I am so grateful to the NSSF members who gave me the necessary information that enabled me
to compile this report.
I cannot forget to thank my children Theresa Wilbrod Nakidde and Innocent Abel Ddembe for
giving me a conducive environment to write this report.
Finally, I thank the university administrators for all the assistance accorded to me while writing
this report. I highly appreciate the cooperation.
v
LIST OF ACRONYMS
BAT British American Tobacco
CCSASE Committee on Commissions, Statutory Agencies and State Enterprises
CVI Content Validity index
DFCU Development Finance Company of Uganda
FMCBC Financial Management Capacity Building Committee
GAAP Generally Accepted Accounting Principles
GFOA Government Finance Officers Association
HRM Human Resource Manager
IPMA International Personnel Management Association
IPPC Integrated Pollution Prevention and Control
KPMG Klynveld Peat Marwick Goerdeler
MD Managing Director
MIS Management Information System
NPV Net Present Value
NSSF National Social Security Fund
OECD Organization for Economic Co-operation and Development
SPSS Statistical Program for Social Scientists
UGX Uganda Shilling
vi
Table of Contents
DECLARATION .................................................................................................................................. i
APPROVAL.........................................................................................................................................ii
DEDICATION ................................................................................................................................... iii
ACKNOWLEDGEMENTS ................................................................................................................ iv
LIST OF ACRONYMS ........................................................................................................................ v
LIST OF FIGURES AND TABLES .................................................................................................. ix
ABSTRACT ......................................................................................................................................... x
CHAPTER ONE .................................................................................................................................. 1
INTRODUCTION ............................................................................................................................... 1
1.1 BACKGROUND TO THE STUDY.................................................................................................. 1
1.2 STATEMENT OF THE PROBLEM ................................................................................................ 3
1.3 PURPOSE OF THE STUDY ............................................................................................................ 3

1.4 OBJECTIVES OF THE STUDY ...................................................................................................... 4
1.5 RESEARCH QUESTIONS ................................................................................................................ 4
1.6 SCOPE OF THE STUDY ................................................................................................................. 4
1.6.1 Conceptual Scope ....................................................................................................................... 4
1.6.2 Geographical Scope .................................................................................................................... 5
1.7 SIGNIFICANCE OF THE STUDY ................................................................................................. 5
1.8 CONCEPTUAL FRAMEWORK ...................................................................................................... 5
CHAPTER TWO ................................................................................................................................. 8

LITERATURE REVIEW ..................................................................................................................... 8
2.0 INTRODUCTION .............................................................................................................................. 8
2.1 INTERNAL CONTROL SYSTEM ................................................................................................... 8
2.2 MANAGERIAL COMPETENCE ..................................................................................................... 9
2.3 MANAGEMENT OF PUBLIC FUNDS ......................................................................................... 11
2.4 INTERNAL CONTROL SYSTEM AND MANAGEMENT OF PUBLIC FUNDS................... 12
2.5 MANAGERIAL COMPETENCE AND MANAGEMENT OF PUBLIC FUNDS ..................... 12
2.6 MANAGERIAL COMPETENCE AND INTERNAL CONTROL SYSTEM ............................ 13
vii
2.7 CONCLUSION ................................................................................................................................ 13
CHAPTER THREE ............................................................................................................................ 14

RESEARCH METHODOLOGY ...................................................................................................... 14
3.0 INTRODUCTION ........................................................................................................................... 14
3.1 RESEARCH DESIGN...................................................................................................................... 14
3.2 POPULATION OF THE STUDY AND SAMPLE SIZE .............................................................. 14
3.3 SAMPLING PROCEDURE............................................................................................................. 15
3.4 DATA SOURCES ............................................................................................................................ 15
3.4.1 Primary data .............................................................................................................................. 15
3.4.2 Secondary data .......................................................................................................................... 15
3.5 DATA COLLECTION INSTRUMENTS ....................................................................................... 15
3.6 MEASUREMENT OF VARIABLES ............................................................................................ 15
3.7 `RELIABILITY AND VALIDITY OF THE RESEARCH INSTRUMENTS ............................. 16
3.8 DATA PROCESSING AND ANALYSIS ...................................................................................... 17
3.9 LIMITATIONS ................................................................................................................................ 17
CHAPTER FOUR .............................................................................................................................. 19

DATA PRESENTATION, ANALYSIS AND INTERPRETATION OF THE FINDINGS ......... 19
4.0 INTRODUCTION ............................................................................................................................ 19
4.1 SAMPLE CHARACTERISTICS .................................................................................................... 19
4.1.1 Response rate ............................................................................................................................ 20
4.1.2 Age group of respondents ........................................................................................................ 20
4.1.3 Gender of the respondents ....................................................................................................... 20
4.1.4 Educational characteristics of the respondents ....................................................................... 22
4.2 EVALUATION OF THE INTERNAL CONTROL SYSTEM IN NSSF..................................... 25
4.3 CORRELATIONS ............................................................................................................................ 28
4.4 INTERNAL CONTROL SYSTEM AND MANAGEMENT OF PUBLIC FUNDS IN NSSF .. 28
4.5 MANAGERIAL COMPETENCE AND MANAGEMENT OF PUBLIC FUNDS IN NSSF .... 29
4.6 MANAGERIAL COMPETENCE AND INTERNAL CONTROL SYSTEM IN NSSF. ........... 29
4.7 REGRESSION ANALYSIS ............................................................................................................ 29
CHAPTER FIVE ............................................................................................................................... 32

DISCUSSION, CONCLUSION AND RECOMMENDATION ..................................................... 32
viii
5.0` INTRODUCTION ............................................................................................................................ 32
5.1 EVALUATION OF THE INTERNAL CONTROL SYSTEM ..................................................... 32
5.2 INTERNAL CONTROL SYSTEM AND MANAGEMENT OF PUBLIC FUNDS................... 33
5.3 MANAGERIAL COMPETENCE AND MANAGEMENT OF PUBLIC FUNDS ..................... 33
5.4 MANAGERIAL COMPETENCE AND INTERNAL CONTROL SYSTEM ............................. 34
5.5 CONCLUSION ................................................................................................................................ 34
5.6 RECOMMENDATIONS ................................................................................................................. 35
5.7 SUGGESTED AREAS FOR FURTHER RESEARCH ................................................................. 35
REFERENCES .................................................................................................................................. 37
APPENDICES ................................................................................................................................... 42
Appendix 1-QUESTIONNAIRE FOR NSSF MANAGERS .......................................................... 42

Appendix 2-QUESTIONNAIRE FOR COMMITTEE ON COMMISSIONS, STATUTORY
AUTHORITIES AND STATE ENTERPRISES .............................................................................. 47
ix
LIST OF FIGURES AND TABLES

Figure 1: Conceptual Framework 6
Table 3.1: Reliability and Validity Test .. 16
Table 4.1: Age group of respondents 20
Table 4.2: Age of respondents by gender .. 21
Table 4.3: Educational characteristics of the respondents in relation to gender 22
Table 4.4: Educational characteristics of the respondents in relation to age . 23
Table 4.5: Period of stay in the organization . 24
Table 4.6: Period of stay as committee member 25
Table 4.7: The Internal Control System in NSSF .. 26
Table 4.8: Zero-order Correlation Analysis 28
Table 4.9: Multiple Regression Model 30
x
ABSTRACT
The study was conducted to examine the relationship between internal control system,
managerial competence and management of public funds in NSSF. Examination of the
internal control system was as well done.
A cross sectional, correlational and regressional survey designs were used for to examine
information, evaluating the internal control system and analyzing the relationship
between internal control system and management of public funds, managerial
competence and management of public funds and internal control system and managerial
competence.
Findings of the study indicated that the internal control system was ineffective, there was
a significant positive relationship between internal control system and management of
public funds, there was a significant positive relationship between managerial
competence and management of public funds and the relationship between managerial
competence and internal control system was also significant and positive.
NSSF management has highly mismanaged public funds. The fund has made a lot of
losses out of negligence and incompetence. Something should therefore be done before
the situation reaches ugly levels.
1
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
Mismanagement of public funds is a common phenomenon in developing countries (ElNafabi 2011). According to Kabiru (2009), embezzlement and mismanagement of public
funds is the biggest obstacle to achieving the millennium development goals in
developing countries. Heald & McLeod (2002) define public money as all money
received by a public body from whatever source. Webber (2004) indicates that managing
public funds should focus on public expectations. The public is concerned about the
purpose for what money is allocated, the way it is spent and the benefits realized.
According to Miller (2003), poor internal controls lead to asset misappropriations,
corruption, organizational fraud and fraudulent financial statements. Yale University
guides (2000) define internal controls as a process effected by the organizations board
members, administration and staff designed to effectively and efficiently achieve
operational, financial and compliance objectives. Osmond (2011) indicates that
organizations implement internal controls basing on the nature of their business and
regularly audit them (internal controls) to ensure their adequacy. He (Osmond (2011))
further relates safety of financial transactions and information to an organizations
internal controls. Amudo & Inanga (2009) state that internal control system is usually
responsible for organizations failure to achieve efficiency and effectiveness, reliability
of financial reporting and compliance with relevant laws and regulations. The New
Vision (2009) states that the KPMG audit report indicates that the NSSF Managing
Director (MD), 10 days after he started work, his deputy and the Human Resource
Manager (HRM) granted him a housing advance of UGX 129 million, after six months,
he (MD) was granted another housing advance of UGX 102 million. The deputy MD
also was granted housing advances of UGX 115 million, 10 days after he started work
and another UGX 91 million was granted after seven months by the MD and the HRM.
In addition, Uganda Debt Network (2009) relates the inability to manage public funds to
lack of human capacity and effective monitoring. Jay (2007) defines competent
management as an approach to managing people for full utilization of available resources
for the continuous achievement of organizational objectives. Ojo et al (2007) indicates
that training and specific skills-sets are essential for human capacity development.
Musoke (2009) indicates that in 2008, the NSSF MD declared a net profit of UGX 131
billion and therefore promised workers an interest increment from 7% to 14%. However
the Auditor Generals report declared a net loss of UGX 50 billion.
Similarly Jong-Hag et al (2009) indicate that the muscle of an organizations internal
control system is determined by human capacity to handle internal control functions.
In relation to management of public funds in NSSF, Juuko & Among (2009) indicate that
NSSF lost the following amounts of money; UGX 7 billion on Nsimbe estate purchase,
UGX 1.7 billion in the Lubowa housing estate, UGX 1.6 billion in the sale of government
bonds, UGX 2.1 billion to brokerage companies on the stock market, UGX 179 millions
in selling British American Tobacco (BAT) shares, UGX 95 million in selling DFCU
3
shares and UGX 800 million in selling Stanbic bank shares. Candia (2009) indicates that
the former managing director spent (UGX) 55 million of workers money on gambling,
clothes and jewellery.
Candia (2009) indicates that due to shocking mismanagement of public funds, the
Minister of Ethics and Integrity called upon all quarters to tackle the problem before the
quality of social services reach ugly levels which could lead people to taking the law in
their hands.
1.2 STATEMENT OF THE PROBLEM
Mismanagement of public funds in NSSF was shocking since 2007. NSSF needs
excellent management of employees savings for future benefits. The misallocation of
funds, premature and untimely sale of shares, conflict of interest increase workers
vulnerability. Unfortunately, workers did not have a hand in the management of their
funds yet they are the ones to bear all the losses. The managers of NSSF did not even
contribute to the fund. The situation therefore compelled the researcher to investigate
whether mismanagement of public funds in NSSF could be attributed to gaps in internal
control system and managerial competence.
1.3 PURPOSE OF THE STUDY
This study sought to investigate the relationship between internal control system,
managerial competence and management of public funds in NSSF.
4
1.4 OBJECTIVES OF THE STUDY

a) To evaluate the internal control system in NSSF.
b) To examine the relationship between internal control system and management of
public funds in NSSF.
c) To examine the relationship between managerial competence and management of
public funds in NSSF.
d) To examine the relationship between managerial competence and internal control
system in NSSF.
1.5 RESEARCH QUESTIONS
a) Is the internal control system effective in NSSF?
b) What is the relationship between internal control system and management of public
funds in NSSF?
c) What is the relationship between managerial competence and management of public
funds in NSSF?
d) What is the relationship between managerial competence and internal control system
in NSSF?
1.6 SCOPE OF THE STUDY
1.6.1 Conceptual Scope
The study examined the relationship between internal control system, managerial
competence and management of public funds in NSSF.
5
1.6.2 Geographical Scope

The study was conducted in Kampala district where the NSSF head office is
located.
1.7 SIGNIFICANCE OF THE STUDY
a) Results of this study will be utilized by NSSF board members and management to
establish the effects of managerial competence and internal control system in relation
to management of public funds.
b) The study will be helpful to the regulatory authorities in formulating and setting
policies related to management of public funds.
c) The study will help workers and their representatives to know the causes for
mismanagement of their funds. This will in turn pave way for them (workers) to
advise accordingly.
d) Researchers will utilize findings of this study for literature review.
1.8 CONCEPTUAL FRAMEWORK
The conceptual framework reflects the study variables which explain the research
problem. In the framework below (figure 1), internal control system and managerial
competence are the independent variables where as management of public funds is the
dependent variable.
6
Figure 1: The Conceptual Framework

Independent variables Dependent variable
Source: Self developed from the literature of Miller (2003), Osmond (2011), Amudo & Inanga
(2009), Uganda Debt Network (2009), Jong-Hag et al (2009).
Miller (2003) indicates that poor internal controls lead to asset misappropriations, corruption,
organizational fraud and fraudulent financial statements. Osmond (2011) relates safety of
financial transactions and information to an organizations internal controls. .Amudo & Inanga
(2009) indicate that the internal control system is usually responsible for organizations failure to
achieve operational efficiency and effectiveness, reliability of financial reporting and compliance
with relevant laws and regulations, Uganda Debt Network (2009) relates the inability to manage
public funds to lack of human capacity and effective monitoring. Jong-Hag et al (2009) indicate
Internal control system
Regulation compliance
Auditing standards
Monitoring & Review
Managerial competence
Interpersonal Skills
Training
Professional competence
Management of public funds
Accountability
Disclosures
Viable Investments
7
that the muscle of an organizations internal control system is determined by human capacity to
handle internal control functions.
8
CHAPTER TWO
LITERATURE REVIEW
2.0 INTRODUCTION
The literature reviewed in the study was cited from previous studies that researched on
one or more variables in this study.
2.1 INTERNAL CONTROL SYSTEM

Pricewaterhousecoopers (2011) states that an Internal Control System is a set of
procedures, methods and control measures designed by the Board of Directors and
executive management to ensure achievement of the organizations objectives. Amudo &
Inanga (2009) indicate that Internal Control system is a contemporary issue after
experiencing global fraudulent financial reporting and accounting scandals. According to
Flick (2010), internal control system ensures proper organizational processes functioning,
financial information reliability and applicable regulation compliance. Organizations
implement internal controls to check fraud and abuse as indicated by the Institute of
Internal Auditors. Wenjun & Shanshan (2008) state that internal control system of an
organization is the basic safeguard to a regular and reliable accounting information
system operation. Vodafone Annual report (2009) indicate that an organizations internal
control over financial reporting is meant for reliable financial reporting and preparation
of financial statements according to Generally Accepted Accounting Principles (GAAP).
Unicredit (2009) states 3 layers of internal control system which are
organization/operations business lines, risk management and compliance and internal
audit. Organization/operations business line is to affirm proper carrying on of
9
transactions. Risk management and compliance is responsible for compliance with the
regulatory frame work. Internal audit screens the adequacy, completeness and
functionality of the internal control system. Schaefer & Peluchette (2010) indicate that
fraudulent financial statements are often avoided by an effective internal control system.
Pricewaterhousecoopers (2009) state that companies face a big challenge in relation to
monitoring and reviewing activities and that auditing standards in several countries are
not flexible to suit all their clients needs. Whereas many authors like
pricewaterhousecoopers (2011) urge that internal controls are designed for the
achievement of company objectives, other authors like Flick (2010), indicate that internal
controls ensures proper organizational processes functioning, financial information
reliability and applicable regulation compliance. Though authors state different purposes
of designing internal controls, the end result is to achieve company objectives. Authors
are however silent on methods of designing internal controls.
2.2 MANAGERIAL COMPETENCE
According to Hellriegel et al., (2008), managerial competence is the skills, sets of
comprehension, behaviours and attitudes necessary for managers to succeed. Tuominen
et al., (2010) define managerial competence as the managements ability to implement
matters profitably and efficiently. Chye et al. (2010), state that business functional skills
in the name of managerial competencies play an important part in developing successful
business firms. Govender & Parumasur (2010) indicate that managers have to
continuously develop new competencies to manage challenges and for organizational
survival. Botha and Camphor (2008) urge that development of managerial skills and
10
competencies is essential for organizations to achieve their objectives. Potgieter and

Coetzee (2010) state that interpersonal skills are important managerial competencies.
Pennacchi and Rastad (2011) urge that pension funds should invest in a portfolio that
immunizes the risk of its liabilities and that any deviation from the benchmark introduces
a tracking error. Fard et al., (2010) urge that presently organizations purely understand
the importance of employees competency improvement since competent ones can apply
their knowledge, skills, capabilities, abilities and personal characteristics and obtain the
organizations goals. Zopiatis (2010) indicate that for a manager to be competent, he/she
should have conceptual, technical and human skills. Zezlina (2008) indicates that in
order to develop managerial competence, team work, efficient communication and
training are important. Whitehead (2009) indicates that in order to develop managerial
competence, an organization has to highly develop communication, interpersonal and
analytical skills. Both Zezlina (2008) and Whitehead (2009) agree that efficient
communication is very important while developing managerial competence however the
two disagree on the issues of training, interpersonal and analytical skills. Bitencourt
(2009) indicates that the training component contributes to the development of
managerial competence. Epstein and Hundert (2008) defines Professional competence as

the routine and careful use of technical skills, communication, knowledge, values and
reflection in daily application for the benefit of the individual and the public being served.
Bitencourt (2009) also qualifies the training issue at indicated by Zezlina (2008) in the
development of managerial competence. As well Epstein and Hundert (2008) also qualify
the issue of interpersonal and analytical skills as indicated by Whitehead (2009). Factors to
consider while developing managerial competence are inexhaustible, different authors give
small components which give a lot of value if put together.
11
2.3 MANAGEMENT OF PUBLIC FUNDS

According to Dayananda et al. (2009), financial management refers to financing,
dividend and investment decision to achieve the firms objective of wealth maximization.
Clark & Urwin (2008) indicate that leadership, in form of application of skills and
expertise, is an essential ingredient in the management of pension fund. Vraniali (2010)
states that in any public spending environment, control system and proper accountability
are significant factors. Tommasi (2007) emphasizes a credible and affordable budget as a
super instrument of public financial management. Vraniali (2010) further urges that a
Management Information System (MIS) is extremely important in the monitoring of
public expenditure and that the Greek government also announced its (MIS)
development. Mulgan (2008) states that accountability is a social interaction relationship
and exchange with complementary rights on the account holder and duties on the
accountor. Bovens (2009) indicates that accountability is a connection between an actor
and a forum whereby the actor has a duty to explain and to justify his transactions or
dealings. Bovens & Schillemans (2009a) however indicate that informal or voluntary
transparency is not described as accountability. Philp (2009) also urges that
accountability should not be seen as a principal-agent relationship because the bilateral
connection between two parties where one party has to serve interests of the other party is
too simplistic. The Commonwealth Parliamentary Association Study Group of MPS,
2004 (2006) states that information is for public consumption and that information
disclosure supports sustainable development, reduces conflict by strengthening public
trust and supports human rights. Organization for Economic Co-operation and
12
Development (OECD) (2008) describes access to information as transparency.

Dayananda et al. (2009) further states that efficient financial management is reflected by
the success in achieving the wealth maximization objective through the investment
decision.
2.4 INTERNAL CONTROL SYSTEM AND MANAGEMENT OF PUBLIC FUNDS
Musfirah (2010) indicates that gaps in internal controls have been found in several
agencies over the management of public funds. Internal control gaps identification are
discusseed by Musfirah (2010), however the study is silent on how to close those gaps
(internal control). According to Young & Cardoso (2009), effectiveness of internal
controls strengthen transparency in the management of public funds. Apart from
transparency as stated by Young and Cardoso (2009), effectiveness of internal controls
further strengthen accountability, investments in viable projects and helps to meet the
wealth maximization objective.
2.5 MANAGERIAL COMPETENCE AND MANAGEMENT OF PUBLIC FUNDS
Avon and Somerset Probation Board Annual Report (2009/10) indicate that their
organization is focusing on managerial competence, professional and business skills for
public protection which leads to good value for public money. Miller (2009) states that a
managers incompetence and poor internal financial controls are a potential abuse of
public funds. The author (Miller (2009)) however does not define incompetence and still
is silent on how to develop managerial competence to check abuse of public funds.
13
2.6 MANAGERIAL COMPETENCE AND INTERNAL CONTROL SYSTEM

Financial Management Capacity Building Committee (FMCBC) (2009) recommends that
managers should be competent so that they get involved in setting internal control
measures and further be responsible for operationalizing those internal controls.
Government Finance Officers Association (GFOA) (2009) recommends that

managements auditing of internal controls is essential to ensure that they (internal
controls) fulfill their intended purpose and in case there are gaps, measures should be
taken to close those gaps. Methods of closing the gaps however are not explained.
2.7 CONCLUSION
The management of public funds should not only be looked at in terms of accountability,
disclosures and viable investments but also in terms of regulation compliance, auditing
standards, monitoring and review and professional competence. Professional Competence
should be emphasized for the public confidence and further save them (public) from
possible embarrassments and financial losses. An example of NSSF where the M.D.
announced a huge profit in year 2008 and based there to promise an interest increment,
when in the actual sense the organization has incurred a huge loss. Setting internal
controls in organizations is important however auditing them (internal controls) is not
emphasized.
14
CHAPTER THREE
RESEARCH METHODOLOGY
3.0 INTRODUCTION
This chapter explains the method used in the study to deal with the research problem. It
focuses on the research design, study population, sample size and sample selection, and
measurement of variables, reliability and validity of instruments, data collection tools,
data processing and analysis, and problems experienced during the research study.
3.1 RESEARCH DESIGN
A cross sectional and correlational and regressional survey designs were used for
purposes of examining information, evaluating the internal control system and analyzing
the relationship between internal control system and management of public funds,
managerial competence and management of public funds and internal control system and
managerial competence.
3.2 POPULATION OF THE STUDY AND SAMPLE SIZE
The study population was 83 composed of 63 NSSF managers at corporate and middle
level (according to NSSF authority) and 20 members of the Committee on Commissions,
Statutory Agencies and State Enterprises (CCSASE) (according to Uganda Parliament
Authority). The sample size was 70 as determined by Krejcie and Morgan (1970).
Though the targeted sample was 70, information was got from 57 respondents
representing a response rate of 81%.
15
3.3 SAMPLING PROCEDURE

Stratified sampling and simple random sampling techniques were applied. In NSSF
strata were according to managerial levels where as in CCSASE simple random sampling
was used right away.
3.4 DATA SOURCES
3.4.1 Primary data
Primary data was collected from NSSF and CCSASE using close ended
questionnaires. The primary data reflected the internal control system, managerial
competence and management of public funds in NSSF.
3.4.2 Secondary data
Secondary data on NSSF was obtained from CCSASE report on Temangalo land
purchase, Auditor Generals report, KPMG audit report and ministry of Finance.
3.5 DATA COLLECTION INSTRUMENTS
Close ended questionnaires were used by the researcher to collect primary data on
internal control system, managerial competence and management of public funds.
3.6 MEASUREMENT OF VARIABLES
The Internal control system was measured according to Brewer & List (2003) using
regulation compliance, auditing standards and monitoring and review. Managerial
competence was measured according to Kaiser (2000) using interpersonal skills, training
16
and professional competence. Management of public funds was measured according to
Allen et al. (2004) using accountability, disclosures and viable investments. Variables
were coded using a five point Likert scale ranging from strongly agree to strongly
disagree.
3.7 `RELIABILITY AND VALIDITY OF THE RESEARCH INSTRUMENTS
Reliability of research instruments was put into consideration using reliability analysis of
questionnaires. Reliability and validity analysis was done on all questions under the three
variables using Cronbach Alpha Coefficient and Content Validity Index. Results of the
analysis are indicated in the table below.
Table 3.1: Reliability and Validity Test
Variables
Anchor
Cronbach Alpha
Coefficient
Content Validity
Index
Internal Control System 5 point 0.724 0.716
Managerial competence
5 point 0.813 0.692
Management of public
funds
5 point 0.706 0.684
Source: Primary data
The outcome of the reliability test in table 3.1 above indicate that questions asked were
satisfactorily reliable and valid since the reliability benchmark for Cronbach Alpha
Coefficient is 0.6. and that of Content Validity Index is 0.5.
17
3.8 DATA PROCESSING AND ANALYSIS

A statistical Program for Social Scientists (SPSS) computer program was used for data
analysis. Statistical methods of correlation were used to evaluate the internal control
system, analyze relationships between internal control system and management of public
funds, managerial competence and management of public funds and managerial
competence and internal control system. The research questions therefore were properly
answered and research objectives achieved.
3.9 LIMITATIONS
i. Getting information was a tag of war because some respondents looked at disclosure
as mortgaging their job security. I frequently explained that the study was purely for
academic purposes to eliminate information concealment.
ii. Financial hardships because research was fully financed by the researcher and it was
conducted at a time when there was hyper inflation and a Uganda Shilling had highly
depreciated. I used more personal funds than had budgeted to overcome the problem.
iii. Meeting members of CCSASE was extremely challenging since Members of
Parliament always have many assignments to handle and some members had not
made it back to parliament. To overcome this problem, I used research assistants and
extended the time for this study.
iv. The Walk to work arrangements by the government opposition team and the several
strikes around Kampala were problematic since police used live bullets and tear gas
18
to disperse participants. I overcame this problem by moving very early in the

morning before strikes began and go back home very late after strikes and their
effects had ended.
19
CHAPTER FOUR
DATA PRESENTATION, ANALYSIS AND INTERPRETATION OF THE
FINDINGS
4.0 INTRODUCTION
This chapter focuses on the presentation, analysis and interpretation of results in
connection with the study objectives. Questionnaires were used to collect the data. The
findings are summarized in tables showing percentages. The chapter further presents the
sample characteristics of the respondents, descriptive statistics of the items under study
and correlation results for the variables under study.
The presentation was guided by the following research objectives
a) To evaluate the internal control system in NSSF.
b) To examine the relationship between internal control system and management of public
funds in NSSF.
c) To examine the relationship between managerial competence and management of public
funds in NSSF.
d) To examine the relationship between managerial competence and internal control system
in NSSF.
4.1 SAMPLE CHARACTERISTICS
This section explains the general characteristics of the sample collected showing the
response rate, age composition of the sample, gender of respondents and education levels.
20
4.1.1 Response rate

With a population of 83 and a sample of 70 as per Krejcie and Morgan (1970),
only 57 responded representing a response rate of 81%. This percentage (81%)
was representative and gave all the information as required.
4.1.2 Age group of respondents
The study examined the age-group of the respondents. Table 4.1 below presents
the results:
Table 4.1: Age group of respondents
Frequency Percent
20 - 29 Years 10 17.5
30 - 39 Years 37 65.0
40 - 49 years 8 14.0
50 - 59 Years 2 3.5
Total 57 100.0
From table 4.1 above, most of the respondents were in the 30 39 age bracket
constituting 65%, followed by 20 29 age bracket with 17.5%, 40 49 age group with
14% and 50 59 age group had the least composition of 3.5%
4.1.3 Gender of the respondents
The study surveyed the distribution of the respondents by gender. Table 4.2 below
presents the cross-tabulated results:
21
Table 4.2 Age of respondents by gender

Age of respondents by Gender Cross tabulation
Gender
Male Female Total
Age:
20 - 29 Years Count 6 4 10
Row% 60.0% 40.0% 100.0%
Column% 13.6% 30.8% 17.5%
30 - 39 Years
Count 29 8 37
Row% 78.4% 21.6% 100.0%
Column% 65.9% 61.5% 65.0%
40 - 49 years Count 7 1 8
Row% 87.5% 12.5% 100.0%
Column% 15.9% 7.7% 14.0%
50 59 years Count 2 0 2
Row% 100.0% 0.0% 100.0%
Column% 4.5% 0.0% 3.5%
Total Count 44 13 57
Row% 77.2% 22.8% 100.0%
Column% 100.0% 100.0% 100.0%

Findings in the above table (4.2) show that among the respondents, males accounted for
77.2% where as females constituted only 22.8%.
According to table 4.2, as table 4.1 already reflected, results show that majority of the
respondents were in the 30-39 age group which contributes 65%, followed by 20-29 age
group with a representation of 17.5%, then, 40 - 49 with 14% and 50-59 constituted the
lowest part of only 3.5%.
22
4.1.4 Educational characteristics of the respondents

The data below reflects the educational characteristics of the respondents. Table
4.3 below presents the results of the distribution.
Table 4.3 Educational characteristics of the respondents in relation to gender
Highest education level attained: by Gender Cross-tabulation
Sex:
Male Female Total
Highest education
level attained:
Diploma Count 0 1 1
Row% 0.0% 100.0% 100.0%
Column% 0.0% 7.7% 1.8%
Bachelors degree Count 10 1 11
Row% 90.9% 9.1% 100.0%
Column% 22.7% 7.7% 19.3%
Post graduate
diploma
Count 12 6 18
Row% 66.7% 33.3% 100.0%
Column% 27.3% 46.2% 31.6%
Masters degree Count 22 5 27
Row% 81.5% 18.5% 100.0%
Column% 50.0% 38.5% 47.4%
Total Count 44 13 57
Row% 77.2% 22.8% 100.0%
Column% 100.0% 100.0% 100.0%
Table 4.3 indicates that most of the respondents were Masters degree holders with a
contribution of 47.4%, followed by post graduate diploma holders with 31.6%, then
Bachelors degree holders with 19.3% and diploma holders with the least representation of
1.8%. The researcher further noted that among the respondents, males held higher
qualifications than the female counterparts. Among the masters degree holders, males
23
accounted for 81.5% where as females constituted only 18.5%. Looking at the post
graduate diploma holders, males comprised 66.7% and females contributed 33.3%.
Similarly, considering bachelors degree holders, males accounted for 90.9% where as
females contributed only 9.1%
Table 4.4 Educational characteristics of the respondents in relation to age
Table 4.4 results show that majority of the respondents were masters degree holders with
a contribution of 47.4%, followed by post graduate diploma holders with 31.6%,
bachelors degree holders accounted for 19.3% whereas diploma holders had the least
contribution of 1.7%. This implies that most respondents were highly educated. 30 39
Age: * Highest education level attained by age Cross-tabulation
Highest education level attained:
Diploma Total
Bachelors
degree
Post graduate
diploma
Masters
degree
Age: 20 - 29 Years Count 1 4 1 4 10
Row% 10.0% 40.0% 10.0% 40.0% 100.0%
Column% 100.0% 36.4% 5.6% 14.8% 17.5%
30 - 39 Years Count 0 5 15 17 37
Row% 0.0% 13.5% 40.5% 46.0% 100.0%
Column% 0.0% 45.4% 83.3% 63.0% 65.o%
40 - 49 years Count 0 1 2 5 8
Row% 0.0% 12.5% 25.0% 62.5% 100.0%
Column% 0.0% 9.1% 11.1% 18.5% 14.0%
50 - 59 Count 0 1 0 1 2
Row% 0.0% 50.0% 0.0% 50.0% 100.0%
Column% 0.0% 9.1% 0.0% 3.7% 3.5%
Total Count 1 11 18 27 57
Row% 1.7% 19.3% 31.6% 47.4% 100.0%
Column% 100.0% 100.0% 100.0% 100.0% 100.0%
24
age group dominated the respondents with a composition of 65%, followed by 20 29

age group with 17.5%, then 40 49 age group with 14% and lastly 50-59 with 3.5%. The
researcher further observed that among the Masters degree holders, 63% were in the 30
39 age bracket, 18.5% in the 40 49 age group, 14.8% in the 20 29 age group and 3.7%
in the 50 59 age bracket. Among the post graduate diploma holders, 30 39 age group
accounted for 83.3%, 40 49 constituted 11.1% and 20 29 contributed 5.6%.
Considering Bachelors degree holders, 45.4% was represented by 30 39 age group,
36.4% by 20 29 age group, 9.1% by 40 49 age group and the 50 59 constituted
9.1%.
Table 4.5: Period of stay in the organization
Frequency Percent
Below 1 year 2 4.9
1 2 years 19 46.3
3 4 years 10 24.4
5 6 years 10 24.4
Total 41 100.0
Source: Primary Data
Table 4.5 shows that most respondents had stayed in the organization for 1 2
years with a contribution of 46.3%. 24.4% had stayed for 3 4 years in the
organization and another 24.4% had stayed for 5 6 years. Only 4.9 had stayed
in the organization for less than one year.
Table 4.6: Period of stay as committee member
Frequency Percent
25
Below 1 year 0 0
1 2 years 6 37.5
3 4 years 0 0
5 6 years 10 62.5
Total 16 100.0
Results from table 4.6 indicate that most respondents (62.5%) had stayed as committee
members for 5 6 years whereas 37.5% had stayed as committee members for 1 2
years. No member had stayed on the committee for a period less than a year and 3 4
years respectively.
4.2 EVALUATION OF THE INTERNAL CONTROL SYSTEM IN NSSF.
Descriptive statistics were used to examine Internal Control System in NSSF. The results
were analyzed and interpreted basing on the anchor of the instrument scale which was
ordered such that a mean close to 5 represents Strong agreement, 4- agreement, 3Uncertanity, 2disagreement and 1-Strong disagreement.
26
Table 4.7 The internal control system in NSSF.

Min Max Mean S. Deviation
NSSF follows the organizations purchasing procedure to buy
assets and services
1 5 2.07 .753
NSSF follows the organizations investment procedure 1 4 2.35 .641
NSSF gives advances and loans according to regulations 1 5 3.81 1.156
NSSFs payments are subject to authorization 1 4 1.95 .971
NSSF applies inventory control techniques 1 5 3.37 1.248
NSSF follows disposing off procedure 1 5 3.95 .990
Travelling abroad is regulated at NSSF 1 4 2.07 1.050
NSSF adequately keeps documents and records 1 4 1.75 .576
Accounting duties are separated in NSSF 1 5 2.12 1.452
NSSF is frequently audited 1 5 3.81 .718
NSSF applies International Accounting Standards 1 5 4.23 .887
NSSF regularly hires proficient external auditors 2 5 3.79 .647
NSSF is audited by certified public accountants 1 5 3.95 1.059
NSSF compares internal with external audit reports and reconcile 1 5 2.04 .981
We easily observe the trend of affairs at NSSF 1 2 1.37 .487
We measure parameters to indicate performance 1 3 1.58 .565
We visit NSSF for checks and balances 1 3 1.75 .474
We use a master schedule of monitoring activities 1 4 1.96 .844
We have all tools used for monitoring 1 5 2.46 1.337
NSSF does internal checks 1 3 1.75 .474
NSSF carries out job rotation 1 5 3.49 1.571
NSSF regularly checks her inventory 1 3 1.75 .510
Results from table 4.7 revealed that majority of the respondents reported that NSSF does
not follow the organizations purchasing procedure to buy assets and services (Mean =
2.07), the organizations investment procedure is not followed (Mean = 2.35), payments
are not subject to authorization (Mean = 1.95) and it was also observed that travelling
abroad is not regulated (Mean = 2.07).
27
Furthermore, it was indicated that NSSF does not adequately keep documents and records
(Mean = 1.75), accounting duties are not separated (Mean = 2.12) paving way to
mismanagement of public funds. Internal audit reports do not reconcile with external
audit reports (Mean = 2.04) indicating that management intends to cover up the
mismanagement issues.
Similarly, NSSF does not easily observe the trend of affairs (Mean = 1.37). This means
that problems are realized when things have already moved out of hand. Further
observation was made that NSSF does not have a set of parameters to measure to indicate
performance (Mean = 1.58).
In addition, the Public Accounts Committee and the committee on commissions,
Statutory Agencies and State Enterprises do not visit NSSF for checks and balances
(Mean = 1.75), a master schedule of monitoring activities is not used (Mean = 1.96). The
study further indicates that NSSF does not have monitoring tools (Mean = 2.46) and no
internal checks are done (Mean = 1.75). It is indicated further that NSSF does not
regularly check her inventory (Mean = 1.75). The information from table 4.7 indicates an
ineffective internal control system in NSSF which partly leads to mismanagement of
public funds.
28
4.3 CORRELATIONS
The zero order correlations were used to establish the relationship between variables.
The Pearsons correlation coefficient test was employed to execute this (see table 4.8
below)
Table 4.8 Zero-order Correlation Analysis
Internal Control
Systems
Managerial
Competence
Management Of
Public Funds
Internal Control Systems 1.000
Managerial Competence .502** 1.000
Management Of Public Funds .351** .460** 1.000
**. Correlation is significant at the 0.01 level (2-tailed).
4.4 INTERNAL CONTROL SYSTEM AND MANAGEMENT OF PUBLIC FUNDS IN

NSSF
Correlation results from table 4.8 above indicate that there was a significant positive
relationship between internal control system and management of public funds in NSSF
(r = 0.351, p <0.01). This means that a good internal control system may result into an
improvement in the management of public funds. This observation was made at the
0.99% confidence level.
29
4.5 MANAGERIAL COMPETENCE AND MANAGEMENT OF PUBLIC FUNDS IN

NSSF
Findings from table 4.8 further revealed that there was a significant positive relationship
between managerial competence and management of public funds (r = 0.460, p< 0.01).
This means that excellent managerial competence is associated with an improvement in
the management of public funds in NSSF. The finding was established at the 99%
confidence level.
4.6 MANAGERIAL COMPETENCE AND INTERNAL CONTROL SYSTEM IN
NSSF.
Further analysis of the correlations revealed a positive significant relationship between
managerial competence and internal control system (r = 0.502, p< 0.01). This implies that
excellent managerial competencies are associated with a strong internal control system.
The observation was made at the 99% confidence level.
4.7 REGRESSION ANALYSIS
A regression analysis was done to establish the predictive qualities of the dependent
variable (management of public funds) in relation to the independent variables (internal
control system and managerial competence). A regression analysis was run to establish
the proportion of the variations in management of public funds (dependent variable) that
is predicted by the changes in internal control system and managerial competence. The
results are indicated in table 4.9 below.
30
Table 4.9: Multiple Regression Model

Coefficientsa
Model
Unstandardized
Coefficients
Standardized
Coefficients
B Std. Error Beta t Sig.
1 (Constant) 1.975 .518 3.816 .000
Internal Control System .136 .117 .161 1.163 .250
Managerial Competence .384 .140 .380 2.750 .008
R = .481 Std. Error of the Estimate = .449 Sig = 0.001
R Square = .231 F = 8.100
Adjusted R Square = .203
A. Dependent Variable: Management Of Public Funds

Table 4.9 above indicates that the prediction was observed to explain 20.3% (Adjusted R
square = 0.203) of the observed variance in management of public funds. This means
that the independent variables (internal control system and managerial competence) in the
model explain only 20.3% of the variations in the dependent variable (management of
public funds). This implies that management of public funds is not only explained by
internal control system and managerial competence, but also by other variables not
included in this study.
The F-statistics of 8.100 with probability of 0.001 shows that the overall model is highly
significant meaning that the regression equation really explains the relationship between
internal control system, managerial competence and management of public funds.
Regression results in table 4.9 above, further show that between the independent
variables, managerial competence was observed to be a better predictor of management
31
of public funds (beta = 0.380, significance = 0.008) than internal control system (beta =
0.161, significance = 0.250)
32
CHAPTER FIVE
DISCUSSION, CONCLUSION AND RECOMMENDATION
5.0` INTRODUCTION
This chapter presents a discussion of the results obtained in chapter four. The discussion
of results is followed by conclusion, recommendations and recommended areas for
further research. The presentation of the discussion is as per the study objectives. The
first part deals with the examination of the internal control system, the second part is
about the relationship between internal control system and management of public funds,
the third part reflects the relationship between managerial competence and management
of public funds whereas the fourth part discusses the relationship between managerial
competence and internal control system. The remaining part of this chapter deals with the
conclusion, recommendations according to results from chapter four and recommended
areas for further research.
5.1 EVALUATION OF THE INTERNAL CONTROL SYSTEM
The study examined the internal control system and results revealed that it (internal
control system) was ineffective. This was clearly reflected by table 4.7. This implies that
things are not done the way they are supposed to be done. An ineffective control system
promotes fraud in organizations. This is in agreement with Wenjun & Shanshan (2008)
who urge that an organizations internal control system is the basic safeguard to a regular
and reliable accounting information system operation. An ineffective internal control
system therefore leads to several adverse effects like fraud and mismanagement of funds.
33
Findings as well are in agreement with Flick (2010), who indicates that an internal
control system ensures proper organizational processes functioning, financial information
reliability and applicable regulation compliance. This is in consistence with Schaefer &
Peluchette (2010) who indicate that fraudulent financial statements are often avoided by
an effective internal control system.
5.2 INTERNAL CONTROL SYSTEM AND MANAGEMENT OF PUBLIC FUNDS
Results revealed a positive relationship between internal control system and management
of public funds. This implies that an improvement in the internal control system leads to
an improvement in the management of public funds and a deterioration in the internal
control system leads to a deterioration in the management of public funds. This is
supported by Young & Cardoso (2009) who state that effectiveness of internal controls
strengthen transparency in the management of public funds.
5.3 MANAGERIAL COMPETENCE AND MANAGEMENT OF PUBLIC FUNDS
Findings indicated a positive relationship between managerial competence and
management of public funds. This implies that good management skills result in good
management of public funds and that managerial incompetence leads to mismanagement
of public funds. Furthermore the implication is that in order for the public funds to be
managed efficiently, management has to be competent with all the necessary skills. This
agrees with Avon and Somerset Probation Board Annual Report (2009/10) which
indicates that in order to get good value for public money, they were focusing on
managerial competence, professional and business skills. This is further in agreement
with Miller (2009) who urges that managerial incompetence and poor internal financial
controls are a potential abuse of public funds
34
5.4 MANAGERIAL COMPETENCE AND INTERNAL CONTROL SYSTEM

Results of the study reflected a positive relationship between managerial competence and
internal control system. The implication is that excellent managerial competencies result
in an effective internal control system since it is the human capital to effect or enforce the
internal controls written on paper. Managerial incompetence leads to having strong
internal controls on paper but having weak internal controls practically. This is in
agreement with Financial Management Capacity Building Committee (FMCBC) (2009)
which recommends that managers should be competent so that they get involved in
setting internal controls and further be responsible for operationalizing them ( internal
controls).
5.5 CONCLUSION
The findings indicate that the mismanagement of public funds in NSSF is related to a
weak internal control system and managerial incompetence. The internal control system
is ineffective. The purchasing procedure is not followed, payments are made without
authorization, advances and loans are given without following the rules and regulations,
travelling abroad is not regulated and there are no checks and balances, all resulting into
mismanagement of public funds.
NSSF has highly mismanaged public funds. The fund has made a lot of losses out of
managerial incompetence and lack of internal control enforcement. Something therefore
needs to be done to save the public from losing their savings.
35
5.6 RECOMMENDATIONS
The public (people who save with NSSF) should have a hand in the management of their
savings. It is unfortunate that people who manage the fund do not contribute to the fund.
Since there is a positive relationship between Internal Control system and management of
public funds, NSSF should make her internal Control System strong in order to save the
public from losing their savings.
The government should stop political interference in the management of the fund so that
the management is not pressurized to do contrary to the funds rules and regulations.
Whistle blowing should be introduced and practiced in NSSF. This helps to save the
situation before it reaches ugly levels.
NSSF should put emphasis on training her management to gain the necessary skills and
gain high competence. Visiting similar organizations, with excellent performance, in
East Africa will add value to NSSF.
5.7 SUGGESTED AREAS FOR FURTHER RESEARCH
The researcher suggests the following areas for further research
a) A similar study in other public institutions.
36
b) The independent variables in this study explained only 20.3%, other studies therefore
should be carried out to explain the problem further.
c) The effect of political pressure on funds management in public institutions
37
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42
APPENDICES
Appendix 1-QUESTIONNAIRE FOR NSSF MANAGERS
Introduction:
I am Wilbrod Birabwa, carrying out a study on Internal Control System, Managerial Competence
and Management of Public Funds. A case of NSSF Uganda. This study is going to be conducted
as partial fulfillment for the award of a Master of Science in Accounting and Finance Degree of
Makerere University. The information provided will be confidential and only used for purposes
of this study. Kindly spare your valuable time and respond to all the following questions.
THANK YOU
SECTION A: BACKGROUND INFORMATION
Please tick the correct box
Management level:
Middle
Corporate
Sex:
Male
Female
Age:
20 - 29
30 - 39
40 - 49
50 - 59
60 - 69
70 79
Certificate
Diploma
Bachelors
degree
Post graduate
diploma
Masters
degree
Doctorate
Period of stay in the organization
43
Below 1 year
1 2 years
3 4 years
5 6 years
7 8 years
Above 8
years
Evaluate the following statements by ticking under the appropriate figure basing on the scale
below:
Strongly agree
Agree
Not sure
Disagree
Strongly disagree
54321
Internal Control System
54321
We follow the organizations purchasing procedure to buy assets and
services
We follow the organizations investment procedure
We give advances and loans according to regulations
The organizations payments are subject to authorization
We apply inventory control techniques
We follow the organizations disposing off procedure
Travelling abroad is regulated
Auditing standards
54321
We adequately keep documents and records
Accounting duties are separated
Our organization is frequently audited
We apply International Accounting Standards
We regularly hire proficient external auditors
We are audited by certified public accountants
We compare internal with external audit reports and reconcile
Monitoring & Review
54321
44
We easily observe the trend of affairs at the organization

We measure parameters to indicate performance
We use a master schedule of monitoring activities
We have all tools used for monitoring
PAC visits our organization for checks and balances
We do internal checks at the organization
We carry out job rotation at the organization
We regularly check our inventory
Managerial Competence
54321
I communicate effectively to people
I interact with people for the benefit of the organization
I am an active listener at the organization
We work as a team at the organization
I can influence staff members to make decisions
I justify my decisions
I delegate duties where necessary to save time and money
Training
54321
The organization gives orientation to all new employees
The organization trains me to suit her needs
The organization gives me decision making techniques
I visit similar bodies to see how affairs are handled
I learn how to resist political pressure
I learn cost minimization at the organizations
I learn effective utilization of resources at the organization
Professional Competence
54321
Our organization recruits according to qualifications
45
Our organization fosters critical thinking in employees

I evaluate whether our objectives are achieved
I carry out a sensitivity analysis before making decisions
I make rigorous decisions
I make cost effective decisions
I work towards benefiting stakeholders
Management of Public Funds
Accountability
54321
All receipts and expenditure are well documented
We draw annual budgets
Our actual expenditure deviates from the budgeted expenditure
We justify our expenditure
We do timely and regular accounts reconciliation
The organizations assets and liabilities are well disclosed
We present timely reports

We provide detailed financial information to stakeholders.
Disclosures
54321
Stakeholders access all financial statements.
Stakeholders get to know all gains and losses
Stakeholders know all our investments
We provide transparency statements to all stakeholders
We inform stakeholder all purchases made
We inform stakeholders the cost of purchases made
We inform stakeholders the cost of travelling abroad
Viable Investments
54321
We follow the organizations investment procedure
We invest at the right time
46
We sell investments at the right time.

We earn profits from all our investments
We invest basing on goals
We carry out cost analysis before investing
Investment manager is consulted on investments
Investment manager justifies investments
47
Appendix 2-QUESTIONNAIRE FOR COMMITTEE ON COMMISSIONS,

STATUTORY AUTHORITIES AND STATE ENTERPRISES
Introduction:
I am Wilbrod Birabwa, carrying out a study on Internal Control System, Managerial Competence
and Management of Public Funds in National Social Security Fund. This study is going to be
conducted as partial fulfillment for the award of a Master of Science in Accounting and Finance
Degree of Makerere University. The information provided will be confidential and only used for
purposes of this study. Kindly spare your valuable time and respond to all the following
questions.
THANK YOU
SECTION A: BACKGROUND INFORMATION
Please tick the correct box
Sex:
Male
Female
Age:
20 - 29
30 - 39
40 - 49
50 - 59
60 - 69
70 79
Certificate
Diploma
Bachelors
degree
Post graduate
diploma
Masters
degree
Doctorate
Period of stay as committee member
Below 1 year
1 2 years
3 4 years
5 6 years
7 8 years
Above 8
years
48
Evaluate the following statements by ticking under the appropriate figure basing on the scale
below:
Strongly agree
Agree
Not sure
Disagree
Strongly disagree
54321
Internal Control System
54321
NSSF follows the organizations purchasing procedure to buy assets
and services
NSSF follows the organizations investment procedure
NSSF gives advances and loans according to regulations
NSSFs payments are subject to authorization
NSSF applies inventory control techniques
NSSF follows disposing off procedure
Travelling abroad is regulated at NSSF
Auditing standards
54321
NSSF adequately keeps documents and records
Accounting duties are separated in NSSF
NSSF is frequently audited
NSSF applies International Accounting Standards
NSSF regularly hires proficient external auditors
NSSF is audited by certified public accountants
NSSF compares internal with external audit reports and reconcile
Monitoring & Review
54321
We easily observe the trend of affairs at NSSF
We measure parameters to indicate performance
We visit NSSF for checks and balances
We use a master schedule of monitoring activities
We have all tools used for monitoring
49
NSSF does internal checks

NSSF carries out job rotation
NSSF regularly checks her inventory
Managerial Competence
54321
NSSF communicates effectively to people
NSSF interacts with people for the benefit of the organization
NSSF is an active listener
NSSF members work as a team
NSSF management influences staff members to make decisions
NSSF justifies her decisions
NSSF management delegates duties to save time and money
Training
54321
NSSF gives orientation to all new employees
NSSF trains employees to suit her needs
NSSF gives her managers decision making techniques
NSSF managers visit similar bodies to see how affairs are handled
NSSF managers learn how to resist political pressure
NSSF managers learn cost minimization at their organization
NSSF managers learn effective utilization of resources
Professional Competence
54321
NSSF recruits employees according to qualifications
NSSF fosters critical thinking in employees
We evaluate whether NSSFs objectives are achieved
NSSF managers carry out a sensitivity analysis before making
decisions
NSSF managers make rigorous decisions
50
NSSF managers make cost effective decisions

NSSF works towards benefiting stakeholders
Management of Public Funds
Accountability
54321
All receipts and expenditure are well documented at NSSF
NSSF draws annual budgets
NSSFs actual expenditure deviates from the budgeted expenditure
NSSF justifies her expenditure
NSSF does timely and regular accounts reconciliation
NSSFs assets and liabilities are well disclosed
NSSF presents timely reports
NSSF provides detailed financial information to stakeholders.
Disclosures
54321
Stakeholders access all financial statements.
Stakeholders get to know all gains and losses
Stakeholders know all NSSFs investments
NSSF provides transparency statements to all stakeholders
NSSF informs stakeholders all purchases made
NSSF informs stakeholders the cost of purchases made
NSSF informs stakeholders the cost of travelling abroad
Viable Investments
54321
NSSF follows the organizations investment procedure
NSSF invests at the right time
NSSF sells investments at the right time.
NSSF earns profits from all her investments
NSSF invests basing on goals
NSSF carries out cost analysis before investing
Investment manager is consulted on all investments
Investment manager justifies all investments
51
Appendix 3-LETTER OF INTRODUCTION
co
M ANAGING P UBLIC
S ECTOR R ECORDS
A Training Programme
Managing
Financial Records
INTERNATIONAL
INTERNATIONAL RECORDS
COUNCIL ON ARCHIVES
MANAGEMENT TRUST
MANAGING PUBLIC SECTOR RECORDS: A STUDY PROGRAMME
MANAGING FINANCIAL RECORDS
Managing Public Sector Records

A Study Programme
General Editor, Michael Roper; Managing Editor, Laura Millar
MANAGING FINANCIAL
RECORDS
INTERNATIONAL RECORDS
MANAGEMENT TRUST
INTERNATIONAL
COUNCIL ON ARCHIVES
MANAGING PUBLIC SECTOR RECORDS: A STUDY PROGRAMME

Managing Financial Records
International Records Management Trust, 1999.

Reproduction in whole or in part, without the express
written permission of the International Records
Management Trust, is strictly prohibited.
Produced by the International Records Management Trust
12 John Street
London WC1N 2EB
UK
Printed in the United Kingdom.
Inquiries concerning reproduction or rights and
requests for additional training materials should be
addressed to
International Records Management

Trust
12 John Street
London WC1N 2EB
UK
Tel: +44 (0) 20 7831 4101
Fax: +44 (0) 20 7831 7404
E-mail: info@irmt.org
Website: http://www.irmt.org
Version 1/1999
MPSR Project Personnel

Project Director
Anne Thurston has been working to define international solutions for the
management of public sector records for nearly three decades. Between
1970 and 1980 she lived in Kenya, initially conducting research and then
as an employee of the Kenya National Archives. She joined the staff of the
School of Library, Archive and Information Studies at University College
London in 1980, where she developed the MA course in Records and
Archives Management (International) and a post-graduate research
programme. Between 1984 and 1988 she undertook an onsite survey of
record-keeping systems in the Commonwealth. This study led to the
foundation of the International Records Management Trust to support the
development of records management through technical and capacitybuilding projects and through research and education projects.
General Editor
Michael Roper has had a wide range of experience in the management of
records and archives. He served for thirty-three years in the Public Record
Office of the United Kingdom, from which he retired as Keeper of Public
Records in 1992. He has also taught on the archives courses at University
College London and the University of British Columbia, Canada. From
1988 to 1992 he was Secretary General of the International Council on
Archives and since 1996 he has been Honorary Secretary of the
Association of Commonwealth Archivists and Records Managers (ACARM).
He has undertaken consultancy missions and participated in the delivery
of training programmes in many countries and has written extensively on
all aspects of records and archives management.
Managing Editor
Laura Millar has worked extensively not only as a records and archives
management consultant but also in publishing and distance education, as
an editor, production manager and instructional designer. She received
her MAS degree in archival studies from the University of British Columbia,
Canada, in 1984 and her PhD in archival studies from the University of
London in 1996. She has developed and taught archival education
courses both in Canada and internationally, including at the University of
British Columbia, Simon Fraser University and the University of Alberta.
She is the author of a number of books and articles on various aspects of
archival management, including A Manual for Small Archives (1988),
Archival Gold: Managing and Preserving Publishers Records (1989) and A
Handbook for Records Management and College Archives in British
Columbia (1989).
Project Steering Group

Additional members of the Project Steering Group include
Association of Records Managers and
Administrators (ARMA International):
International Council on Archives:
Project Management Consultant:
University College London:
Video Production Co-ordinator:
Educational Advisers
Moi University:
Universiti Teknologi Mara:
University of Botswana:
University of Ghana:
Akotia
University of New South Wales:
University of West Indies:
Project Managers
Hella Jean Bartolo

George MacKenzie
Tony Williams
Elizabeth Shepherd
Janet Rogers
Justus Wamukoya
Rusnah Johare
Nathan Mnjama
Harry Akussah, Pino
Ann Pederson
Victoria Lemieux
LynnColeman(19946)
LauraMillar(19967)
ElizabethBox(19978)
DawnRoutledge(1999)
Production Team
Additional members of the production team include
Jane Cowan
Nicki Hall
Greg Holoboff
Barbara Lange
Jennifer Leijten
Leanne Nash
Donors
The International Records Management Trust would like to acknowledge
the support and assistance of the following:
Association of Records Managers and Administrators (ARMA International)
British Council
British High Commission Ghana
British High Commission Kenya
Caribbean Centre for Development Administration (CARICAD)
Canadian International Development Agency (CIDA)
Commonwealth Secretariat
Department for International Development (East Africa)
Department for International Development (UK)
DHL International (UK) Limited
Foreign and Commonwealth Office Human Rights Fund
Hays Information Management
International Council on Archives
Nuffield Foundation
Organisation of American States
Royal Bank of Scotland
United Nations Development Program
Managing Financial Records

Principal Authors
Piers Cain and Don Brech
Piers Cain is the Director of Research, Development and Education of the
International Records Management Trust. He is responsible for developing
and implementing the Trusts research strategy, directing research
projects and overseeing the Trusts education projects. His research
interests include the impact of the information revolution on in both
industrialised and developing countries. In addition Mr Cain has extensive
experience in a wide range of organisations, including Reuters Ltd,
International Monetary Fund, European Bank for Reconstruction and
Development and the Corporation of London.
Don Brech is principal consultant of Records Management International
Limited in Hong Kong. He has over 30 years experience in records
management and has held senior professional positions in government
organisations and cultural institutions in Australia, the United Kingdom and
Hong Kong. In 1994 he established his own consultancy company. As a
consultant he has worked with clients in Africa, Asia and Europe on the
development of records strategies, the design and implementation of
records systems and records training programs. Born and educated in
England, he graduated from Cambridge University and emigrated to
Australia in 1965. In 1966 he was appointed assistant archivist at the
Commonwealth Archives Office (now National Archives of Australia). He
held foundation appointments at the Royal Air Force Museum, Hendon, the
Riverina College of Advanced Education, Wagga Wagga, and the Northern
Territory Archives Service, Darwin. He was appointed first Government
Records Service Director in the Hong Kong Government in 1989.
Contributors
Kimberly Barata
Barbara Reed
John Walford
Reviewers
Pino Akotia, University of Legon, Ghana
Ray Bennett, (formerly) National Audit Office, UK
Ron Denault, Condar Consulting, Canada
Peter Mazikana, ARA-Techtop Consulting, (formerly) National
Archives, Zimbabwe
Robert Meagher, Condar Consulting, Canada
Vincent Spring, (formerly) Accountant Generals Department, Ghana
Testers
University of Botswana
Contents
Introduction
Lesson 1
1
The Importance of Record Keeping for
Financial Management
Lesson 2
Stakeholders
Lesson 3
The Financial Management System: Business

Functions, Processes and Outcomes
29
Lesson 4
Financial Management Functions: Information

Systems and Records
44
Lesson 5
Managing Financial Records in a Mixed

Paper/Electronic Environment
6
19
63
Appendix 1: Accounting Records Retention Schedule

82
Lesson 6
87
Integrated Financial Management Systems
Lesson 7
What to Do Next?
Appendix 2: Glossary of Financial Terms

123
108
Figures
1
The Financial Accountability Cycle
11
Conceptual Framework for the Budget Function
20
Functions and Processes of the Legislative Framework
30
Inter-relationships in Financial Management
33
Financial Management: Main Functions and Processes
36
Illustration of Documentation Flow in Relation to the Payment Function
46
Analysis of Documentation Flow in Relation to the Payments Function
49
Analysis of Documentation Flow: Revenue
52
Outline of Documentation Flow: Revenue
53
10 Documentation Flow Within the Accounting Function
54
11 Financial Management: Main Information Systems and Records
59
12 Financial Management System Boundaries
88
13 Stages of Expenditure
93
14 Scope of an IFMS
97
15 Chart of Accounts
98
INTRODUCTION
INTRODUCTION TO MANAGING
FINANCIAL RECORDS
The purpose of the Managing Financial Records module is to
provide a management framework for the control of financial records as a vital

resource for public sector financial management, economic policy development
and planning
assist records managers and non-records staff, including accounting and audit
personnel, to manage financial records in support of public accountability and
good governance
inform policy makers and administrators associated with the financial
management process of the value of, and necessity for, the effective management
of financial records.
This module focuses primarily on the management of financial records in

the public sector, with a particular emphasis on records created by central
government agencies. It will also be relevant to local government
agencies; and will have some relevance to semi-government and private
sector organisations.
In many countries the tradition is that records managers do not become
involved in managing financial records; it is generally assumed that
financial records management is the responsibility of accountants.
However, accounting staff have rarely been introduced to records
management principles and practices. They know what information they
require and why, but they seldom receive training on how it should be
kept. Therefore, the care of financial records often falls in the gap
between the two professions. This problem often extends through all
financial management functions.
The situation has important consequences for the capacity of countries
around the world to manage public sector spending and to introduce
measures to enhance accountability and transparency. Records managers
have an important role to play in the care of financial records; this module
aims to help them understand the functions and tasks involved.
The module deliberately contains a large amount of material on financial
management. There is considerable emphasis on the analysis of
stakeholders (or users), on functions and processes and on information

flows. Financial records are examined in this context.
There are two reasons for including a high level of financial information in
this module. First, in many countries there is no easy way for records
managers to obtain this information, and unless they can speak the
language of accountants and auditors, they will not be able to make an
effective contribution. Second, financial systems are so complex that
there is no way to teach records managers how to manage the records
generated by these systems other than by equipping them to analyse the
various components of financial systems and then to apply records
management principles.
The module does not seek to cover records management principles in any
depth, as they are covered in detail in other modules. However, it does
address records issues that specifically affect financial records.
The following key terms used in the module are defined here, so that users
are familiar with them as they work through the lessons. A more detailed
glossary of financial terms is also included as an annex to this module.
Financial management: The planning, controlling,

implementation and monitoring of fiscal policies and
activities, including the accounting and audit of
revenue, expenditure, assets and liabilities.
Records management: That area of general
administrative management concerned with achieving
economy and efficiency in the creation, maintenance,
use and disposal of the records of an organisation
throughout their entire life cycle and in making the
information they contain available in support of the
business of that organisation..
Accountability: The requirement to perform duties,
including financial and operational responsibilities, in a
manner that complies with legislation, policies,
objectives and expected standards of conduct.
Financial records: Records resulting from the conduct
of business and activities relating to financial
management.
Users of the module should bear in mind that financial management and
records management operate in a dynamic and changing environment.
The information provided in this module offers sound principles for the
management of financial records, but specific management strategies will
change over time and will differ from country to country.
The module addresses records care at an advanced level; those studying it

should have a solid grounding in and experience with records
management. Students using this module should have worked through or
be familiar with the issues discussed in the core and advanced modules in
this study programme before beginning.
This module is composed of seven lessons:
Lesson 1:
The Importance of Record Keeping for Financial
Management
Lesson 2:
Stakeholders
Lesson 3:
The Financial Management System: Business

Functions, Processes and Outcomes
Lesson 4:
Financial Management Functions: Information Systems

and Records
Lesson 5:
Managing Financial Records in a Mixed Paper/Electronic

Environment
Lesson 6:
Integrated Financial Management Systems
Lesson 7:
What to Do Next?
Aims and Outcomes

Aims
This module has seven primary aims. These are
To explain the importance of good record keeping for efficient and effective financial
management
To outline the role and importance of stakeholders in financial records management
To explain the business functions and processes of financial management, in relation

to the records generated
To examine the information systems and records created by financial management
To outline how to manage financial records in a mixed paper/electronic records

environment
To introduce the concepts involved with integrated financial management systems
To explain where to go for more information.
Outcomes
When you have completed this module, you will be able to
understand the importance of good record keeping for efficient and effective financial
management
appreciate the role and importance of stakeholders in financial records management
understand the business functions and processes of financial management, in relation

to the records generated
understand the information systems and records created by financial management
know how to manage financial records in a mixed paper/electronic records

environment
understand the basic concepts involved with integrated financial management systems
know where to go for more information.
Method of Study and Assessment

This module of seven lessons should occupy about 95 hours of your time.
You should plan to spend about:
10 hoursonLesson1
10 hoursonLesson2
12 hoursonLesson3
20 hoursonLesson4
20 hoursonLesson5
15 hoursonLesson6
8hoursonLesson7.
This includes time spent doing the reading and considering the study
questions.
At the end of each lesson there is a summary of the major points. Sources
for additional information are provided in Lesson 7. In addition to the
various terms defined throughout the module and included in the master
glossary to the MPSR study programme, this module includes a glossary of
specific financial terms, added as an appendix to the end of the module.
Throughout each lesson, activities have been included to help you think
about the information provided. Each activity is a self-assessed project;
there is no right or wrong answer. Rather, the activity is designed to
encourage you to explore the ideas presented and relate them to the
environment in which you are studying or working. If you are studying
these modules independently and are not part of a records or archives
management organisation, you should try to complete the activities with a
hypothetical situation if possible. If the activity suggests writing
something, you should keep this brief and to the point; this is not a
marked or graded exercise and you should only spend as much time on
the activity as you feel necessary to understand the information being
taught. You are encouraged to write down your answers for all of the
activities and keep the answers together in a booklet or file; you may want
to refer back to your answers as you work through this module or through
other modules in this study programme.
Following the summary at the end of each lesson are a number of selfstudy questions. Note that these self-study questions are designed to help
you review the material in this module. They are not intended to be
graded or marked exercises. You should complete as many of the
questions as you feel will help you to understand the concepts presented.
External assessments, such as assignments or exams, will be included
separately when this module becomes part of a graded educational
programme.
Additional Resources
Thismoduleassumesthatyouhaveaccesstoarecordsoffice,recordscentreorarchival
institutionandthatyouhavesomeinvolvementwiththemanagementoffinancialrecords.
Thevariousactivitiesmayaskyoutodrawonyourownexperiencesandcomparethosewith
theinformationprovidedinthelessons.Ifyoudonothaveaccesstosuchfacilities,youmay
needtodevelopafictitiousscenarioforyouractivities.Alternately,youmaywishtodiscuss
thismodulewithfriendsorcolleagueswhoworkwithrecordsandarchivessothatyoucan
discussprinciplesandconceptswiththemandcompareyourunderstandingwiththeirs.
Case Studies
Thefollowingcasestudywillprovidevaluableadditionalinformation.
15:
PinoAkotia,Ghana,ManagementofFinancialRecords:TheGhanaCaseStudy
LESSON 1
THE IMPORTANCE OF RECORD KEEPING

FOR FINANCIAL MANAGEMENT
Financial management involves planning, controlling, implementing and
monitoring fiscal policies and activities, including accounting and auditing
revenue, expenditure, assets and liabilities. It embraces daily cash
management as well as the formulation of short-, medium- and long-term
financial objectives, policies and strategies in support of the organisations
business. Financial management also includes planning and controlling
capital expenditure, managing assets, liaising with the treasury and
making decisions related to funding and performance.
Good financial management is critical to the success of any organisation,
whatever its size and whether or not it is in the public, private or voluntary
sector. In the public sector, the rendering of accounts to public scrutiny is
key to accountable government. Financial records are produced in every
area of financial management. If these records not are well managed, the
financial management function suffers. Therefore, financial records
management and records management are closely intertwined.
Financial management makes an important contribution to government,
particularly in the areas of
accountability
efficiency
ensuring resources are matched to objectives
economic stability.
This lesson examines these four areas of financial management. It then

discusses changing approaches to financial management, and it examines
the relationship between financial management and records. It concludes
with a discussion of the senior management issues involved in financial
records management and emphasises the importance of securing senior
management support for the involvement of records managers in financial
records care.
Accountability
Accountability is fundamental to good governance. Accountability is the

process that allows people to measure and verify the performance of
government. Financial accountability is a critical component of
accountable government. It involves legislative control of the executive
through budgets and accounts. Weaknesses in financial accountability are
generally linked to weaknesses in public accounting, expenditure control,
cash management, auditing and the management of financial records. An
enhanced level of control over financial management is vital for all
governments to maintain their commitment to their citizens.
Ensuring Resources are Matched to Objectives
Financial management ensures that money is allocated in accordance with
the governments strategic priorities. This is achieved by controlling the
budget approved by the legislature and is reinforced by the publication of
audited accounts of what was actually spent.
Efficiency
Public sector financial management has been the focus of increasing
attention in recent years. Reductions in public expenditure have
pressured public authorities to maintain services with less money. To
achieve cuts, financial managers have had to improve their financial
analysis as a basis for improving efficiency and value for money.
Traditionally, financial management in government has focused on
controlling expenditure; the main emphasis has been on keeping public
spending down in order to minimise borrowing. However, private sector
financial management techniques have increasingly been imported into
the public sector. For example the National Audit Office may carry out
value for money audits, which look beyond whether the money was spent
according to the governments financial regulations to whether the public
is getting an economic, efficient and effective service. In other words,
financial systems in government are changing from systems designed to
keep the government from spending too much to systems that ensure the
government makes the best use of resources.
Economic Stability
Every modern government needs to define an economic policy and then
manage its economy according to that policy. Much of a countrys
economy depends upon the private sector, but it can also be influenced by
the governments fiscal policies, interest rates and regulatory
environment.
Government itself is a major component of a nations economy. Public
sector borrowing and expenditure have an impact on the stability of the
overall economy. Governments can improve their capacity to manage the

economy by introducing reforms of the treasury, budget preparation and
approval procedures. Reforms can also be made in tax administration,
accounting and audit mechanisms, central bank operations and the
preparation of official statistics. These reforms will help ensure the
government manages its finances well and contributes to the overall
stability of the nation.
Changing approaches to Financial management

Records managers need to stay abreast of changing trends in financial
management. Changes to financial management processes will inevitably
affect the information systems needed to support them and the records
generated by them. Each country will have different experiences with
financial management, as the countrys own financial circumstances and
political and cultural factors will create different requirements. The most
successful systems are those that have been tailored to meet specific
country needs.
Various approaches to financial management have been designed and
tested in recent years. The recent trend is to move the focus away from
measuring inputs toward measuring outputs: that is, to focus less on how
much money has been spent on what product and more on whether the
work performed has been useful. Public sector financial management is
increasingly seen as a tool to enable management to discharge its
responsibilities more efficiently and effectively. These trends are
revolutionising government accounting practices, standards and reporting
systems.
For example, the changing perspective in financial management has led to
changes in the process of budgeting. There are now several different
methods of budgeting, including the following.
Line item budgeting lists expenditures for the coming year according to objects of
expenditure, or line items. These budgets specify how much money a particular
agency is permitted to spend on personnel, fringe benefits, travel, equipment, and
so on.
Performance budgeting divides proposed expenditures into activities and relates
the activity to cost. This method allows the budget to be built on the basis of
anticipated workload rather than incrementally, as in traditional line-item
budgeting.
Programme budgeting focuses on budgetary choices among competing policies
and treats the different budget objectives as variable.
Zero-based budgeting arrives at a budget by literally starting from scratch. At the
national level, this would require answering such questions as what if we did not
have an army? or what if national insurance did not exist? This has not proved
useful as an annual budget tool.
As governments develop more business-type functions and operate
services on a commercial basis, the public sector is adopting features of
private sector accounting. For example there is a move from cash
accounting to accruals accounting.
Cash accounting includes only the transactions that actually take place within the
period covered by the account.
Accruals accounting reflects all the financial transactions proper to the period of
the account, regardless of whether the account has actually been paid during that
time.
Cash accounting is traditional in central government. Under this system,

receipts and payments are recognised only when cash is received or paid.
The emphasis is on the objects and purposes for which funds have been
received and paid out during a particular period. Cash accounting is also
used when the system lacks enough sophistication to implement accruals
accounting and the benefits of changing methods do not justify the costs
involved.
Accruals accounting recognises transactions when they occur, irrespective
of when cash is paid or received. Transactions are recorded in the
accounting record and reported in the financial statements of the period in
which the service was received (expenditure) or rendered (revenue).
Financial statements prepared on an accrual basis indicate past
transactions involving payment and receipt of cash, as well as future
obligations to pay and payments to be received in the future. This method
facilitates economic decision making, by making it easier to account for
the use of resources, focus on performance and measure outputs.
Financial Management and Records

Financial management systems provide decision makers and public sector
managers with the means to
control spending
prioritise expenditures in order to allocate resources efficiently and equitably
make better use of budgeted resources to achieve outcomes and produce outputs at
the lowest possible cost.
All financial management systems create records, and all financial

systems depend upon records.
Activity 1
Before reading further, write a brief description of how you think records contribute
to financial management. Write down as many ideas as you can think of.
The ways in which these records contribute to financial management are

described below.
Accountability and Control
Records management reinforces financial management controls and
supports accountability. The ability to establish who did what, when, why
and how is a powerful means of deterring individuals from engaging in
fraud or corruption, thus enforcing accountability. Well-managed records
provide an unbiased account of responsibility and liability. Authentic,
reliable records provide an unambiguous link between the authorisation to
carry out a transaction, the particular individual concerned and the date.
Thus records can identify abuse, misuse and non-compliance with financial
instructions.
Financial management also depends upon a system of internal controls
that make it possible to carry out business in an orderly and efficient
manner, ensure adherence to management policies and safeguard assets.
The management of financial records is a critical component of this control
system. Where financial records are not controlled, their completeness
and accuracy cannot be guaranteed. Records needed for reference,
decision making and risk assessment can become difficult to access.
The senior official responsible for accounting, such as the Accountant
General, normally issues detailed regulations for the control of financial
management systems. In other countries such as Zimbabwe, these
regulations are issued by the Public Service Commission. Complete and
accurate records must be available to prove that these controls are
functioning properly and consistently.
In turn, these controls help to ensure that the records themselves retain
their context, structure and content. In countries operating the Exchequer
system of financial management, there is no Accountant General. Instead,
each ministry maintains their own bank accounts and is responsible for
their own accounting systems. The Exchequer system allows for a greater
range of diversity of practice than the more centralised approach
represented by the Accountant General system. In the Exchequer system,
the Permanent Secretary to the Treasury is usually responsible for issuing
general regulations where needed.
The aim of a records management programme should be to ensure that

those records that provide evidence of financial management activity are
systematically controlled throughout the organisation.
Accounting and Auditing
Records management also supports the accounting function and enables
the audit function. Financial record keeping provides the basis or
foundation for accounting and introduces controls that protect essential
audit trails. At the most practical level, if records are disorganised, it will
take auditors an excessive amount of time to locate needed documents, if
they can find them at all. Individuals guilty of embezzlement may
deliberately allow financial records to become disorganised or to be stored
in unsuitable conditions because this makes it harder for auditors to
identify fraud. Conversely, in some cases government officers have been
inappropriately accused of embezzling funds simply because the
documents authorising the expenditure could not be located. Wellorganised and well-managed records are essential to combat economic
crime and protect the innocent.
A financial records management programme should enable the physical
and logical control of records and prevent unauthorised access, tampering,
loss or destruction, whether intentional or accidental. Records
management should contribute a layer of security and reassurance that
operations are functioning at the level required.
Taken together, records management, accounting and auditing provide the
layers of control that are essential to ensuring transparency, probity and
integrity in financial management systems. Although in reality records
management is integrally connected to accounting and auditing, their
interface is illustrated below in a simple fashion.
External Audit
THE SYSTEM
Internal Control/Internal Audit
Compliance Level
Financial
Audit
Records
Management
Audit
Procedures Level
Finance/
Accounting
Records
Management
Transaction Level
Operations = Transactions = Records
Figure 1: The Financial Accountability Cycle
Management Issues
In many respects, financial records are similar to other kinds of
administrative records, and thus many of the professional principles and
practices described in other modules in this study programme are
applicable. However, financial records also have unique features that
require attention.
Financial record-keeping systems in government are so large and
pervasive that changes to the system will need support at a senior level.
Moreover, because financial management systems are subject to
accounting and auditing standards and are under the close control and
scrutiny of government financial officers, it is essential that records
managers gain the support of senior managers and other stakeholders in
order to provide an effective financial records management service.
It is the record managers job to understand how records management can

contribute to the organisations financial management objectives and to
articulate the case for efficient records management in terms that senior
management can understand. Therefore, records managers must
understand the unique qualities of financial records and the effect of good
or poor financial records management on the government or organisation.
Activity 2
Before reading further, write a brief description of as many special features of
financial records that you can think of that will affect their management. How you
could present these issues to senior managers in order to gain their support for
improved financial records management?
Consider the following management issues related to financial records

care.
The Volume, Scope and Complexity of Financial Records
Financial records are voluminous. The records of financial transactions are
one of the largest categories of records found in government. The benefit
of managing these records translates into large savings in office space.
Most of these records need to be kept for relatively short periods of time
(often only 6 or 7 years, depending upon the relevant legislation), but
during that time they are vital for controlling fraud and corruption.
Records related to financial policy are smaller in volume compared to
records of transactions, but policy records are very important for the
process of developing and then executing policies. These records can be
of considerable historical significance and need to be identified by as
having archival value.
Further, financial records are found everywhere. Every aspect of
government involves expenditure and thus requires financial
management, which in turn generates records. These records need
managing across the entire spectrum of government.
Moreover, financial management systems are complex. The scale of
financial management and its importance to government has led to the
development of a complex and inter-related set of functions and systems
including budgeting, accounting, forecasting, purchasing and payroll. The
range of controls and regulators (for instance internal audit, external
audit) are also complex. Records managers must understand the basic
principles involved with financial management in order to be credible
when working with financial managers. Records managers must also

understand financial management in order to analyse and appraise the
records.
Financial Records and Accountability
Records are essential for financial accountability. Records provide a
reliable, legally verifiable source of evidence of decisions and actions
about the management of government finance and are the basis for
determining responsibility. They are a powerful tool in constraining
individuals from engaging in corruption. But if financial records
management systems are weak, public servants cannot be held
accountable for their decisions and actions. Fraud and corruption will
flourish. Records management is a cost-effective restraint. If corrupt
officials know that there is an audit trail, they are less likely to take the
risk. Conversely, a clear audit trail can protect the innocent from false
accusations. Where the ultimate sanction of prosecution is appropriate,
lawyers will rely heavily upon records to provide the evidence.
However, records management controls are often missing in government
financial control systems. The organisations financial instructions and the
accounting manual will specify rules for the security and use of financial
records. However, these documents tend not to prescribe rules for the
management of records. At the same time, financial records are usually
outside the jurisdiction of the organisations records manager. As a result,
this vital resource is not managed or controlled adequately. Failure to
manage records can lead to the build up of unwanted records,
overcrowding and disorganisation. This will make it very difficult to
retrieve and use financial records efficiently and to carry out the audit
process.
Auditors should comment where there is non-compliance with the
legislative requirements for financial record keeping. Although rules,
regulations and procedures for efficient management of financial records
may exist on paper, they are of no value if they are not enforced. Auditors
can make a powerful contribution to better records management by
commenting on cases where record keeping is inadequate and insisting
that management implements sanctions against persistent offenders.
Regulatory Requirements and Financial Records
Financial records should be subject to tight regulation and control.
Financial records are usually subject to legislation that forbids their
destruction for a set period of years after the accounts have been audited.
Failure to observe these requirements could lead to prosecution. The legal
framework affecting financial records comprises the constitution, which

may provide for the supervision and audit of public accounts, and laws
relating to finance, audit and government records. Finance and audit laws
generally require ministries, departments and agencies to ensure that
financial and accounting records are adequately kept and managed. They
also empower the audit body to obtain access to all financial records.
Other legislation enacted in support of government functions may also
give rise to financial records or specify conditions for their maintenance,
use or disposal. For example, pensions legislation imposes an obligation
on departments to maintain records of contributions. Revenue laws may
indicate a time limit on the recovery of tax or duties, thereby establishing
a minimum period for the retention of revenue files. Subsidiary
requirements such as accounting instructions and financial regulations are
frequently promulgated under powers conferred by a main law, such as a
finance act. These subsidiary requirements lay down more detailed
conditions and requirements for accounting and financial records,
including their creation, filing, storage, production and disposal.
Financial Records and Computers
Financial records are increasingly created using computers. Financial
functions are usually among the first to be automated. Most countries
have automated payroll systems and many have automated budget and
accounting systems. In some countries the entire financial management
function has been incorporated into a single automated integrated
financial management system. Financial records are often the first
electronic records that records managers are likely to encounter.
With the increasing use of electronic technologies, record keeping is
becoming technically more complex. Although the fundamental principles
for keeping records in an electronic environment are more or less the
same as in a paper environment, the skills required to manage them may
be different. Records professionals and information technology (IT)
specialists need to co-operate closely. This may require the creation of a
specialised electronic records unit within the National Archives. The unit
will require specialised equipment and an enhanced set of professional
capacities.
Computerisation has implications for audit evidence. The principles
relating to audit evidence do not change because an audit is being carried
out in a computer environment. Computer records in the form of data on
magnetic disks or optical disks still provide the auditor with audit
assurance.
There are few precedents that address the admissibility of computer
records in a court of law. Where computer evidence has been submitted in
legal cases the courts have taken into account expert evidence on the
effectiveness of the IT control environment before assessing the reliability
of the computer data. Computerised transactions or images of documents
may be inadmissible as legal evidence unless controls can be shown to be
so strong as to remove reasonable doubt about the authenticity and
integrity of data held by the system. Some of these controls are recorded
on paper. It is therefore important that both the electronic records and the
paper records that document the control environment are managed
properly.
Creating an enabling environment will enhance the success of records
management programmes. Institutions need to promote an environment
which will encourage the better maintenance and use of records systems.
Senior management should support an agenda for the future that includes
developing a culture for creating, maintaining and using records
strengthening the role of records management and records managers within an

institution
identifying and strengthening records legislation
defining and implementing records related standards
developing tools to assess the vulnerability of records systems to corruption and

fraud
imposing disciplinary action for poor record keeping and providing incentives for
better records management.
The Need for Financial Records Management

Financial records tend to be excluded from the records management
process. Despite the fact that financial records are covered under the
broad legislation governing the management of government records and
archives, financial records tend to be stored separately from other records
and even excluded from the jurisdiction of the records manager. In this
situation, the volume of records may grow uncontrolled until is exceeds
the space available to store it. Then the systems to control and retrieve
the records will break down.
The breakdown of financial systems are often related to the breakdown in
records management. People rarely make the link between problems in
financial management and inadequacies in the way records are managed,
yet records are the source of all the information used in financial
management systems. If records become so disorganised that it is
difficult or impossible to audit properly, the long-term effect will be that
fraud or errors will not be detected or corrected.
When a system of financial management breaks down, the consequences
are serious. Typical symptoms include the following.
Monitoring systems are inadequate and information is difficult to access.
Votes ledgers are not kept properly, and an important tool for expenditure control
is lost.
Accounts are not produced on time, rendering them of limited value for
expenditure control and monitoring.
The audit process is ineffective.
Summary
This lesson introduces the concept of financial management and explains
its importance to government for
accountability
ensuring resources are matched to objectives
efficiency
economic stability.
Approaches to financial management change over time, and their success

depends upon access to information. Reliable information is ultimately
derived from accurate and complete records. It is not enough simply to
change approaches to financial management systems without giving
attention to information systems. It is essential that records managers
understand the functions and processes that the records document so that
they can ensure that records systems remain appropriate and effective.
This lesson has discussed those changing approaches to financial
management, and it has examined the relationship between financial
management and records.
It has also considered the senior management issues involved in financial
records management, emphasising the importance of securing senior
management support for the involvement of records managers in financial
records care. The issues examined include
the volume, scope and complexity of financial records
financial records and accountability
regulatory requirements and financial records
financial records and electronic technologies
the need for financial records management.
Study Questions
1
What are the different methods of budgeting that you might encounter in government
administration?
What is the difference between cash accounting and accrual accounting?
Why do accounting and auditing rely on accurate records?
What does a records manager need to know about the impact of computers on
financial records?
What are the factors that can improve the chances of success of a records
management programme?
Activities: Comments
Activities 1-2
These activities will help you compare the information provided in this
lesson with your own understanding of financial records and the related
records management issues. Compare your answers with the information
given in this lesson and refer back to this information as you proceed
through this module.
LESSON 2
STAKEHOLDERS
Records managers need to understand the roles and requirements of
stakeholders in financial management. Government systems are large
and complex, and the fact that the public sector is accountable to the
people adds a layer of complexity that is reflected in the various roles,
responsibilities and information needs of public servants.
A stakeholder can be defined as follows:
A stakeholder is any person, group or organisation that
has a claim on the organisations attention, resources or
output, or is affected by that output.
Key stakeholders in public sector financial management include some or
all of the following: the public, the head of state, the legislature, the
government itself and in particular the cabinet. Ministers outside the
cabinet, the civil service as a whole and separate departments are also
stakeholders.
Activity 3
Before reading further, write down as many stakeholders as you can think of who
might be involved with or affected by financial management and therefore by the care
of financial records.
The diagram below illustrates the relationship between some of the key
stakeholders in relation to the budget function. It illustrates the
delegation of authority within the framework of laws, rules and
regulations, in a parliamentary system of government. In a presidential
system, authority and control would be more diffused, but there still would
be checks and balances to provide control. Records managers need to
understand this internal framework if they are to understand how the
various stakeholders interact.
Organisations
Institutions
Citizen
Election Law,
Political Party Law
Constitutional
Control
Agencies
Legislature
Govt. Formation Law,
Vote of Confidence,
Rules Budget Law,
Accounting Reporting
and Audit Law
Cabinet
Executive
Control
Agencies
Budget
System
Cabinet Rules
Ministry
Internal
Regulations
Ministry
Control
Agencies
Department
Reporting
Requirements
Authority
Delegation
Constitution
and Laws
Figure 2: Conceptual Framework for the Budget Function

From PREM Network, Public Expenditure Handbook, The World Bank, June 1998, p. 20.
Upper-level Stakeholders
Legislature
The legislature usually has responsibility for acquiring and using financial
resources and for overseeing their administration. The legislature
sanctions the financial plan or budget and authorises the executive to
make expenditures (within pre-determined limits)
invest
raise revenue (such as taxation, borrowing)
administer programmes in accordance with any laws that may affect them.
The legislature is responsible for the management of the whole of

government financial reporting. The documentation required and
produced by this process includes
annual budget
the fiscal policy statement
budget estimates and projections
Public Accounts Committee reports.
The legislature has the right and responsibility to hold the government and
its units accountable for the management of financial affairs and for the
use of financial resources. In practice, independently audited government
financial statements are an important means by which governments and
units demonstrate their accountability. In many countries, the Public
Accounts Committee scrutinises these statements.
Executive
The executive has responsibility for the management of financial
resources. This includes planning, directing and controlling operations and
reporting on financial administration.
The Public
The public has an interest in ensuring that public money is accounted for
and spent wisely. Citizens rarely have direct access to public sector
financial records except in the form of published government accounts. In
practice these are seldom read by the general public, but citizens are, or
should be kept informed about them by means of the press and national
political debate.
International and Bilateral Aid Agencies
Although these agencies are not part of the formal constitutional

arrangements for public sector financial management, in many developing
countries they are de facto stakeholders. They provide funding in the form
of grants or loans for a large proportion of public sector projects in many
countries in the world.
Examples of international bodies include the International Monetary Fund
(IMF), the World Bank, the United National Development Programme
(UNDP), and regional development banks such as the African Development
Bank or the Asian Development Bank. The British Governments
Department for International Development (DFID), United States Agency
for International Development (USAID), Norwegian Agency for
Development Cooperation (NORAD), and the Danish international aid
agency (DANIDA) are all examples of bilateral donors. Each has its own
rules for financial reporting on the projects it funds, and the recipient
country will be expected to follow these rules. The records this generates
are often kept separately from the governments other financial records,
and their treatment may not be consistent with the governments financial
instructions. This can fragment the financial management system, with
information in several locations.
Operational-level Stakeholders
While all public sector organisations create and maintain financial records,
certain core institutions have key roles to play in the operation of financial
systems and management of the records they generate. The core
agencies are described below.
Central Bank
The central bank is responsible for maintaining the countrys monetary
policy, issuing bank notes, regulating and supporting the countrys
principal systems for clearing and settling payments and acting as fiscal
agent for federal government debt.
In countries where the civil service accounting system has deteriorated,
policy makers will rely on records of cash balances in the central bank.
They provide a crude but accurate picture of how much has been spent
and how much money the government has received from taxation and
other sources. The records of the central bank are highly sensitive and are
often managed entirely separately from other public sector financial
records.
Finance/Economic Planning Agencies
The ministry or department in charge of finance and economic planning

plays a major role in translating the political objectives of the government
into financial policies and workable instructions to departments and
budgetary units.
The finance ministry is responsible for overall management and control of
public expenditure, government debt, fiscal policy and long-term financial
planning. It is also responsible for deciding what resources are necessary
and how to distribute the resources. This brings the ministry close to the
political sphere. In countries that operate planned economy models of
economic development, the ministry in charge of planning, such as a
National Development Planning Commission, may also contribute to
planning the preparation of the budget and its execution.
The finance ministrys treasury function comprises two activities:
setting policy
physically handling funds.
For historical reasons, in many former British colonies the institution of the
Treasury was abolished and replaced with a Department (later Ministry) of
Finance responsible for policy and an Accountant Generals Department
responsible for the physical handling of funds.
In other countries that are part of the British administrative tradition, the
Exchequer system, as it is known, often continues to operate.
Responsibility for managing money is decentralised to ministries and
departments, but they are ultimately are answerable to the Permanent
Secretary to the Treasury. The Treasury brings together and co-ordinates
the data which is produced by each individual produced by each individual
ministry or department. Each ministry must work within the confines of
the appropriate government regulations and must produce accounts
which, when submitted to the Permanent Secretary to the Treasury,
provide data for the preparation of the final government published
accounts.
Accountant General
Some countries operate a centralised system of accounting controlled by
an Accountant General. The Accountant General, as the governments
principal accounting officer and adviser on accounting policy, is
responsible for regulating the receipt and disbursement of funds. He or
she is responsible for overseeing accounting policies and procedures and
for introducing changes as appropriate. The Accountant General will
normally be responsible for controlling any centralised accounting system
used by the civil service. If the accounting system is computerised, the
operation will often be in the hands of an IT unit run from within the
Accountant Generals department. Typically, there will be a separate

payroll unit to handle the payment of civil servants. This payroll function
is often computerised.
Supreme Audit Institution
In many countries the supreme audit institution is the Auditor Generals
department or a National Audit Office. The supreme audit institution is
responsible for examining, evaluating and reporting independently on the
ministries and departments on the collection, expenditure and
management of public funds and resources.
The supreme audit institution is also responsible for value for money
audits. Value for money audits examine the economy, efficiency and
effectiveness with which an organisation has used its resources in
discharging its functions.
Economy involves minimising cost (spending less).
Efficiency involves maximising output for a given input or minimising input for a
given output (spending well).
Effectiveness involves ensuring the results achieve the objectives, goals or
intended effects (spending wisely).
While auditing has traditionally been about financial management and

performance, there is a growing tendency to expand the role to include
monitoring the performance of particular programmes or functions.
External auditors are becoming involved in performance auditing for a
range of government activities, involving reporting on how activities or
programmes are carried out and what systems and controls are in place
for monitoring and reporting. Auditors are thus increasingly interested in
issues such as corporate governance of public sector bodies, ethical
management, risk management and accountability.
Internal Revenue and Customs and Excise Departments
These departments are responsible for the collection of government
revenues. Internal Revenue usually comprises taxes on the income of
individuals (income tax), on the profits of companies (corporation tax), on
the gain in the value of capital assets (capital gains tax), on inherited
wealth (inheritance tax) and on transfers of titles to assets (stamp duty).
The Customs and Excise Department collects taxes on goods and services
(value added tax), import and export duties (customs), and duties on
petrol, spirits, tobacco, betting and gaming.
Heads of Ministries/Departments
The heads of ministries and departments are responsible for the
management of their internal accounting systems. In many countries, the
permanent head of the department is the accounting officer, but he or she

will usually be able to draw upon the services of an officer responsible for
administration and finance who will be responsible for the daily operation
of the financial management systems within the department. In many
Commonwealth countries, there is an accounting cadre/service under the
control of a head (usually the Accountant General); this group provides
accounting staff to ministries and departments. This group may also
include internal audit staff posted to government departments.
In countries operating the Exchequer system there is no Accountant
General (see above). Instead, ministries or departments have accounting
staff appointed through the normal civil service appointments system
usually the Civil Service Commission. Individual ministries or departments
operate and manage their own bank accounts, keep their own accounting
own accounting records and are answerable in the final analysis to the
Permanent Secretary to the Treasury. Thus each ministry has greater
flexibility and degree of control over accounting and financial operations
relating to their functions.
Internal Audit Units
Internal audit is an appraisal or monitoring activity set up by the
management of an organisation to review and evaluate accounting and
internal control systems. As such, it can be considered to be part of an
organisations overall control system. In the central government sector,
accounting officers are responsible for establishing appropriate internal
audit arrangements within their departments. Often this takes the form of
an internal audit unit.
Central Computing Bureau/IT Department
Computerised financial systems need to be maintained by IT specialists.
Sometimes these specialists are organised into units dedicated to
supporting specific strategic applications, such as payroll. These units are
often physically located at the ministry in charge of finance. In other
cases, they are operated by a central computing bureau on behalf of that
ministry. In either case, IT specialists have a responsibility for providing
advice on the choice of IT standards, systems and applications.
National Archives/National Records Service
The National Archives has a statutory responsibility for the preservation of
financial records of permanent value. In addition it should have a role in
ensuring that all government financial records are managed from the point
of creation. It has an obligation to respect the interests of other
stakeholders, especially the Auditor General and Accountant General, in
controlling the security, use and treatment of financial records.
Summary
In this lesson we have surveyed the key stakeholders in the public sector
financial function. We have seen that these can be divided into upper
level stakeholders that provide a framework for accountability for
government income and expenditure. The operational level stakeholders
have a stake in making the financial management system work on a daily
basis.
The stakeholders examined included
the legislature
the executive
the public
international and bilateral aid agencies
the central bank
departments responsible for finance and economic planning
the Accountant General
the supreme audit institution
the internal revenue and customs and excise departments
heads of ministries or departments
internal audit units
central computing bureaus and information technology departments
national archival institutions and national records services.
Study Questions
1
List the stakeholders in the government financial system in your country and explain
their roles.
Draw a diagram to show the relationship between these stakeholders.
What are the four main documents that the legislation of your country requires to
fulfil its role in holding government institutions financially accountable?
What is the difference in the role of the accountant general and the head of the
supreme audit institution?
Activity 3
This activity will help you compare the information provided in this lesson
with your own understanding of financial records and those stakeholders
affected by their management. Compare your answers with the
information given in this lesson and refer back to this information as you
proceed through this module.
LESSON 3
THE FINANCIAL MANAGEMENT SYSTEM:

BUSINESS FUNCTIONS, PROCESSES AND
OUTCOMES
Lesson 3 examines the major business functions and processes that
comprise public sector financial management. These functions and
processes result in records; therefore it is critical to understand financial
activities in order to manage the records.
The nature of the financial records identified here in
relation to outcomes will be discussed in greater
detail in Lesson 4.
It is important to remember that financial management is a system.
System: A perceived whole whose elements hang

together because they continually affect each other
over time and operate toward a common purpose.
Systems consist of sub-systems or functions, processes,
activities and tasks.
Function: The means by which an organisation or
system fulfils its purpose.
Process (1): The means whereby a systems functions
are performed.
Process (2): The means whereby an organisation
carries out any part its business.
For more information on systems, see Analysing
Business Systems.
Financial management systems are broadly similar all over the world. The
functions and processes described in this lesson are generic.
SYSTEM : Financial
FUNCTION : Macro Fiscal Planning
PROCESS :
develop macro economic framework
FUNCTION: Budget Preparation
PROCESS :
develop public
sector investment
programme
PROCESS :
prepare fiscal plan
Figure 3: Functions and Processes of the Legislative Framework
The Legislative Framework

The functions and processes that define the financial management system
are derived from and must adhere to a legislative and regulatory
framework or control structure. Controls are defined at several levels as
described below.
Financial legislation and financial instructions help to define the functional areas
that govern financial management. The financial instructions specify the detailed
controls needed to ensure that transactions are properly authorised and
documented and that they do not exceed the amount of money assigned for that
purpose.
Within most legislative frameworks, revenue received by governments is paid into
a fund, and any expenditure from the fund must be formally appropriated by the
legislature. This fund becomes the basis for accounting and reporting in
government.
Regulations, administrative instructions and administrative practices specify the
standards and procedures to be followed when carrying out functional processes.
These controls include
controls at the document and transaction level to ensure correct

processing, full and correct recording and audit trails
controls on access to ensure that only authorised personnel can record,
change or report information
controls over the entire system to ensure that it embodies the
established processing standards.
This framework of controls set the regulatory context for the main financial
functions and processes described below. The records manager must
thoroughly understand the particular laws, regulations and controls that
apply when analysing a financial management system in real life. They
are also important to take into account when making appraisal decisions.
All of these will be written records that must be managed somewhere
within the governmental system. In some cases (eg laws), they will be
published. At this stage, it is sufficient that the student understands that
they are important for ensuring that financial operations are in line with
good practice and government policy.
Financial Management: Main Functions and

Processes
Figure 4 below illustrates the complex inter-relationships involved in
financial management. It shows the links between the overall legislative
and regulatory framework and the processes that flow from it. These
processes relate to three aspects of financial management:
budget preparation
budget implementation and case management
accounts administration and auditing.
At the broader level, these processes are carried out by the central
agencies responsible for budget and cash management. At a more
specific level, they are carried out by the spending ministries and agencies
in managing the public sector. The figure demonstrates how information,
in the form of documents, flows through the central agencies and
spending ministries regulated by the control structure.
The bulk of the records generated are accounting records, mainly payment
vouchers, purchase orders and supporting documentation. However, the
diagram also shows other categories of strategically significant records,
for example the macroeconomic policy document, the budget circular and
the draft and approved budget documents. The records that support the
control structure are also important because they set the context for both
the implementation of government policy through the public sector work

programme and for the detailed working of financial management
systems.
Control
Structure
Macro-economic
P olicy
Central Agency Functional

P rocesses
Spending Ministry/
Agency Processes
Budget and Cash Management
P ublic Sector Work

P rogrammeManagement
Macroeconomic
Budget Circular
Budget
Classification
Budget Proposals
Fund
Structure
Recurrent
Draft Budget
Organic Budget
Law
Appropriation
Law
Supplementary
Appropriation
Law
Capital
Existing Programmes and

P rojects
New proposals
Approved
Budget
Revenue P rojections
P roposed Work P rogram
Cash Requirements
Forecasts
Consolidated Cash
Flow
Fund Requests
Warrant releases
to Ministries
Financial
Regulations
Accounting
System
Accoun ts Payable
Check Vouchers
Purchase Orders
Purchase Contracts
Commitments
Goods Receipt and
Verifications
Paym ent Vouchers
Issue payment Orders

to Bank
Reporting
Requirements
T reasury General
Ledger System
Agency General
Ledger System
T ax/Non-tax Receipts
& Loans
Receipt T ransfers to
T reasury Account
Accoun ts
Re ce ivable
T ax and Non-tax
Receipts
Issues and Redemptions of

Govt. Securities
Reconcilliation with Bank
Budget Reviews
and Fiscal Reports
Revisions to Revenue
P rojections & Work
Figure 4: Inter-relationships in Financial Management

From PREM Network, Public Expenditure Handbook, The World Bank, June 1998, p 63.
Functions of a Financial Management System

The main functions of government financial management systems can
also be understood in relation to the figure above. In broad terms, a
financial management system can be broken down into ten primary
functions. Together, these functions make up the financial management
cycle, as described below.
Macro-fiscal planning establishes the policy objectives and needs for financial
resources and a forward-looking strategy for revenue and expenditure. For example,
the fiscal policy and medium-term expenditure plan should contain statements of
government objectives, policies and priorities; strategies for achieving objectives; a
resource framework for the plan period and a programme of sectoral development to
be implemented during this period. It is the first step toward preparing the budget and
involves contributions from line ministries as well as from the ministry of finance and
other central agencies.
Budget preparation involves allocating resources to achieve the objectives of

government. It is a management tool for national economic and fiscal planning and
for controlling the use of funds to ensure that the stated objectives can be met. The
budget preparation process is most successful when linked to a longer term
macro-fiscal plan.
Budget implementation follows approval of the budget by the legislature, when

funding allocated to specific areas and items of expenditure can take place.
Budget monitoring and evaluation provides a method of feedback to the fiscal

planning and policy area. Linking budgeting to accounting enables financial
managers to receive the feedback needed to adjust planned activities to expected
resources.
Cash management is an integral part of financial management. It provides an up-todate picture of the amount of cash in government accounts and the amounts of cash
needed. Cash management compares data from cash flow forecasts and fiscal reports
to data on cash balances, government bonds, treasury bills and cash deposit
maturities. In many countries, cash management tends to occur at a high level
involving the central bank (or similar body).
Debt management involves managing all transactions relating to external loans. It

also serves as the mechanism for calculating the future cost of servicing the debt.
Foreign aid management matches aid agencies to projects and oversees the process of
project negotiations.
Revenue administration executes tax policies through the levy and collection of
revenues (including taxes, duties, etc) as stipulated by these policies. It also involves
the valuation and collection of non-tax revenues, such as stamp duties or charges for
government services.
9
Accounts administration is the means by which government assembles and analyses

accounting information to help it to control business, safeguard assets, prepare
financial statements and comply with legislation.
10 Auditing is the means of reviewing the accuracy and reliability of financial

information produced by financial management functions.
It is important to understand these functions as a basis for analysing
government financial systems. The objectives of each function are met
through a series of processes as shown in the tables which follow.
Activity 4
Before studying the chart below, carefully consider each of the ten functions listed
above. Find out which of these financial functions are carried out by your
organisation and which are carried out by others. Identify who in your organisation is
responsible for each of those functions that are carried out by your organisation.
Write down the name of the department or agency. Then, choose two of the functions,
other than the function of preparing an annual budget, which is given as an example
below. For each of those two functions, write down all the processes you can think of
that must be performed to fulfil that function.
For example, consider the processes that must be done to fulfil the function of
preparing a budget. They will likely include
determining initial budget allocations
informing various agencies in the government of budget ceilings for the next year
and seeking their input
analysing the information received from those agencies
preparing a draft budget as a result of that information received
finalising the budget for presentation to the legislature.

Your list for the two functions you have examined should look the same: a short
statement of each of the steps (processes) involved in completing that activity. You
may need to discuss this activity with people in your organisation responsible for
various parts of the financial management process.
When you have finished this activity, compare your findings with the information
presented in the figure below.
Description of Outcome (if

not self explanatory)
Function
Processes
Macro-fiscal
planning
develop macroeconomic
framework
an economic framework linking

growth of national income,
savings, investment and balance
of payments to public
expenditure
develop public sector

investment programme
a listing of investment projects

(including possible sources) that
a government intends to
implement over a period of the
programme (3-5 years)
prepare fiscal plan
a medium-term rolling plan (3-5

years) showing forecasts of tax
and non-tax revenues, estimates
of additional incomes, estimates
of resources from external and
internal borrowings and
projections of current
expenditure
make initial budget

allocations to agencies and
programmes
a listing of allocations linking the

medium-term framework to
annual budgeting based on the
results of macro fiscal planning
issue budget call circular

containing budget ceilings
and guidelines
a circular issued by the core

agencies, indicating economic
prospects, broad policy
objectives, budgetary ceilings,
and guidelines inviting line
agencies to present programmes
and projects for inclusion in the
budget
receive and analyse

annual budget
submissions
proposals for programmes and

projects prepared by line
agencies, in response to the
budget call circular, for execution
during the fiscal year
prepare draft budget
a draft compilation of the public

sector work programme based
on submissions from line
agencies
finalise budget
the final budget prepared by the

core agencies for presentation to
the legislature. The legislature
considers the final budgets
framework in general and
Budget
preparation
examines detailed proposals at

budget committee level and then
passes the budget into law at a
final plenary session.
Figure 5: Financial Management: Main Functions and Processes

Function
Processes
Budget
implementat
ion
prepare expenditure plans
line agency projections of

expenditure based on planned
programmes and projects
prepare cash flow

forecasts
a forecast of cash requirements

over the year based on known
and anticipated commitments for
both recurrent and capital
expenditures
release funds to agencies
warrants issued by the Ministry

of Finance authorising periodic
release of funds to sector
agencies within the budgetary
allocations
receive budget
authorisation and execute
process payroll and
pensions
procure goods and
services. The process that
consists of the following
sub-processes which can
be either centralised or
decentralised:
request goods and

services
authorise expenditure
commit funds
issue purchase order
verify receipt of goods

and services
receive bills/invoices
authorise payment
Figure 5: Financial Management: Main Functions and Processes (cont.)
Function
Processes
Budget
implementat
ion
continued
pay for good and services
Budget
monitoring
and
evaluation

request budget
adjustments/supplementar
y allocations
requests to transfer
appropriations from one budget
category to another or
requesting the addition of
supplementary allocations
adjust budgetary
allocations
revised budgetary allocations

based on work programme
priorities and funds availability
authorise expenditure and

implement expenditure
controls
authorisations incurred after

ensuring compliance with
financial rules and regulations,
availability of budgetary
allocations and funds to cover
the transaction
prepare fiscal reports
reports detailing and explaining

major deviations from the
planned budget programme and
suggesting corrective measures
that might have to be considered
monitor and evaluate

budget implementation
monitor progress on
agency programmes and
projects
periodic reviews of actual

expenditure and analysis of
budgetary lags and variations
with budgetary estimates
matching financial and physical
progress and reallocation of
funds where necessary
Function
Processes
Cash
managemen
t
monitor cash flows and expected

cash requirements; issue and
redeem government securities.
This process includes the
following sub-processes:
receive agency
expenditure plans

status reports and forecasts of
cash requirements and
availability and data on
transactions relating to
governments short term and
cash deposits
receive revenue forecasts

from revenue collection
agencies
prepare overall cash flow
forecasts
monitor revenue inflows
monitor maturities of cash
and term deposits
monitor cash balances
monitor overall cash flows
issue and redeem
securities
receive actual expenditure
statements from
agencies
receive and process
agency requests for
funds
release funds to agencies
Debt
Management
float domestic loan

offerings
account for receipts
project debt service
requirements
Foreign aid
managemen
t
service debts
cheques issued by the

Accountant Generals Office for
payment of interest and
repayment of principal. Debt
management information is used
in economic and policy analysis
co-ordinate aid inflows
aid agencies matched to projects

and project negotiations
overseen
disburse and account for

aid
disbursement and repayment

transactions pertaining to
external borrowings

Function
Processes
Revenue
administrati
on
administer tax revenue

and tax collection systems
Implementation of the tax

policies covering the actual levy
and collection of revenues
including taxes, duties etc as laid
down in these policies
administer non-tax
revenues and associated
revenue collection systems
implementation of the valuation

and collection of other non tax
revenue systems such as stamp
duties, user fees/charges for
services products supplied by the
government
Accounts
administrati
on
administer payment and

receipt systems
administer general and
subsidiary ledgers and
budget ledgers, including
accounts reconciliations
account for fixed assets
account for inventory
Auditing
develop costs for

recording and accounting of all

government transactions relating
to revenues, expenditures, public
debt and other (eg fixed-asset)
financial transactions
audit government
accounts
internal audit at the line ministry

level during the course of the
fiscal year and external audit
carried out by the Auditor
General through random checks
and on the final accounts for the
fiscal year
Summary
This lesson has examined the concept of a financial system, the functions
of financial management and the processes involved with completing
those functions. The legislative framework establishes the basic principles
of financial management and help to define the various functions; this
legislative framework was discussed in this lesson. The lesson also
examined the specific functions of financial management and the
processes and outcomes involved. Figures were included to show
graphically how functions and processes are related in government
financial management systems.
Study Questions
1
Draw a table showing each of the ten financial functions listed and which
organisation(s) is/are responsible for this in your country.
Obtain a copy of your government's accounting manual and identify the main
processes in your accounts administration against the relevant paragraphs in the
manual.
Activity 4
You may find that when you have completed this activity you have
identified more processes than are listed in this document. This is fine;
the document cannot identify every specific process in place in all
governments or organisations.
While you are discussing this activity with people in your organisation, you
will want to talk with them about the types of records created as a result
of the two functions you examined, as you will be considering these types
of records in the next lesson.
This activity could take quite some time; spend as much time as you need
to understand the relationship between functions and processes. You are
asked only to examine two functions because of the time involved with
this activity; if you wish, you may want to examine other functions.
LESSON
FINANCIAL MANAGEMENT FUNCTIONS:

INFORMATION SYSTEMS AND RECORDS
Lesson 3 provided an introduction to the financial management system
and the main functions and processes involved. Lesson 4 is concerned
with analysing the records generated from these functions and processes.
This lesson demonstrates how business systems analysis can be used to
build up a picture of information flows in relation to financial functions and
processes.
Analysing Business Systems explores the techniques
of business systems analysis in greater depth.
Information Flows
Each of the functions and processes examined in Lesson 3 requires records
as inputs and generates records as outputs.
Input: Any resource required for the functioning of a
process, in the course of which it will be transformed
into one or more outputs.
Output: The product of the transformation of inputs by
a process.
For example, a payment voucher to authorise payment of goods supplied
to a ministry is an input to the accounting system. The output is the
cheque issued to the supplier
One way to examine these inputs and outputs is to study the information
flows associated with the particular process being examined.
Stakeholders must be consulted, and individual processes can be analysed
in greater depth by studying the information flows associated with the
process. This analysis builds up a picture of the existing documentation
controls and thus provides the basis for taking records management
decisions.
The data gathering exercise should lead to a flow diagram with a narrative
text, describing in detail the steps involved in the process. As each
function will be made up of one or more processes, it is necessary to
analyse each of them before the complete picture will emerge. The
records manager needs to understand the relationship between all these

factors when making decisions about records.
This analytic approach is best illustrated with the following example.
In a small Commonwealth country, a records manager was asked to
improve the handling of records relating to payments. He began by
studying the accounting manual, which was an invaluable source of
information about the main accounting records, their formats and the
procedures for processing payments.
The Auditor Generals office should have documented the payments
process as part of the routine audit of the financial system and recorded
any departures from the accounting manual. However, the records
manager discovered that this had not been done. It was therefore
necessary to trace the payment process through the system and to
interview the relevant officers at each stage.
Ultimately, the records manager produced the flow diagram shown below
and a chart of the procedures, the records generated and the
documentation controls in place.
By the time the records manager had completed the analysis, he had most
of the information he needed to identify the series required to support the
payments functions. In most cases the records derived from the records
column in his chart formed clear series. His last step was to refine his
analysis to define the series and to create retention schedules to cover all
of the series created including the computer data files and the systems
documentation.
Budgets and Allocations

Budgets and Allocations
MINIS TRY
MINIS TRY OF
FINANCE
Original and Duplicate

Payment Vouchers
OFFICE OF THE
ACCOUNTANT GENERAL
TREASURY UNIT
Internal Audit Unit

Receiving Unit
Vote Charge Book
Verification Unit
OFFICE OF THE ACCOUNTANT GENERAL
ACCOUNTING UNIT
Output Batch
Control
Input Batch
Control
Original Payment
Voucher
Ledger printout
Original Payment
Voucher
File
DATA PROCES S ING AND

INFORMATION UNIT
Ledger Printouts
Cheque Preparation
Cashier
Original Payment Voucher
Duplicate Payment Voucher

and supporting documents
Outstore
OFFICE OF THE AUDITOR GENERAL
Figure 6: Illustration of Documentation Flow in Relation to the Payment Function
Analysis of Documentation Flow in Relation to the Payments

Function
Departments of State
Documentation
Controls
Procedures
Records
1.1 Raise requisition
departmental requisition
book
forms serially numbered
local purchase order

(LPO)
forms serially numbered
1.2 Obtain goods,

services
copy retained in unit

copy retained in unit
Petty contract
Claim/petty cash
voucher
1.3 Submit for payment
payment voucher in
triplicate
ministry reference
number;
voucher dated
LPO Number.
account code.
copy retained in unit.
1.4 Enter in main ledger
vote charge book
retained in unit for

reconciliation with
monthly print out from
Accountant General.
1.5 Send to Internal

Audit
voucher way book
voucher way book signed

by Internal Audit for
receipt of original and
duplicate payments
vouchers, LPOs and all
supporting documents.
payment vouchers and

supporting documents
e.g. requisition,
invoices
Internal Audit Unit

Documentation
Controls
Procedures
Records
2.1 Receive vouchers
voucher way book of

ministry/department
all vouchers from

ministry signed by
internal audit.
2.2 Register vouchers

by department
departmental register
date of receipt and

voucher reference.
2.3 Approve/check
vouchers
payment voucher
voucher signed by
principal accountant;
date stamp
2.4 Ensure funds

available
vote control book
vote control book;

retained in internal audit
unit.
2.5 Validate Local
LPO register
LPO register; retained in
Purchase Order
internal audit unit.
2.6 Ascertain daily cash

flow for Ministry of
Finance
daily register of vouchers
Maintained in date order

with voucher reference;
retained in internal audit
unit.
2.7 Transfer vouchers to

Treasury unit
voucher list/way book
Entries serially
numbered. original and
duplicate payments
vouchers, LPOs and all
(requisitions, invoices)
sent to Treasury
receiving unit. Signed for
by Treasury receiving
unit.
Treasury Unit
Procedures
Records
3.1 Vouchers received in

Receiving Unit from:
voucher list/way book of

internal audit unit
voucher list/way book of
accounting unit
Internal Audit Unit
Ministry/Dept Below
the Line accounts
and family allotments
Sub Treasuries and

embassies
input batch control

document
Documentation
Controls
)
)
)
)
)
)
)
)
All vouchers
signed for
date stamped
RECEIVED
and entered in
Registers.
3.2 Record documents
register of documents
received
Register maintained by
date received and
payment voucher
number.
3.3 Transfer to
Verification Unit
register of documents
received
Signed for by unit.
3.4 Record accepted

vouchers
Voucher Control
Form/Way Book for each
Ministry:
maintained by payment
voucher number.
3.5 Return rejected
LPOs and Petty

contracts
Recurrent payments
including salaries
and allowances
Below the Line

and family
allotments, loans,
court deposits
way book of rejected
Entered by date and
vouchers to
originator
3.6 Dispatch vouchers
for payment
vouchers
purchase voucher
number, signed for by
originator.
voucher control
form/way book
signed for by accounting

unit, cheque drawer, and
cashier.
cheques
payment voucher given

Treasury payment voucher
reference number from cash
book by cashier, in sequence.
Voucher stamped PAID.
foreign payments and

special accounts to
accounting unit
others to cheque
preparation
payments less than
300D to cashier
3.7 Draw cheque
cash book (cheque

payments)
3.8 Transfer to:
cashier
accounting unit
cheque, duplicate
payment voucher and
cash book (cheque
payments) and original
payment voucher
Cashier signs cash book

for cheques.
accounting unit signs for
documents in way book.
Cashier
Procedures
Records
Documentation
Controls
4.1 Issue cheque
duplicate payment
voucher and supporting
documents
To store, filed in Treasury

payment voucher (TPV)
number order.
4.2 Pay cash
cash book (cash

payments)
Sent to accounting unit.
Accounting Unit
Procedures
Records
Documentation
Controls
5.1 Prepare for data

processing
payment cash books

summary cash book
salaries and allowances
cash book
check way book and sign

batch daily vouchers in
account code order (less
than 40 per batch)
input batch control form
batch numbers, Treasury

payment voucher
numbers and number of
documents.
5.2 Take to data

processing and
information unit
(DPI) at end of
month
way book
batch numbers reconciled in

way book.
computer operators sign
for batches.
5.3 Check computer

processing
Print out of ledger by

vote code and
batch/voucher
All entries checked against

vouchers.
original payment
voucher stored by month
in batch number order.
Figure 7: Analysis of Documentation Flow in Relation to the Payments Function
The analytic technique described above can be applied to any process

associated with a financial function. For example here is the same process
of analysis and diagramming applied to the process for accounting for
revenue generated by line ministries. Most government departments
generate some revenue, for example by issuing licences or charging for
publications. The main revenue generating departments are Customs and
Excise and Revenue. These may have different procedures than those
used in line ministries. The analysis of the procedures for recording
revenue by a line ministry has been broken down into stages which
represent the activities of a particular administrative unit. These have
been numbered. Individual procedures have been sub-numbered. There
is no particular rule that this system of numbering has to be used, but it
makes it easier to follow. This analysis is important because it illustrates
that the records generated by the process will be captured by the record
keeping systems of different administrative units and how they relate to
each other. It makes it easier to make informed appraisal decisions.
Analysis of Documentation Flow: Revenue

1 Ministerial/Department
Documentation
Controls
Procedures
Records
Issue of Receipt
Books
General Triplicate
Receipt Book (GTR)
GTRs issued by Treasury

Unit (Accounting Unit) on
departmental requisition.
Receipt Book Issue Note
recording serial numbers
signed for by receiving
officer.
Receipt of cash and

cheques
GTR official receipt

Revenue Voucher (AGF
2)
Copy 1 to payer
Copy 2 to Receipts
Section
Copy 3 retained in GTR
Book
AGF 2 prepared and
given Ministry reference
number
Enter in Cash Book
Revenue Collectors Cash

Book
Entered from GTR and

AGF2
2 Treasury Unit Receipts Section (TURS)

Procedures
4
(i) Payment to Central Bank
(ii) Payment to SubTreasury
iii
(iii)Payment to TURS
Documentation
Controls
Records
iv
Paying-In-Slips
Sub-Treasury Cash Book
TURS Cash Book
AGF2
For revenue paid to

Central Bank; take
GTRs, Cash Book
and Paying-In-Slip
to TURS
GTRs
Cash Book
Paying-In-Slip
For revenue paid to

Central Bank take
GTRs, Cash Book
and Paying-In-Slips
to Treasury Unit
Receiving Cashier
(TURC)
GTRs
Cash Book
Paying-In-Slip
AGF2
AGF2
iii
Stamped by bank;
Receipt issued, recorded
in Sub-Treasury Cash
Book;
Receipt issued, recorded
in TURS Cash Book
TURS check Paying-InSlips against Cash Book,
GTRs. TURS stamp
examined
Cashier issues receipt for
documents;
Receipt posted to TUCs
Cash Book;
Treasury Receipt Number
given (TRV No) and
entered on voucher.
Duplicate AGF2,
supporting documents to
store in TRV no.
3 Accounting Unit
Procedures
Records
Documentation
Controls
1.7 Accounting Unit:

prepare for data
processing
Receiving Cashiers Cash

Book
Sub-Treasury Cash Books
TURS Cash Book
Input Batch Control
Vouchers checked to
Cash Books and batched.
Batch numbers allocated
and entered into Way
Book
Original AGF2
1.8 Take to Data
Processing and
Information Unit
(DPI) at end of
month
Way book and vouchers
Batch numbers reconciled in

way book
Computer operators sign
for batches
1.9 Check computer

processing
Print out of ledger by

Vote Code and
batch/voucher
All entries checked against

vouchers
Original AGF2 stored by
month in batch number
order
Figure 8: Analysis of Documentation Flow: Revenue
Accounting is at the core of any financial management system and

generates a large proportion of the financial records in government. The
following diagram provides an overview of the main information flows and
records that would be found within the accounting function within a typical
mixed paper/electronic environment in a small Commonwealth country.
The boxes with shading indicate records. The arrows show the flow of
information.
MINISTERIAL/DEPARTMENT/SUBTREASURIES ACCOUNTING UNITS
Payer
Cash/cheques
Receipt (GTR)
copy
copy
GTR Book
Revenue Voucher (AGF2)
Revenue Collectors Cash
Book
Sub-Treasury Cash Book
ACCOUNTING UNIT
TREASURY UNIT
RECEIPTS SECTION
Original Revenue Voucher

(AGF2) retained
Recovering Cashiers Cash
Book
Batch Control Book
Ledger Print Out
DATA PROCESSING
UNIT
Receipt (GTR)
Revenue Voucher (AGF2)
Paying-in Slips
Duplicate revenue vouchers
(AGF2) and supporting
documents
store
Ledger Print Out
Figure 9: Outline of Documentation Flow: Revenue
Central
Bank
Staff
costs
Goods
Services
Payroll:
Computerised
and/or Manual
Capital
expenditur
e
Requisitions
Local Purchase Orders
Goods/Services Received
Note
Check
Contracts
Suppliers
Invoice
Check
Charge
Book
PAYMENT VOUCHERS
Vote
Charge
Book
Authorisation for payment
Accountant General
Treasury verification, cheque preparation,
bank transfers, cashier
Accounting batching, data processing;
manual accounts; bank reconciliations
Check
Estimates
Cash book
and Cash
Accounts
Bank
Statements
Monthly
Accounts
General
Ledger
Paying-in-slip
Annual
Accounts
RECEIPTS
Cash receipts
banked daily
REVENUE VOUCHERS
Receipts paid
direct to Bank by
main revenue
collectors
Official receipt
Figure 10: Documentation Flow Within the Accounting Function
The analytic process could ultimately be extended to any area of financial

management. The table below provides an overview of the main financial
management functions and relates them to the following areas:
information systems
the principal records inputs required
the records outputs generated
the main users or beneficiaries of the system (the stakeholders).
It is important to understand that financial management in the public

sector is very complex and therefore in many countries different systems
are used to support a particular function. For example, the revenue
administration function will normally have at least two distinct sets of
systems: tax administration systems and customs administration systems.
In many countries these systems are computerised, but they could also be
manual systems, or a mixture of the two. The macroeconomic framework
document, the fiscal plan and budget records will be used to determine
what taxes and customs are collected. The systems will be used to
administer the process of tax and customs gathering and the most
important records generated by these systems will be records of the tax
and customs revenue.
Each of the functions listed in the table below will generate large volumes
of transaction records. The table provides a high level at a glance listing
of all government financial management functions. It is important to
thoroughly understand the table because it provides the means for the
records manager to have a meaningful dialogue with financial managers
about the systems they use and the records generate by them.
For each function, the associated processes should be analysed when
setting up a records management programme. The table provides a
framework to assist records managers in planning this process, prioritising
the detailed analytic work, identifying the main systems that generate
records and relating them to broader functional areas, identifying key
stakeholders to be consulted and identifying important categories of
records.
Complete the following activity and then compare your findings with the
information presented in the figure.
Activity 5
Before studying the chart below, look back at the two functions you examined in the
last lesson, when considering the processes involved with fulfilling those functions.
For each of those two functions, look again at the processes involved and identify:
the principal systems supporting those functions. What are they called and are they computerised
or manual systems?
the principal records inputs required (the records needed to perform the process)
the records outputs generated (the records that result from the process)
the main stakeholders (the users or beneficiaries of the system).
For example, look again at the processes you identified to fulfil the function of
preparing an annual budget. The records required for this process will include
macroeconomic framework document
public sector investment programme document
fiscal plan
public sector work programme
expenditure reviews (previous year)
fiscal reports (previous year)
budget guidelines and ceilings
line agency budget submissions
draft budget.
The records generated by this process include
initial budgetary allocations to programmes/projects budget call circular
line agency budget submissions
draft budget
approved budget
The main stakeholders include
Ministry of Finance budget division
Treasury
line agencies
Parliament
National planning agency
central bank
revenue collection agencies
ministry of public service
donor agencies
records management agency.
Your list of inputs, outputs and stakeholders should look the same. You may need to
discuss this activity with people in your organisation responsible for various parts of
the financial management process.
Financial Management: Main Information Systems and Records

Function
Macro-fiscal
planning
Budget
preparation
Main Information
System(s)
systems for
macroeconomic
forecasting
systems for budget

preparation;
spending agency
budget preparation
systems; public
enterprise budget
preparation
systems; tax
systems; customs
systems
Record Inputs Include:
Record Outputs
Include:
Sta
external economic data; public

sector work program
document; fiscal reports
(previous); expenditure
reviews (previous); accounts
data; data on tax revenue
collections; data on non-tax
revenue collections; data on
domestic borrowings; data on
external borrowings
grants/grants in aid; debt
service projections; data on
civil service
complement/emoluments/
benefits
macroeconomic
framework; public
sector investment
programme; fiscal
plan
Res
Min
div
macroeconomic framework
document, public sector
investment programme; fiscal
plan; public sector work
programme; expenditure
reviews (previous); fiscal
reports (previous); budget
guidelines and ceilings; line
agency budget submissions;
draft budget
initial budgetary
allocations to
programmes/projects
budget call circular;
line agency budget
submissions; draft
budget; approved
budget
Res
bud
age
Ass
ban
age
age
Ass
cen
age
ser
ma

Function
Budget
implementa
tion
Main Information
System(s)
systems for budget

execution and fiscal
reporting; core
government
accounting system;
spending agency
budget execution
systems; public
enterprise budget
execution systems;
payroll and pension
systems; personnel
information
systems;
expenditure review; public

sector work programme; fiscal
reports; fiscal plan; public
sector investment programme;
approved budget, public sector
work programme; cash flow
forecasts; fiscal reports;
contracts; purchase requests;
cost evaluations; bids; reviews
of contractor performance;
inventory documents;
personnel documents; payroll
documents; expenditure
authorisations; commitment
Record Outputs
Include:
expenditure plan;
budget warrants;
purchase orders;
procurement
transactions; payment
vouchers; payment
receipt transactions;
virement request
transactions;
expenditure
authorisations
Sta
Res
bud
age
Ass
cen
age
ser
ma
purchasing systems
transactions; invoices;
vouchers; shipping documents;
inventory documents; receiving
reports; payment
authorisations;
Budget
monitoring
and
evaluation
systems for
monitoring
investment
projects; systems
for monitoring
public enterprises;
spending agency
investment projects
monitoring systems
approved budget; public

plan; public sector investment
programme; macro-economic
framework; fiscal reports
fiscal reports;
expenditure reviews
Cash
managemen
t
cash management
systems
cash flow forecasts; fiscal

reports; expenditure review;
data on domestic borrowings;
plan; macroeconomic
framework
liquidity position;
issues and
redemptions of
government securities
Res
bud
age
Ass
cen
age
ser
ma
Res
bud
age
Ass
age
Ser
age

Function
Main Information
System(s)
Record Outputs
Include:
Sta
Debt
managemen
t
debt management
systems
fiscal plans; public sector

investment programme; fiscal
reports; expenditure reviews;
data on issues and
redemptions of government
securities; approved budget;
public sector work
programme
data on domestic
borrowings
Res
Foreign aid
managemen
t
foreign assistance
co-ordination
system
public sector investment

programme; fiscal plan;
sector work programme;
approved budget; data on
external borrowings/
grants/etc
data on external
borrowings/
grants/grants-in-aid;
data on foreign aid
disbursements/
repayments
Res
age
Revenue
administrati
on
tax administration
systems; customs
administration
systems
macroeconomic framework;
fiscal plan; approved budget
data on tax revenue/

collections; data on
non-tax
revenue/collections
Res
age
Ass
Min
div
cen
ma
Ass
Min
div
ma
Ass
Min
div
age
ma
Accounts
administrati
on
Auditing
core government
accounting system
systems for
auditing

sector work programme;
financial transactions; data
on government receipts/
receivables; data on
government
payment/payables;
expenditure authorisations
balance sheets; trial

balance; general
ledgers; subsidiary
ledgers; accounts
receivable ledgers;
accounts payables
ledgers; fixed-assets
accounts ledgers; cost
accounting reports
Res
bud
age
work programme;
government books of
accounts ledgers
transactions; audit plan;
assets and liabilities
audit reports
Res
Figure 11: Financial Management: Main Information Systems and Records
Ass
rec
Ass
arc
ma
Summary
Financial management systems require records as inputs and generate
records as outputs. The records manager needs to analyse individual
processes in detail to grasp how the records and documentation controls
fit into the larger financial management system.
Lesson 4 has shown how to document a process and analyse it and
described the means of applying the principles involved to the various
functions that comprise financial management.
Study Questions
1
Why is it important to study the information flows within a financial function?
Describe the steps you would need to take to analyse an information flow.
Document the processes, records and documentation controls for processing a change
to an employee's monthly pay after a promotion in your organisation, from the point
that the line ministry issues an instruction to the payroll unit for processing.
Draw a diagram of this process.
Taking the example of the documentation flow for the payment function (Figure 6),
identify which documents are inputs and which are outputs.
Activity 5
When you have finished this activity, compare your findings with the
information presented in Figure 11. You may find that when you have
completed this activity you have identified more records than are listed in
this document, and you may have listed different stakeholders. This is
fine; the document will relate specifically to the situation in your own
government or organisation.
This activity could take quite some time; spend as much time as you need
to understand the relationship between functions, processes and records.
You are asked only to examine two functions because of the time involved
with this activity; if you wish, you may want to examine other functions.
LESSON 5
MANAGING FINANCIAL RECORDS IN A

MIXED PAPER/ELECTRONIC
ENVIRONMENT
Records managers concerned with financial records are likely to find that
records are created and used in a mixed paper/electronic environment, in
which some records are maintained in paper form and some electronically.
Usually the first financial management function to be computerised is the
payroll, because payroll management is a routine operation and the
benefits of automation are substantial. Accounting and debt management
systems are also prime targets for computerisation. Such systems
produce both paper and electronic records, but the electronic records do
not need to be kept for long periods. Therefore, in practice the records
manager should focus on managing the paper inputs and outputs.
Some governments have installed integrated financial management
systems, which are computer-based, inter-related sets of sub-systems that
plan, process and report upon financial resources. Integrated financial
management systems are discussed separately in Lesson 6.
Although financial records may differ from other records in certain
respects, they should be managed as part of the framework of the
organisations overall records management policy. There is no universally
applicable system for the management of financial records. Every
organisation must take account of its own particular context, needs and
resources. However, an effective mixed paper/electronic system would be
expected to reflect the basic elements discussed in this lesson.
The lesson considers the implications of computerisation for the
management of financial records. It then explores the steps involved in
managing financial records in a mixed paper/electronic environment.
Implications of Computerisation for Financial

Records Management
It can be very difficult to protect electronically created personnel
information and make it available. Managing Electronic Records explores
these issues in detail. In summary, the following key factors affect the
management of electronic records over time.
The electronic storage media is fragile and changes with time.
In order to understand the record when it is retrieved in future, it is essential to

capture sufficient accurate contextual and structural information about the record.
Changes in technology mean that records that were generated on computers ten
years ago may not be accessible today. Electronic records must be moved to new
computer systems (migrated) periodically so that they remain accessible.
Often the responsibility for the management of the integrity of electronic records
has not been assigned, making it difficult to ensure they are cared for adequately.
Typically, problems with automation arise in three areas. First is the

maintenance of electronic records. Records are dependent upon the
computer environment in which they were created and if those computers
cease to be available, the records may become inaccessible. Second is
the control of access to records. Many people can gain access to
information in computers, so it is important to ensure only authorised
personnel work with electronic records, otherwise information may be
altered inappropriately or without approval. Third is the control of versions
of records. Because computer records can be altered easily, and the
changes may not be readily apparent, it is important to ensure official
records are protected from change over time.
Where there has been no attempt to manage electronic records, the
organisation is exposed to a number of risks, including
uncontrolled accumulation of records, documents and data
inadvertent destruction of records, documents and data
unauthorised tampering with records and documents
absence of systems documentation and associated structural and contextual

information (known as metadata).
Metadata: The information about a record that explains
the technical and administrative processes used to
create, manipulate, use and store that record.
The consequences of inadequate care of electronic records may include

the following:
increased risk of wholesale, unsystematic and possibly illegal destruction of

records
loss of valuable business records and archives
increased risk of security breaches
unauthorised alteration or deletion of records (loss of evidence)
public embarrassment
unnecessary delays or breakdowns in the business process
lack of public accountability
system paralysis or, at the very least, difficulties in accessing information.
Essentially the records manager needs to answer a number of basic

questions.
Are the financial systems producing electronic records?
Is there a need to keep the records electronically?
Is there a risk that they cannot be accessed when needed because the media, software
or hardware may become obsolete?
Can printouts from the system provide all the information needed?
In many cases, the automated systems are carrying out high volume,
routine transactions, such as payroll. It is not usually necessary to keep
these records for long periods because they usually cease to be of use to
the original creators after they have been audited and kept for their
statutory retention period. They seldom have permanent cultural or
historical value.
In practice, for the present the records manager can usually concentrate
on managing the paper records that form the inputs and outputs to the
computerised system, as well as related paper records such as contracts
and policy documents. Nonetheless, the electronic records should be
scheduled for retention or disposal along with the paper records. In future,
it is very likely that electronic records will become the main format in
which financial records will be preserved, and it will be essential for
records managers to develop the capacity to do so.
Roles and Responsibilities of Electronic Records

Managers
Although the fundamental principles for keeping records in an electronic
environment are more or less the same as in a paper environment, the
skills required to manage them may be different.
As the Canadian archival writer and educator Terry Cook has noted:
for the first time, [records managers and archivists] are not
producing, managing, and saving physical things or artefacts, but
rather trying to understand and preserve logical and virtual patterns
that give electronic information its structure, content, and context, and
thus its meaning as a record or as evidence of acts and transactions. 1
Managing records within an electronic system or in a mixed
paper/electronic environment requires new partnerships between
information professionals. In general, the decision to use computers to
manage financial records will be taken by senior managers, with technical
advice from information technologists. The development and introduction
of computerised financial systems should involve collaboration between all
key individuals, including financial managers, information technology (IT)
staff and records managers. Financial managers, as the users, need to
determine their own requirements. IT systems programmers will be
primarily concerned with developing and introducing current systems and
preparing for the next generation of systems. It is the role of the records
professionals to bring a longer term perspective to the project and to
ensure that records management principles are safeguarded.
In many countries, records managers previously have not been involved in
the management of financial records. When extending records
management into what may be, in effect, a new area, there is potential for
a conflict of interests in the management and control of the records. The
roles and responsibilities of the records manager, the accounting staff and
the auditors are complementary, but the scope of their duties must be
clearly defined, documented and communicated.
The scope of the records management authoritys powers and
responsibilities should be defined and set out in a records procedures
manual. This should be distributed to all staff concerned and the financial
and accounting staff should be encouraged to see the records procedures
manual as a complement to the financial instructions and accounting
manual.
The written procedures should clearly define the records management
process and its application to financial records. Financial instructions,
audit and accounting manuals should also reflect records management
requirements. Records management procedures should be monitored and
updated on a regular basis. The introduction of records management
techniques and practices will require careful staff training.
The first action is for records managers to understand the objectives of
financial records management, and then be clear on the key principles of
financial records care, regardless of whether the records are in paper or
1 Terry Cook, Electronic Records, Paper Minds: The Revolution in Information

Management and Archives in the Post-Custodial and Post-Modernist Era, Archives
and Manuscripts 22 (November 1994): 302.
electronic form. Then they can consider the criteria for an electronic
records system.
Objectives of Financial Records Management
Developing and implementing a financial records management system
requires clarity about its aims and objectives irrespective of whether the
system is manual, electronic or mixed. The objectives involved normally
include
maintaining the financial record throughout its life in a consistent and structured
manner
supporting the audit function and external accountability of the organisation
enabling the organisation to meet its legislated financial obligations
meeting the accounting, reporting and financial management needs of the

organisation, including economic and fiscal policy and planning
protecting the integrity and accuracy of the record to guarantee the organisation a
reliable source of financial information
providing ready access to and retrieval of financial information
making cost-effective use of resources allocated to the creation, maintenance and

use of financial records, thus ensuring timely disposal of financial records without
compromising their integrity and utility as an information resource
adding value to the financial information system through documentation and
control of financial records.
General Principles of Financial Records Management

The following principles should provide the basis for managing financial
records.
Managing financial records is the joint responsibility of accounting, audit,

financial and records personnel.
Financial records should be managed throughout their life, from the point of
creation to their ultimate disposition.
Records should be identified and documented in relation to financial functions.
Records should be arranged to permit their retrieval by accounting periods and by
financial activity.
Records should be protected against unauthorised access, alteration, copying and
destruction.
Control should be exercised over the structure, content, location and movement of
records.
Records should be retained for the length of time required to meet statutory
obligations and the needs of financial operations, management, audit and research.
Records and record systems should be subject to audit and review.
Criteria for an Electronic Records System

All too often, projects developed without the input of records managers fail
to meet their objectives because there has been inadequate attention to
records issues. The records manager must ensure the following
safeguards are in place to ensure electronic records are protected.
The information in the existing financial management system must be

well-organised, accurate, easily accessible and sufficiently reliable to move to an
integrated system.
The integrity of the electronic records must be maintained: that is, the records
must be complete, accurate and verifiable.
Appropriate security procedures and systems (such as access restrictions/
permissions) must be imposed to ensure that (1) only authorised information is
input into the system and generated from the system and (2) only authorised
individuals can access or amend records. There must also appropriate back-up
procedures and storage facilities to ensure records can be restored if necessary.
It must be possible to retrieve the records when needed for administrative, legal or
historical purposes, and records should only be destroyed with proper authority
according to records schedules.
There need to be appropriate management structures in place to support the
operation of the system, including legislation to support the legal admissibility of
electronic information if there is no parallel paper system.
There must be adequate administrative provisions to support the ongoing
maintenance of the system, including financial resources, adequate physical
conditions and sufficient staff. For example, there must be a reliable power
supply; there need to be secure backup and storage procedures and facilities; the
electronic and paper records need to be stored in appropriate environmental and
physically secure conditions.
The organisations accounting manual will usually specify record formats for
accounting records, and in some cases it will define rules for the handling and
custody of financial records. However, accounting manuals do not normally
establish standards for managing records. Records managers need to work with
officials in financial agencies to establish standards in such areas as retention
periods, records formats, media, control systems and equipment.
There must be an effective training programme for users and custodians of
records.
In addition to ensuring these standards and requirements are in place,

records professionals can also help the development of the financial
records system by
identifying records with continuing utility and enduring value
determining, with the stakeholders, how long valuable records need to be

maintained and accessible in order to meet administrative or archival requirements
identifying the structural and contextual information (metadata) that needs to be

captured and maintained with electronic records of enduring value if they are to
remain identifiable and accessible over time
working with systems developers to ensure that electronic records can be
preserved over time and public access provided, as specified in archival
legislation.
These issues are explored in greater depth in
Managing Electronic Records and Organising and
Controlling Current Records.
Activity 6
Does your organisation automate its financial management functions? If so, write a
description of exactly what processes are automated. Who manages the system?
How is it used? If your organisation does not have an automated financial
management system, write a brief description of whether you think such an automated
system could be installed and what advantages and disadvantages it might bring.
Managing Financial Records In a Mixed

Paper/Electronic Environment
Following are specific actions that can be taken to manage financial
records in a mixed environment. They primarily refer to the paper inputs
and outputs.
Series Control
It is important to establish control over records series from the time that
they are created and to maintain control throughout their life. Within each
series, there is usually a further level of control over individual record
items. There may be, for example, serial numbered vouchers, checks or
forms classified by account codes or a chronological arrangement of
documents by financial years or monthly accounting periods.
Information about the records series can be recorded in a register of
records series held in each agency. Such a register would record essential
contextual information about the series. This contextual information
should include
title and description
date range
creating agency
system of arrangement and control
records format
related series
related legislation/financial instructions
related accounting manual procedure
storage location
disposal authority and action.
Identifying Financial Records

Individual records must be clearly labelled on the front cover to ensure
that they can be readily identified and maintained. Each item should be
clearly marked with the following information:
creating agency
series and item numbers
title
financial year
control number.
A number of principles apply to the process of identifying financial records.
Where more than one volume of a record is created in a financial year, each volume
should be given a single, sequential number (1, 2, 3, and so on), with the sequence
starting again at the beginning of each financial year.
The main components of financial information systems will be accounting records,

which should be created and maintained as discrete record series.
Each item should be part of a clearly defined record series.
Some types of financial records are retained in a general filing system. These may
include policy documents, authorities such as warrants, budget papers, tenders,
contracts and project documentation. The organisations registry or records office
should play a role in their management. In a decentralised organisation the files may
also be managed by sub-units, individual action officers or secretaries, who should
take account of financial information management requirements.
In order to identify records in a consistent way, file titles should use terms obtained
from a master list of authorised terms. File titles should also include the financial
year and, where appropriate, the accounting code. For example:
WARRANTS - VIREMENT - 1995/96
EXPENDITURE - MONITORING - 1995/96 -SUB-HEAD 021
Arranging Financial Records
Where possible, records should be arranged by financial year and then by

month, accounting code or control number, as appropriate. This will
greatly assist retrieval and facilitate the audit process. Files should be
arranged by file number, while file plans should provide for retention and
retrieval of records by financial year, expenditure head and document
type.
Determining Storage and Security Needs
Equipment used for storing financial records should be capable of
accommodating the variety of formats and sizes in which these records
are created. Adjustable shelving allows optimum use of floor space and
shelving. It is important that the accommodation should be secure and
that doors should be locked when the storage areas are unoccupied.
Accounting and financial documents are frequently stored in lever arch
files, binders and box files. This is appropriate for current records but
semi-current records should be transferred to file covers, labelled and
placed in records storage boxes on open shelving. Boxes, which are less
costly, provide greater protection for documents against damage from
dust, humidity, fire and water and make for easier handling, identification
and processing. Lever arch files can then be recycled.
Activity 7
How does your organisation presently arrange its financial records? Describe the
processes followed. Do these processes follow an established method and is that
method documented? Where? Are people trained to arrange the records according to
the method chosen? How are they trained?
How does your organisation physically store its financial records? Are they stored in
boxes, files, binders or other containers? Explain the systems used.
Then, write at least three recommendations for how you would improve the process of
arranging financial records to make the information more accessible. Then write at
least three recommendations for how you would improve the process of storing
financial records, to make them more physically secure.
Managing the Physical Location and Movement of Records
In order to aid retrieval, help maintain physical integrity and prevent
unauthorised access or use, it is essential that the location of financial
records be controlled. Following are basic guidelines for retaining control
of the physical movement of financial records.
While current, financial records are usually held in the unit that creates them, but
they may be stored elsewhere. For example files containing warrants or contracts
should normally be held in the records office or registry.
The storage location of current and non-current records should be clearly
identified and recorded in the series location register.
Some financial records (such as cheque books and specimen signatures) may have
to be kept in specially secure accommodation such as a safe or strong room. The
Financial Instructions or Accounting Manual will usually specify which financial
records must be kept in specially secure accommodation. All financial records
must be kept securely owing to their sensitive nature.
Day-to-day retrieval and movement of financial records within the records
creating unit does not normally require recording. Records retrieved from their
permanent location for operational purposes should be returned at the close of
business each day.
When a record is removed from a record series for use outside the record creating
unit, this use should be authorised and noted in an issue record and the movement
recorded in a transit or way book.
The movement of records should be monitored on a regular basis, and it is
advisable to limit the number of records that may be issued to another agency and
the period for which they may be retained by that agency without notification.
Protecting the Information in Electronic Records2

There are particular issues and risks associated with processing and
retaining records on a computer system that are not encountered in wholly
paper-based systems. These include
the inadvertent destruction or corruption of electronic records
unauthorised tampering with electronic records
the possibility that electronic records and operating systems will become obsolete
because of constant upgrading or changing of computer systems over time.
Various precautions must be in place to protect against the loss of data

during a temporary or permanent loss of computer facilities. This
precautions include
introducing a disaster recovery plan
regularly producing back-up copies of systems software, financial applications

and underlying data files
storing back-ups together with a copy of the disaster recovery plan in an off-site
fire safe
2 The specific auditing provisions have been adapted from Australian Taxation
Office Ruling TR97/21, Income tax: recordkeeping - Electronic Records, 1997,
http://www.ato.gov.au
introducing arrangements with one or more organisations possessing compatible

data processing equipment to handle essential work in the event of a computer
crashing.
For more information on protecting electronic
records, see Managing Electronic Records. See also
Preserving Records and Emergency Planning for
Records and Archives Services.
Managing Forms
Forms and reports are used extensively in accounting and financial
information systems. Controlling of their design, eliminating unnecessary
forms and limiting the number of copies produced and distributed are
essential aspects of forms management.
Financial forms should be eligible for audit, legal or informational
purposes, and it is helpful if forms can be printed on self-carboning paper
when multiple copies are required. The use of carbon paper and separate
forms results in illegible copies, particularly if these are handled by more
than one person.
The purpose, use and distribution of financial management forms should
be kept under regular review. For example, forms may be revised when
changes take place in the operating environment, such as with the
development of computer networks or the introduction of a new
accounting system.
Monitoring and Reviewing Records Systems
The financial records management system should be monitoring regularly
to ensure that it is meeting its objectives cost-effectively. Such monitoring
should also identify weaknesses or areas for improvement. Users and
external auditors should be asked for feedback.
It is also important to monitor changes in the financial and technological
environments, particularly the impact of information technology.
Conducting a Records Management Audit

A records management audit should be carried out on financial records at
random intervals two or three times a year. The audit or inspection should
check that records management procedures are understood and are being
carried out consistently. It can be undertaken more frequently where
computerised accounting applications are in use and provide for audit
trails. This audit should be performed by the internal audit unit or by the
records authority.
Audits should check that
the financial records required by law and internal regulations are maintained and
readily accessible
standard disposal actions have been carried out under approved disposal authorities.
Copies of the audit report should be forwarded to the records authority

and to the accountable head of the agency, who should be able to take
responsibility for ensuring that appropriate action is taken on any
recommendations made.
The audit report provides a basis for action where a records problem is
identified. It should be particularly useful to accounting officers, who are
responsible for producing and maintaining financial records, and to the
head of the ministry of finance, who has broad policy responsibility for the
operation of the governments financial and accounting system.
Appraising and Disposing of Financial Records

Despite the introduction of computerisation, the volume of financial
information and records in most organisations continues to grow. The
appropriate and timely disposal of these records is an essential aspect of
managing financial records. Disposal is also at the centre of
accountability. As Chris Hurley, a former Keeper of Public Records in
Victoria, Australia, expressed it:
The statutory regulation of the disposal and treatment of government

records is the foundation, in a democratic society, upon which all other
measures of public and internal scrutiny of the affairs of government
rest.3
These two concerns, the reduction of records holdings and the retention of
records as evidence in support of accountability, need to be reconciled in
the disposal of financial records.
Perhaps more than other types of records, financial records are found in a
range of records systems throughout an organisation. The planning,
appraisal and implementation of the disposal process requires cooperation and co-ordination throughout the organisation to ensure that
audit trails and the evidential qualities of records are maintained while the
volume of records is controlled. Three key points to consider are outlined
below.
3 Quoted in Judith Ellis, ed., Keeping Archives, 2d ed. (Australia: Thorpe, 1993),. p.
191.
The extensive use of forms and the practice of copying of documents in

accounting and financial transactions leads to a high level of duplication of
records. As auditors generally require the original of a document, it is important
to clearly establish which records are duplicates and which copies may be used in
place of originals. For example, is it appropriate for accounting and auditing
purposes to attach supporting documents to a copy of a voucher instead of the
original?
The period of the financial year is also a determining factor in the creation and use
of many financial records. This fact can be used in a positive way to assist in the
disposal process, to trigger action when disposal is required.
Accountable documents, such as licence receipt books, are usually subject to
financial regulations or instructions that provide for their handling and disposal.
Care needs to be taken to identify these and accommodate their accounting
requirements in the records management process.
Appraisal Criteria
Appraisal involves determining those records worthy of ongoing retention
because of their continuing utility or enduring value. The following issues
should be taken into account in the appraisal of financial records.
Legislation and regulations may contain requirements for the retention and
disposal of records. Particularly relevant are laws relating to finance, customs and
excise duties, taxation, pensions, social security, employment and audit. Also
important are statutes concerning evidence and limitations on action for claims.
For example, statutes bearing on retention periods for accounting records may
include the Civil Evidence Act, Value Added Tax Act, Companies Act, Consumer
Protection Act, Data Protection Act, Financial Services Act and the Limitation
Act.
Financial records may provide the creating organisation with valuable
administrative, legal and fiscal evidence. A knowledge of the administrative
context in which the records were created, including an understanding of financial
systems and the functional relationships of records, is required for a proper
assessment of these values.
The records may also provide valuable information of wider research interest. For
example, research into political, economic and social activities has demonstrated a
clear interest in the long-term preservation of financial records.
The cost of retention and the availability of resources should be considered when
appraising records. Cost is a critical factor given the volume of many series of
financial records and the technological support required for electronic records.
The utility of the records must be considered. The utility of records is dependent
on their completeness, accuracy, arrangement, physical condition and
accessibility. These factors are in turn linked to the quality of records
management, including the maintenance and use of financial records by
accounting and finance staff.
Aggregate financial information may provide more information in less space than
other records. Financial records may comprise summaries, consolidated accounts,
annual statements, statistics and reports. Where aggregation has occurred,
consideration should be given as to whether there is a need to retain supporting
documents.
Financial records may be duplicated. The duplication of transaction records is a
common feature of manual or mixed financial record-keeping systems because
of the need to keep different stakeholders informed. Duplicates should be
removed from the system as soon as they are not needed.
Developing Retention Schedules

Developing retention schedules for financial records requires consultation
with and input from key stakeholders, including the accounting authority,
finance departments, the external audit body and the records authority.
Consultation also helps ensure stakeholders comply with the appropriate
financial regulations or accounting instructions relating to retention
periods.
The appraisal process usually results in the development of two kinds of
schedules. General schedules cover financial records in common use
throughout government agencies, frequently referred to as administrative
or housekeeping records.
Administrative records: Records relating to those
general administrative activities common to all
organisations, such as maintenance of resources, care of
the physical plant or other routine office matters. Also
known as housekeeping records.
Functional schedules relate to records created by agencies in the
performance of their own particular function, often called operational
records.
Operational records: Records created for the purpose
of carrying out the core functions of an organisation.
Also known as functional records.
When determining schedules, the following points should be considered.
General disposal schedules should not be overly customised. The advantages of

uniform retention periods for records of the same type that perform the same
function are lost if those schedules are altered too significantly. Further, it
becomes more difficult to monitor the use of the schedule.
The schedules should be clearly laid out and presented in language that is readily
understood by non-records personnel. After all, it is financial personnel, not
records managers, who will be involved in implementing the schedules. Terms
that are familiar and in general use in accounting, audit and finance areas should
be used to describe the records.
The contents of the schedules are arranged by financial system and by record
class, providing appropriate links to functions and statutory requirements.
Triggers for initiating disposal action are required. For financial records, the end
or start of the financial year or completion of audit, or a specified number of years
after those events, are convenient points in the records life to indicate when the
schedule should be applied.
Monitoring the application of the schedules is essential to ensure that disposal
objectives are achieved and that retention periods and disposal decisions are
relevant. Financial policy, the regulatory framework and the accounting system
should also be kept under review to enable the schedules to be updated as
necessary.
Documentation should be kept of all records destroyed or transferred, in order to
maintain the audit trail and enable agencies to account for all their records.
Appendix 1 illustrates a sample retention schedule for accounting records.

The example, taken from the United Kingdom, illustrates the range and
variety of accounting records that may be encountered. The disposal
periods are based upon a detailed analysis of relevant legislation,
accounting practice, audit requirements and user needs.
Every country has different requirements for the disposal periods, and the
terms used to describe the records may also differ from country to country.
Nevertheless, the types of accounting records will be similar, and the list
may at least provide a useful starting point in analysing retention
requirements.
Activity 8
Choose one of the sections shown in the retention schedule in Appendix 1, such as
bank account records or salaries and related records. Consider each type of record
described in the section and write down why you think the retention period given has
been chosen. Can you think of any legal, administrative or financial reasons why the
record has been retained for the time given?
Once you have completed your analysis of the records identified in one section of the
figure, consider the similar records created by your organisation. Write down how
long those same records are kept by your organisation.
Then, examine the similarities and differences between the retention periods given in
the figure and those of your organisation. Are they the same? Where are there any
differences? Can you describe the reason for the differences?
Identifying Financial Records of Archival Value
Among the classes of financial records that should be considered for
retention as archives are
strategic fiscal planning documents
policy and expenditure guidelines
approved published budgets (including supplementary budgets)
public accounts committee reports
audit reports
financial statements and end-of-year accounts
statistical reports
records of exceptional events, activities or transactions, especially when these

events or activities set a precedent.
Activity 9
What criteria is used to appraise financial records in your organisation? Describe the
main criteria and the processes followed. Then, write at least three recommendations
for how you would improve the process of appraising financial records.
Summary
This lesson has considered the implications for managing financial records
in a mixed paper/electronic environment. Financial systems produce both
paper and electronic records. Most of the electronic records do not need
to be kept for long periods. At the moment, it is wise for the records
manager to focus on managing the paper inputs and outputs rather than
trying to preserve electronic records. This lesson has examined the
implications of computerisation and discussed the issues surrounding the
recommendation to care for records in paper form.
This lesson has also looked in more detail at the steps involved in
managing financial records, including
understanding the roles and responsibilities of electronic records managers
clarifying the objectives and general principles of financial records management
determining the criteria for an electronic records system.
The lesson then examined the specific actions that can be taken to
manage financial records in a mixed environment, including
controlling series
identifying financial records
arranging financial records
determining storage and security needs
managing the physical location and movement of records
protecting the electronic record
managing forms
monitoring and reviewing records systems
conducting a records management audit.
It then discussed the issues involved with appraising and disposing of

financial records, including
determining appraisal criteria
developing retention schedules
identifying financial records of archival value.
Study Questions
1
What are the basic questions the records manager needs to be able to answer when
making decisions about records from mixed paper/electronic financial systems?
What are the main principles that provide the basis for managing financial records?
What information is needed to identify and maintain financial records?
What factors does the records manager need to take into account in maintaining
control of the physical movement of financial records?
What are the main issues that must be taken into account when appraising financial
records?
Name four categories of financial records that could be considered for permanent
preservation as archives.
Activities 6-9
Each of these activities is designed to help you compare the information
provided in this lesson with the reality of financial records management in
your organisation. Answer each question to the best of your ability and
focus your attention on understanding current practices and how they are
different from or the same as the practices discussed in this lesson.
APPENDIX 1
ACCOUNTING RECORDS RETENTION

SCHEDULE4
Bank Account Records
TYPE
ITEM
DESCRIPTION
DISPOSAL
Cheques and
associated
records
cheque book/butts for all

accounts
2 years
cancelled cheques
2 years
dishonoured cheques
2 years
fresh cheques
6 years
paid/presented cheques
6 years
stoppage of cheque payment

notices
2 years
record of cheques opened

books
2 years
cheque registers
2 years
record of cheques drawn for

payment
6 years
10
bank deposit books/slips/butts
2 years
11
bank deposit summary sheets;

summaries of daily banking;
cheque schedules
2 years
12
register of cheques lodged for

collection
2 years
13
reconciliation files/sheets
2 years
14
daily list of paid cheques
2 years
15
unpaid cheque records
2 years
16
Bank statements
2 years
17
bank certificates of balance
2 years
18
cash transactions; payment

instructions; deposits;
Disposal action in
line with paper
Bank deposits
Bank
reconciliations
Bank statements
Electronic
banking and
4 United Kingdom Public Record Office, Retention Scheduling: Accounting Records

(London, UK: Public Record Office, 1998).
funds transfer
19
withdrawals
records
audit trails
Retain for the

same period as
the base
transaction record
Expenditure Records
TYPE
ITEM
DESCRIPTION
DISPOSAL
Cash
books/sheets
Expenditure sheets
6 years
Cash books/sheets
6 years
Petty cash
records/books/sheets
2 years
Petty cash receipts
2 years
Postal cash book/sheets;

postage/ courier account/cash
records; register of postage
expenditure; postage paid
record; postage books/sheets
2 years
Summary cash books
2 years
Creditors
Creditors history records;

lists/reports
6 years
Statements
Statements of accounts
outstanding; outstanding
orders
2 years
Statements of accounts
rendered/payable
2 years
10
Copies of extracts and

expenditure dissections
11
Credit note books
2 years
13
Debit note books
2 years
14
Vouchers claims for payment,

purchase orders, requisition for
goods and services, accounts
payable invoices etc
6 years
15
Wages/salaries vouchers
6 years
16
Copies of vouchers
1 year
17
Voucher registers
2 years
18
Voucher registration cards and

payment cards
6 years
19
Voucher summaries
1 year
20
Advice/schedule of vouchers
despatched; delivery notice
1 year
21
Cost cards
2 years
Petty cash
records
Subsidiary
records
Vouchers
Costing records
22
Costing records, dissection

sheets, etc
2 years
Ledger Records
TYPE
ITEM
DESCRIPTION
DISPOSAL
General and
subsidiary
ledgers
General and subsidiary ledgers

produced for the purposes of
preparing certified financial
statements or published
information
6 years
Creditors ledgers
6 years
Other ledgers (contracts, costs,

purchases etc)
2 years
Related records
Audit sheets ledger postings
2 years
Journals
Journals prime records for the

raising of charges
6 years
Journals routine adjustments
Year-end balances,
reconciliations and variations
to support ledger balances and
published accounts
Trial balances
and
reconciliations
2 years
6 years
Salaries and Related Records
TYPE
ITEM
DESCRIPTION
DISPOSAL
Salary records
Employee pay histories
6 years
Salary rates register
When superseded
Salary ledger cards/records
6 years
Copies of salary/wages/payroll
2 years
sheets
Receipts and Revenue Records
TYPE
ITEM
DESCRIPTION
DISPOSAL
Books/butts
Receipt books/butts; office

copies of receipts cashiers,
cash register, fines and costs,
sale of publications, general
receipt books/butts/records
6 years
General remittance
books/records
6 years
Receipt books/records of
imposts (stamp duty, VAT
receipt books, etc)
6 years
Irregular remittance books
2 years
Copies of forms
6 years
Reconciliation sheets
6 years
Audit rolls
2 years
Summaries/analysis records
2 years
Reading books/sheets
2 years
Cashiers records
10
Handover books
2years
Revenue records
11
Revenue cash
books/sheets/records; receipt
cash books/sheets
6 years
12
Daily revenue dissections
1 year
13
Periodical revenue dissections
1 year
14
Copies of invoices/debit notes

rendered on debtors (invoices
paid/unpaid, registers of
invoices, debtors ledgers, etc)
6 years
15
Source documents/records
used for raising of
invoices/debit notes
6 years
16
Copies of invoices and copies

of source documents
2 years
17
Records relating to
unrecoverable revenue, debts
and overpayments (register of
debts written off, register of
refunds, etc)
6 years
Cash registers
Debtors records
and invoices
Debts and
refunds
Stores and Services Records
TYPE
ITEM
DESCRIPTION
DISPOSAL
Stores records
Goods inwards books/records
6 years
Delivery dockets
2 years
Stock/stores control
cards/sheets/records
2 years
Stock/stores issue
registers/records
2 years
Stocktaking sheets/records,
including inventories, stock
reconciliations, stocktake
reports
2 years
Purchase order books/records
6 years
Railway/courier consignment
books/records
2 years
Travel warrants
2 years
Requisition records
2 years
Purchase order
records
Requisition
records
Other Accountable Financial Records
TYPE
ITEM
DESCRIPTION
DISPOSAL
Asset registers
Assets/equipment
registers/records
6 years after
asset or last one
in the register, is
disposed of
Depreciation
registers
Records relating to the

calculation of annual
depreciation
6 years after
asset or last one
in the register, is
disposed of
Financial
statements
Statements/summaries
prepared for inclusion in
quarterly/annual reports
6 years
Periodic financial statements

prepared for management on a
Destroy when
cumulated into
regular basis
quarterly/annual
reports
Ad hoc statements
1 year
LESSON 6
INTEGRATED FINANCIAL MANAGEMENT

SYSTEMS
An integrated financial management system (IFMS)
is a computer-based, inter-related set of sub-systems
used to plan, process and report on financial resources
in a broad spectrum of financial management areas.
Most governments around the world have either implemented an
Integrated Financial Management System (IFMS), or are planning to do so.
In the near future virtually all important government financial records will
be contained in an IMFS, as electronic records, or will be generated by it,
as paper outputs. Within the next decade records managers need to come
to grips with the record keeping implications of IFMS systems or the
national archives will be unable to fulfil its statutory responsibility for
financial records.
In an IFMS, one central database contains all the aggregated data and
facilitates the flow of information between the inter-related system parts.
A transaction is entered once when it is processed, and then the
information is aggregated and expressed in various reporting formats.
Information about the transaction can thus be shared throughout the
system.
Integrated financial systems are most commonly used for budgeting,
accounting, cash management and debt management. As governments
around the world begin to introduce integrated financial management
systems, it is important that records managers should become acquainted
with the concepts involved so that they can contribute to the planning
process.
There is another significant reason why records managers and archivists
should be interested in IFMS systems. An increasing proportion of
financial management processes within IFMS systems are conducted in a
wholly electronic environment. Because IFMS software developed in the
private sector does not meet public sector accountability requirements, it
is not possible to use off the shelf software. Instead the software must be
specially designed or adapted when it is first introduced and again when it
is subsequently upgraded.
This need to create special software for integrated financial management

makes it more difficult to manage information and records. In particular, it
is more difficult to migrate information to new computer systems, since
the old and new systems may not be easily compatible. Records
managers and archivists therefore have reason to be concerned that the
official record will be distorted. This issue is explored in greater depth
later in this lesson in the section on electronic systems and records.
Figure 12 below illustrates the complex nature of the relationships and
information flows between the financial management functions, main
information systems and stakeholders.
Financial management system boundaries
Project
appraisal
Planning
system
Medium term
plans, e.g. three
year rolling plans
Resource
allocation
Annual budgets
Development,
recurrent and
revenue
Expenditure
review
Liquidity
management
Public expenditure
review
Information technology
A core tool of integration
Fund release
procedure, e.g...
warranting
Accountability
Expenditure
control
Project moitoring
Audit system
Post event
review
Reports and
financial statements
National
economy
Government
policy
International
donors
organisations
Monitoring
& controlling
Stakeholder
groups
Accounting for
revenue and
expenditure
State
enterprises
Other State
institutions
Figure 12: Financial Management System Boundaries

From Michael Parry, Integrated Financial Management Training Workshop on Government Budgeting
in Developing Countries, December 1997, p. 7.
There are many ways of implementing an IFMS. No two systems will be

the same. Some of the major variables include
the number of sub-systems integrated
the degree of centralisation or decentralisation embedded in the design and

operation of the system
the delegation of responsibility and accountability
the type of technological infrastructure.
An IFMS should be tailored to the needs of the organisational unit or group

of organisational units for which it is developed. The key point to grasp is
that an IFMS is an electronic record keeping system. As with other
electronic record keeping systems, the records manager needs to be
involved in the design stage in order to ensure that records management
requirements are incorporated into the system. Attempts to ensure that
these requirements are added later are likely to prove costly or even
impossible. The records manager must understand who are the
stakeholders, why IFMS systems are needed, what they do and in broad
terms how they work in order to make a useful contribution to the design
team. The following sections provides this necessary context.
Major Stakeholders
The stakeholders in public sector financial management were discussed in
Lesson 2. Their roles in the government-wide adoption of IFMS must also
be considered.
The Legislature
IFMS systems make it possible to provide the legislature with improved
factual information, thus enabling a better understanding of the
governments choices for the allocation of resources.
Ministry of Finance and the Accountant Generals Department
The Accountant General, who usually reports to the ministry in charge of
finance, is responsible for establishing and operating the uniform chart of
accounts, the single bank account and the appropriate linkages from
departmental systems into the single centralised database. He or she is
responsible to the legislature for the preparation of reports that reflect the
state of financial management across government. Typically annual
accounts are presented to the legislature every year, although in some
countries, long delays occur before the presentation of final audited
accounts. Examples of these types of whole-of-government reports
include
the statement of revenues and expenses, which shows the financial performance
over the year
the statement of assets and liabilities, which shows the financial position at the
end of the period
the statement of cash flows, which shows how government has financed its
activities.
The ministry of finance is also often responsible for public debt

management. In that role, it requires information on individual loans, their
terms, due dates and interest. Using the IFMS capacity, individual
transactions that service the debt can be accounted for centrally and
reconciled with information about the types of loans involved.
Heads of Agencies
Many IFMS projects decentralise responsibility and accountability for
financial management to heads of agencies. The responsibilities are
usually specified in the financial frameworks approved by the legislature
and developed in policies and procedures issued by the ministry of
finance. The head of the agency can devolve responsibility to chief
financial officers and individual project or programme managers.
At the agency level, IFMS systems must be able to supply data to the
centralised database but still enable sufficient reporting and monitoring to
ensure that the responsibilities and accountabilities are appropriately
fulfilled. Many IFMS implementations include components that are tailored
to the management of departments and correspond to the central
components of budget, accounting, cash management and debt
management. Sometimes departments have quite separate financial
management systems, which report their transactions up to the
centralised database for consolidation into whole-of-government accounts.
Auditor General
The Auditor General is responsible for reviewing and forming an opinion on
the accuracy of the accounts produced by the government and its
departments. Audited financial results are usually required for every
department in addition to the government's own audited financial
statements that are often tabled in Parliament. The auditor must be
assured that the systems that produced the data are accurate, reliable
and complete. The issues of auditing an electronic system have given rise
to a specialised branch of the audit profession known as EDP (electronic
data processing) auditors.
Internal Auditors
Internal auditors work with management in an IFMS to ensure that internal
controls are appropriate and that the systems are operating as they are
intended. They also check that the financial information generated by the
system is correct, that applicable rules and regulations are appropriate
and that there is compliance.
Individual Departmental Staff
An IFMS is about distributing responsibility and accountability for financial
action out to the operating environment, where the transactions happen.
The availability of timely information reflecting status of programmes and
budgets improves the capacity of individual managers to make
appropriate decisions and gives them a greater degree of responsibility.

Using the IFMS as a monitoring system and a managerial tool requires
significant training and sometimes adjustment.
Civil Society
Citizens benefit from the reforms introduced by IFMS by greatly improved
transparency in government operations. Better information is available on
the performance of the government as a whole
the performance of specific agencies serving the government
the goods and services produced by agencies for government
the resources administered by agencies on behalf of the government.
Moreover, the fact that many stakeholders can easily obtain up-to-date
information should encourage greater transparency and help to
discourage corrupt practices.
Why Are Integrated Financial Management Systems

So Attractive?
IFMS systems enhance the efficiency, accountability and transparency of
financial management functions; they also introduce accountability to
programme areas. In particular, an IFMS can
improve the quality of decision making regarding the use of financial resources
make financial consequences of decisions more apparent
provide financial information that is timely, reliable and relevant.
The various components of the IFMS support these goals by doing the
following.
An IFMS integrates budgeting estimates with accounting data, in order to track

the progress of projects.
It aggregates financial information and uses this data to produce financial
snapshots of the organisation.
It combines information from various departments across government to produce
institutional profiles of spending on particular types of activity.
It improves cash management in order to
improve cash flows and forecasts
reduce borrowing costs
increase investment income
assure the availability of funds when needed
facilitate payment of bills.
It improves public debt management in order to
ensure that money is not borrowed before it is needed
make it possible to offset foreign exchange risks more completely
give policy makers a clearer picture of liability.
It enables the production and reporting of timely and accurate financial

information, thus improving the confidence of creditors that the government or
organisation is able to pay bills on a timely basis.
For many countries, implementing an IFMS at a national level involves a

major review of the financial management infrastructure. Public finance
management is very complex, and significant effort in terms of design,
negotiation and political will is involved if reforms are to be achieved.
Such reforms are supported by the international financial institutions such
as the World Bank and the International Monetary Fund.
IFMS Systems and Technical Problems

The very nature of IFMS software brings with it high risks in preserving
records over time, as indicated in the introduction to this lesson. There is
a significant difference between public sector and commercial financial
management in that in the public sector, for reasons of accountability, it is
necessary to track expenditure through its various stages, as illustrated in
Figure 13 below.
Time
Medium
term
financial
plan
Annual
budget
Supplementary budgets
Budget
transfers
(virements)
Financial planning and budget system
Expenditure
warranted
Fund control
system
Purchase
order
issued
Commitment
accounting
Invoice
from
supplier
Accrual
accounting
P ayment
Cash
accounting
Figure 13: Stages of Expenditure

From Michael Parry, Integrated Financial Management Training Workshop on Government Budgeting
in Developing Countries, December 1997, p 9.
This means that it is not possible to buy off the shelf commercial
software, and specially adapted software must be developed. Moreover,
whereas commercial software is regularly upgraded, with the capacity to
migrate data from one version to the next, IFMS systems in the public
sector must be replaced by custom built systems each time there is an
upgrade. This can make it very difficult to migrate the data, and over time
data held on the old system may become impossible to read.
The principles of managing electronic records are
examined in Managing Electronic Records.
Activity 10
Find out if the civil service in your country has developed or is considering
developing an IFMS. If so, what reasons have been identified for developing such a
system? If not, explain if you think such a system could and should be instituted and
why or why not.
Functions of an IFMS
An IFMS may encompass a number of sub-systems. Exactly how many
sub-systems are linked will vary, but the core components usually
managed by sub-systems include
budgeting
accounting
cash management
debt management.
Other components that might be integrated into an IFMS include
asset management
personnel management
procurement.
Each of these components is discussed below.

The way the IFMS handles these individual functions is very similar to
individual computerised systems described in other sections. The main
difference is that data is entered only once and then is reused as
appropriate. For example, both the personnel system and the payroll
system needs to store information about staff members names. In
addition to saving staff time re-entering data, the other big advantage is
to ensure that information remains consistent. Thus if a woman marries
and changes her name, in an integrated system, the name has only to be
amended once. Where the systems are separate, it is possible for one
system to be updated and the other to be neglected, which can cause
confusion and double reporting.
Budgeting
Budgeting involves planning for, implementing and evaluating policies,
activities and programmes. Budgeting can be done for the whole of
government or for individual units of the larger organisation. As a
management tool, budgeting it is a way of monitoring expenditure to
ensure that activities stay within budget. Budgeting also acts as a major
performance indicator of how efficiently and effectively government funds
are being used.
An IFMS allows the organisation to formulate a budget, execute actions
against that budget, reprogramme activities to accommodate changes in
the amount of money available and evaluate the success of the budget at
the end of the time. An IFMS also allows the organisation to decentralise
budgeting down to the operating areas of departments, where
responsibility for delivering services and products of government is
located. Providing greater local control over budgeting is key to obtaining

greater accountability for government services. If the organisation can
receive timely reports of expenditure against budget expectations, it can
manage its finances and performance much more effectively. With this
degree of internal performance monitoring, it is possible to delegate
authority for a greater number of tasks.
The budgeting component feeds into the accounting component in that
the accounting system reports against the budget estimate. The reporting
capacity needs to be closely linked to budgeting to provide the type of
reports required for decision making and monitoring.
Accounting
The accounting component of the IFMS records and integrates the results
of the individual financial transactions that occur daily, thus providing the
basic data for other components of the system.
The accounting system allocates financial transactions against the agreed
chart of accounts, which is based on the budgeting process. IFMS systems
then allow comparison across agencies and programme types.
In an IFMS, reporting can be ad hoc or it can be structured to produce
standardised reports. A fully operational IFMS allows programme
managers to obtain information electronically about their programme and
to structure reports to meet their own requirements. Standardised reports
such as balance sheets, statements of operations and cash flow
statements can also be produced automatically at various levels of
aggregation, such as by department or for the whole government.
Internal reports, such as comparison of actual expenses to budget
estimates, can be fed back into the budget planning process. These
accounting reports can be updated rapidly to reflect transactions
undertaken and allow informed decision making.
Cash Management
Cash management within an IFMS is about managing the flow of public
sector resources in ways that minimise costs and maximise effectiveness.
This is a change from the traditional view that saw the cash management
function as just involving the payment of bills. The IFMS enables active
monitoring of the cash reserves of government and helps to ensure that
the resources are consolidated and managed so that they are available for
distribution as required.
A major benefit of this cash management is the capacity to produce cash
flow projections based on the expected receipts and expenditures. Thus it
is possible to ensure that funds are available when required and that cash
is not left idle but earns appropriate interest.
The cash management function is closely aligned to the budget function.
The budget provides the master plan for spending. Linked to the cash
management function, the budget provides the data for the cash flow
projection that then determines when and in what form money will be
available for expenditure. Certain priorities for expenditure are agreed by
policy makers and authorisations for payments are assigned. The
accounting function provides feedback to the cash management system
about actual expenses and what remains to be paid, as well as what has
been collected. Similarly, there is a close relationship between cash
management and public debt management; the public debt system
provides resources to cash management and also makes demands in
terms of loan repayments.
Public Debt Management
The need to manage public debt appropriately became starkly apparent in
the 1980s when many countries were thrown into crisis because of heavy
and unsustainable debt burdens. Some countries did not know how much
they owed or to whom. Debt financing is a complex issue involving
multiple currencies, variable interest rates, syndicated debt (ie borrowing
from a group of banks who spread the risk among several financial
institutions), restructuring of debt and debt swaps. Dealing with such
complex concerns requires highly trained staff. Significant attention was
paid to this problem by the world funding bodies and various independent
pieces of software to manage debt were developed.
Debt management is a concern of the central government department
responsible for financial management. However debt management has an
integral relationship with the IFMS system as it often provides the budget
resources to carry out such capital intensive programmes. Working out
what money is due for repayment and when needs to be built into the
budget planning and cash flow projections to ensure that funds are
available and that penalties for late payment are not incurred. The actual
payment takes place in the cash management system. The accounting
function records the transactions that reduce or increase debt, reports on
the debt transactions and provides consolidated reports on debt liabilities.
Other Components of an IFMS System
In addition to core components, and IFMS system can have other
components for related functions. For example, personnel systems, which
involve the administration of payroll or pensions, have an impact on the
financial management function. Sometimes a personnel management
component will be found within the IFMS. In other cases, the personnel
function will be managed separately but there will be a process for feeding
appropriate information into the finance system. Similarly, asset
management systems supply data to financial systems concerning
depreciation and commitment of funds.
The potential scope of an IFMS is shown in Figure 14: Scope of an IFMS.
This figure is from PREM Network, Public Expenditure Handbook, The World
Bank, June 1998, p. 64.
Function
Agencies
Macro
Central
Paying/Rec
MOF
Audit
Planning
Ministry of Finance
Economic
Forecasting
Regional
Government Spending
Public
Revenue Coll.
Arrows show information flows. Full lines indicate electronic flows, dotted lines,
paper based flows
Legen
d
Systems for Macro-Economic Forecasting
Key Information Systems Modules for GFM

Investment
Spending
Agency Bud.
Prep. Systems
Current
Macro-Economic Framework
Data on
previous
and
current
Budget Guidelines
Budget
Guidelines
Systems for Budget

Preparation
Budget
Proposals
Tax
System
s
(policy)
Pub. Enterprise
Bud Prep
Systems
Customs
Systems
(policy)
Feed
back
from
Audit to
various
Receipts
Historical
& Base
line data
on
Budget
Preparation
Investment
Current
Budget
Estimates
Budget Figures
Budget
Budget Appropriations
Approved Bills
Budget
Execution,
Accounting
and Fiscal
Reporting
Budget Appr.
Systems for Budget

Execution and Fiscal
Reporting
Est. of
Borrowings and
Public Debt
Interest
Systems
for
Monitoring
Investment
Notifications to Line Agencies
Expenditure
Systems
for
Monitoring
Public
Core
Government
Accounting
System
Cash Requirements
Cash
Managemen
t
Debt
Managemen
t
Cash
Mgmt
Systems
Borrowing
Requirements
Debt Management Systems

Domestic
Foreign
Foreign
Assistance
Coordinator
Cash/Expend figures
Revenue Receipts
Post control
Bank Reconciliation
Paying
Receivin
g Bank
SystemsSystems
for
Auditing
Returns on key indicators from Public

Input to Audit Systems from
Enterprise
Cash Allocations
Foreign Assistance Utilization (on

investment projects)
Foreign Assistance
Disbursements
Systems
for Post
Manageme
nt
Payment
s
Spending
Agency
Investment
Projects
Debt Service Payments/Loan

receipts
Authorised
posts
Pub.
Enterprise
Bud Exec
Systems
Financial Information on
agency programs and
Physical Data on
Projects
Financial Data on
projects
Spending
Agency Bud.
Exec. Syst.
Payroll &
Pension
Systems
Pers.
Action
s
Systems
for Post
Manageme
nt
Tax
Admins.
Systems
Custom
s
Admins.
Systems
Key Features of an IFMS

Traditionally governments have tended to regard the various sub-systems
within financial management as being largely separate systems, within
separate ministries or departments, carried out by persons with different
skills.
An IFMS involves more than one organisational unit. It might be
government-wide, in which case all of the departments of state and other
organisations that contribute to the governments finances would be
included. Alternately, the IFMS might serve the whole of a local authority,
where it could cover the individual departments as well as the
independent services.
In linking the sub-systems together, the IFMS should include as a minimum
a uniform classification of accounts
an identified and cohesive legislative framework
a standard set of rules and definitions
one bank account.
These features are discussed in greater detail below.

Uniform Classification of Accounts
A uniform classification of accounts, or uniform chart of accounts, ensures
that budgeting and accounting are co-ordinated, or that reporting is
carried out against items in the budget. This extract from a chart of
accounts illustrates the principle.
Group
Account
CHECKING
1000
CASH
Sub Account
1001
BANK
1010
CASH
1050
1055
MY SAVNGS #1
1060
MY SAVINGS #2
Figure 15: Chart of Accounts
This classification system will be determined by the Accountant General or

the official with overall responsibility for the accounting function.
Classification of accounts can be developed in layers (nested) to meet the
needs of different users. At the whole-of-government level, higher layers
of aggregated data will be needed to meet the requirements of the
parliament and external investors. At the policy-making level a different
layer of categorisation may be needed, and within operational levels a far
greater degree of breakdown will be necessary. As long as these
categories can be aggregated up into the higher categories, the detail
required can be specified to suit operational needs.
Standard and Consistent Legislative Framework
Any financial management system, whether paper or electronic, requires a
standard and consistent legislative or regulatory framework. Each country
will have its own specific legislation that identifies the broad framework
within which government agencies operate. Such legislation identifies the
responsibilities and accountabilities of the various officers of government
and defines the measures of compliance. The package of legislation that
sets the framework for the operation of the system will include a number
of specific laws.
The legislation will define responsibilities for major financial functions such
as budgeting, accounting, cash management, debt management and
reporting and define the types of agencies that are subject to the
provisions specified. Legislation might also address the organisation of
different types of government agencies and the process of reviewing and
monitoring government functions. (This last function usually takes place
in the office of the Auditor General.) For example, it will state whether or
not government-owned businesses and local government authorities are
covered by audit or accountability requirements. It will also identify key
reporting requirements for the agencies covered, and it will define internal
and external audit functions. Relevant legislation might refer to the
governments financial management and accountability to the public.
Standard Set of Rules and Definitions
As the information from financial management systems will be aggregated
to meet different user needs, standards and rules for the development,
maintenance and use of an IFMS must be set centrally so that they will
apply across all the parts using the system. International accounting
standards are now being established by international bodies to allow
comparisons across systems.
One Bank Account
Within an IFMS, all transactions and monies must flow through a single
bank account. This account is usually established at the countrys central
bank, and all revenue collection is consolidated into this account. There
may be any number of sub-accounts established for individual agencies or
programmes, but the IFMS systems sweep the sub accounts daily and
aggregate the transactions into the central account. The use of a single
account enables the central finance unit of government to manage the
cash for the whole entity and manage the overall finances.
Other Basic Issues to Consider

When analysing an IFMS, the following issues should also be considered.
Centralisation and Decentralisation of Responsibilities
Most IFMS are based on the principle that controls and standards are set
centrally and their execution or operation is decentralised. There are
many ways to achieve this division between centralised and decentralised
management. Decentralising responsibility for the financial management
to departmental heads and the heads of budgetary units helps them to
monitor and manage more closely the finances for which they are
responsible. But with this devolution of responsibility goes greater
accountability. All parts of the government need to comply with
procedures and policies related to reporting and managing performance.
Technology
Technology has made the concept of IFMS practical to implement. Data
entry takes place at the place the transactions occur and then rolls
through the various parts of the application updating accounting reports
against budget estimates and aggregating across units and finally across
departments, to provide a whole picture of government expenditure. With
the powerful distributed computing capacity now available, data can be
fed from departments to a centralised database, which is usually located
at the ministry of finance.
Within the IFMS framework, there are many ways of providing the
necessary integration of both hardware and software. Systems can
operate as independent units, they can be centralised or they can
operated in distributed database environments.
Centralisation and Decentralisation of Usage
In older systems, government agencies typically provided the central
department with details of cash commitment and expenditure details
along with claims for payment using paper-based forms. This information
was then keyed into the central computer to update records. The central
agency then provided individual agencies with extensive paper reports

from the system on their budgets, expenditure and available funds. In
newer systems, the individual departments are able to enter their own
data directly into the central system. The database is physically controlled
and located with the central agency, although departments can access the
data and enter their transactions into the central system via tailored
computer screens.
Distributed Databases
In this technology configuration, a core system is implemented in the
central finance ministry linked to feeder databases operated by line
ministries. Because the database is distributed, different users can access
it without interfering with one another. However, the central database
management system (DBMS) must periodically synchronise the scattered
databases to make sure they all have consistent data.
Independent Units
In this approach, the ministry of finance allows each line ministry to design
its own system, providing it meets certain standards for interfaces and
reporting requirements. The use of these standards makes it possible for
the line ministries to feed information by diskette or other means into the
central system operated by the ministry of finance.
Records Generated from IFMS

Because IFMS systems vary so much, it is not possible to identify specific
types of records generated. In general, the record-keeping requirements
of the IFMS will be largely the same as the requirements for any paper
based system. Automating processes does not change the fundamental
principles of what records are needed and where they are required to be
kept.
The information contained in a record kept in a computerised system is
generally the same as would be contained in a manual system. For
example, the report of the general ledger will be very similar in
appearance to a traditional general ledger report. The main difference is
that in some IFMS systems the user is given on-line information on the
status of a transaction throughout the entire process. It is claimed that
that the ability of many stakeholders to easily obtain up-to-date
information increases transparency and discourages corrupt practices.
The key to working out the record-keeping requirements in integrated
financial management systems is understanding the layers of
responsibility and accountability specified in the way the system is
designed and set up. The delegation of responsibility for action and
accountability will dictate where the record-keeping responsibilities lie.

The financial management framework will identify what responsibilities are
delegated and to whom. Records reflecting the conduct of the delegated
responsibilities will need to be maintained at the point that the actions
take place.
IFMS Framework Data
The framework (ie the basic design and structure), standards, rules, policy,
procedures and manuals that surround the IFMS specify and define the
system. Therefore, it is important to preserve those records that detail the
process of designing and establishing the IFMS. Moreover, records
assigning financial responsibility and accountability are crucial to working
out who is authorised to conduct certain transactions. Delegations and
authorisations are critical records for the operating of a financial system,
but these will often not be found in the system itself.
Maintaining records about the rules and assumptions built into the system
will be crucial. These records include documents about accounting
standards, policies and procedures. Audit reports on the management,
performance and operational aspects of the system produced by internal
auditors should be kept for periods of between five to seven years. Again,
these types of records will not reside in the financial system itself.
Framework Documents within the System
Basic control records which provide the framework for the system
operation will also need to be kept. A key record is the uniform
classification of accounts. This determines the allocation of categories to
transactions and is a critical operational control record.
Formal reports can be specified for the system. The formal reports that
are used as a basis for decision making should be treated as records and
maintained in ways that protect their integrity. To achieve this within
electronic systems can be complex, as the nature of the integrated system
is such that data is constantly being updated. Often the report needs to
be frozen or made tamper-proof. Working out which reports need to be
managed in this way can be done in conjunction with an auditor. Any
reports that are formally transmitted through a management chain would
be likely to fall in this category. All formal statements, such as the
departments annual financial statements and anything which is formally
audited and signed off by an auditor, would also need to comply.
Base Transaction Data
The accounting component of an IFMS deals with the recording and
categorisation of transactions, so it is here that the base records of the
transaction are to be found. At the initial entry level, the requirement is to

record and explain all transactions in sufficient detail that the transaction
can be understood. This will involve recording the date, the amount and
the character of the transaction. The recording of initial transactions will
usually take place at the budgetary unit level, and it is here that the
responsibility for maintaining an adequate record of the transaction lies.
The process of reconciliation, which ensures that the individual entries
balance with the totals recorded in the system, takes place within the
system. Reconciliations of transactions usually take place at a set time:
the end of the day, the end of a shift work period, weekly, monthly etc.
The transactions and the reconciliations together provide a complete
picture of the financial activities for the set period. Reconciliations occur
throughout the system and may be the responsibility of the budgetary
unit, the finance section of a department, or the central Ministry.
Aggregations of transactions take place in those parts of the system that
produce ledgers, journals and financial statements. These are summary
records of the individual transactions with various degrees of specificity.
The ledger contains summary details about each transaction. Journals
record variations in the ledger. Financial statements are summaries of the
ledgers and journals reporting on financial transactions against specified
categories at various time periods (such as monthly, quarterly and so on).
By studying the specification of responsibility and accountability for the
system it will be possible to identify responsibility for record keeping. It
may be at the level of the budgetary unit, or may be at the level of the
department.
The major point of record keeping in any financial system is the point of
entry of data into the system. The data reflecting the transaction must
explain the transaction and be accurate. This general rule applies to any
points of data entry into the IFMS.
Audit Trails
Audit trails are essentially no more than a chronological log of every
transaction that happens within a system. In other words these are
electronic records generated by the system that are essential for
demonstrating that the system has integrity. They ensure that transaction
records the system produces are complete, accurate and authorised.
Reconstructing the path of a transaction using these trails is very time
consuming, but possible. Audit trails allow a transaction to be traced
through a system forward to its ultimate destination and backwards to
relevant source transactions. More sophisticated logging techniques also
record who had access to the system at a particular time, what data was
viewed in addition to the normal logging, and what data was added,
deleted or changed.
Event logging is a common computing protection technique. In large
systems, these logs create very big files. This data can easily be
segregated by time chunks (daily, weekly, monthly) and stored in back up
or archive systems. Typically these logs are not kept beyond the time it
takes to audit the annual accounts.
Legal and Audit Issues

An IFMS is a record keeping system. The system is consistent with the
archival principle that the records of an organisation are different in
quality from literary manuscripts because they arise from the regular
business of an organisation. These records have been created by staff
following procedures that are reinforced by a variety of controls that
ensures their completeness, accuracy and authenticity. The archival
principle of continuous custody is important because it guarantees that
this system of control has not been broken. In the world of electronic
records, the traditional techniques for achieving these guarantees are
harder to apply. Auditors and lawyers are the professions that have a
particular concern for ensuring that financial records complete, authentic,
authorised and admissible in a court of law. Archivists and records
managers need to understand the legal and audit issues in order to ensure
that the financial records generated by an IFMS meet the needs of the
government, management and the public.
There are few precedents that address the admissibility of computer
records in a court of law. Where computer evidence has been submitted in
legal cases the courts have taken into account expert evidence on the
effectiveness of the IT control environment before assessing the reliability
of the computer data. Computerised transactions or images of documents
may be inadmissible as legal evidence unless controls can be shown to be
so strong as to remove reasonable doubt about the authenticity and
integrity of data held by the system. Some of these controls are recorded
on paper. It is therefore important that both the electronic records and the
paper records that document the control environment are managed
properly.
Because of the integrated nature of an IFMS (that is, data is entered once
and rolls through the system according to a pre-programmed route), the
controls on the system itself are critical. To be able to verify that the
information which is accumulated, aggregated or moved within the system
itself, is accurate and reliable, it is essential to ensure that the system is
reliable and that it is doing what it is supposed to do. Some of the
auditing controls used to verify this are
access controls: controls over access to the computer system by some form of
identity recognition, such as password, card system, personal identification
number and so on
input and output controls: controls which ensure the accuracy and security of the
information received and transmitted
processing controls: controls which protect and ensure the integrity of the
information processed by the system
back-up controls: controls that guarantee the retention of back-up copies of

computer files, computer programs and the recovery of computer records in case
of system failure.
Auditors also need assurance that the system is understood by the staff
who use it and that it is operating effectively. It is essential that records
are available to explain the basic aspects of the system operation,
including
the operation of the various components of the system
the controls built into the system
the flow of data from input to output
details of file organisation and controls
details of record content, context and structure
the program logic
audit trails or logs of records added, deleted and amended that relate to the system
disaster recovery procedures.
Records must be available to allow an auditor to understand:
the access controls on who is permitted to access and alter data
procedures for monitoring access
all changes or upgrades to the software and hardware employed
migration of data which may have taken place across either software or hardware
back-up procedures and procedures for compliance.
Summary
Integrated financial management systems are being introduced world
wide. They are sophisticated computer systems which greatly increase
the transparency of and accountability for government information. There
are many ways of implementing IFMS, but each implementation should
include
budgeting
accounting
cash management
debt management.
Some of the key issues involved are:
standards and rule setting are centralised, while the actual operations of the system
are decentralised to where the business of government is actually being done
transaction information is recorded once at the point closest to where the
transaction takes place and then aggregated and accumulated from that point into
centralised systems
responsibility and accountability are distributed for management of programmes,
activities and units out to the people doing the work by providing timely, reliable
accurate and complete information systems against which to monitor performance.
Because of the many variations in ways of implementing IFMS it is difficult

to determine precisely which records should be kept. Some of the general
rules that will assist in determining specific record keeping responsibilities
are
records should be aligned to responsibilities and accountabilities determined in the

framework structures
framework documents that support the design and processes of the IFMS will be
critical records
many of these records will live outside the IFMS system
policies, procedures, manuals will be important records
controls on access, inputs and outputs, processes and back ups will be needed for
audit purposes
documenting the system and its operating environment is crucial to proving that
the system operated as it was intended.
Study Questions
1
Who are the main stakeholders in an IFMS system?
How do these stakeholders differ from the stakeholders in a traditional mixed

paper/electronic system?
What are the main variables that determine the way an IFMS is implemented?
Where are the main advantages of an IFMS system for government financial
managers?
Why doe the electronic records of an IFMS system present several problems for
public sector records managers?
What are the core sub-systems that are found in most IFMS systems?
What other sub-systems might be added?
List the four features that are generally considered as the minimum required for an
IFMS system?
What is the main advantage that an IFMS system provides in handling data? Why
can this only be achieved in an integrated system?
10 Why is it necessary to understand the various controls that must be applied to an

IFMS system?
11 List the four auditing controls used to verify that the information is accurate and
reliable.
12 What records need to be kept to document the basic aspects of systems operation?
Activity 10
This activity will help you examine the situation in your country and
compare it with the suggestions and ideas outlined in this module. Read
through this lesson carefully once you have completed the activity and
compare your findings.
LESSON 7
WHAT TO DO NEXT?
This module has examined the management of financial records. It has addressed
the importance of good record keeping for efficient and effective financial
management, and it has outlined the role and importance of stakeholders in
financial records management. It also explained the business functions and
processes of financial management, in relation to the records generated and
examined the information systems and records created by financial management
functions. It considered how to manage financial records in a mixed
paper/electronic records environment and introduced the concepts involved with
integrated financial management systems.
Establishing priorities for action

This module has introduced key activities in the management of current and semicurrent financial records within the public sector. But which tasks should you
undertake first? Which are high-priority and which are low? Each institution will
make different decisions based upon:
the state of record-keeping systems
the state of preparedness and training of the records staff
the appropriateness of the legislative and regulatory framework
the governments priorities for managing the financial function.
The latter is particularly important records management is there to serve the

wider priorities of the organisation, not the other way round. However, it is possible
to offer some recommendations for action, which will help organisations manage
their financial records more efficiently. Complete the activity below then consider
the suggestions offered here.
Activity 11
Based on the work you did throughout this module, identify the priorities you would establish to
establish or improve the financial records management system in your organisation.
Priority 1: Assess the Existing Situation
Almost any change to the existing systems needs to be based on a solid

understanding of functions, processes and user requirements. It is also vital to
develop a good understanding of the present state of the records. Existing record
systems should be surveyed to identify strengths and weaknesses. This should
cover
the legal and regulatory framework
organisational structures and training for records specialists
policies, procedures and guidelines
the completeness of the records inventory and retention schedules
vital records and disaster recovery arrangements
records storage
security of access, including physical security.
One of the key facts to establish is whether problems are widespread or whether
they are concentrated in one or two administrative units. The former would suggest
problems with the overall framework in which the record system is operating; here a
strategic approach may be most effective. The latter might suggest that a more
limited and focused approach would be more appropriate.
Priority 2: Analyse the Information Flows
An analysis of the way information flows within the organisation and between
organisations will identify unnecessary duplication, sometimes because it is simply
not needed and sometimes because the activity it supports is no longer meaningful
activities. The analysis will also assist in identifying the boundaries of the record
keeping system and its main stakeholders (see Lesson 4). This is important
because it is easy to define the boundaries of the system too narrowly and then run
into problems later. Lessons 3 and 4 identify the main functions, processes,
information systems, records and stakeholders and may assist in this analysis. The
analysis may be represented in a simple flow chart or it may result in a much more
detailed set of diagrams and descriptive text depending upon the need. As a
general rule, wholly manual systems require rather less intensive analysis because
manual systems are much more tolerant of imprecision and unwritten rules than
automated systems. The techniques outlined in the Analysing Business Systems
Module provide an appropriate methodology.
Priority 3: Identify the Stakeholders and the Organisations Policy Objectives
Stakeholders will be able to provide valuable information about whether a policy is
really going to be implemented, whether it has had to be modified in the light of
events and whether large automation projects are being considered. Financial
management is a dynamic area, and priorities can change rapidly. Stakeholders (eg
auditors or accountants) will also be able to provide information about problems
they are experiencing or which they anticipate for the future. For example, do they
experience delays in obtaining the information they need? Do they consult the
records at all? If not, why not? A questionnaire can provide a useful way of
gathering information it should usually be supplemented by interviews.
See Restructuring Current Records Systems: A Procedures
Manual for a methodology for information gathering.
It is also important to identify the organisations policy objectives for financial
management before determining a plan of action. There are likely to be policy
statements and planning documents on the governments objectives for the
ministry of finance as well as policy documents specifically on financial
management issues. Business plans, where they exist, usually have implications for
the management of finance, and this in turn has implications for the management
of financial records. For example, if the civil service changes the approach to
budgeting or accounting, these will all have implications for the management of
financial records.
Financial management is an area that readily lends itself to computerisation. Many
countries are in the process of automating processes that were hitherto largely
paper based systems, or integrating hitherto separate computerised systems into
integrated financial management systems. The records manager should be in a
position to support this process by providing an electronic records management
service if required.
It is important to remember that different stakeholders will have differing and
sometimes conflicting objectives and priorities. If there are existing automated
financial management systems, or plans to introduce them, the IT department will
also be a stakeholder with its own agenda, as well as being a service provider.
Priority 4: Stabilise Existing Record-keeping Systems
The information gathering exercise should make it possible to decide where best to
direct the financial records improvement programme. It is advisable to stabilise the
existing system for managing paper records as much as possible before attempting
to introduce automated systems.
One of the most common problems in neglected records systems is that they are
congested with vouchers, output data, files and other records that are not required
on a daily basis. In such conditions it is almost impossible to provide the
information that financial managers and auditors need.
A significant step forward will be achieved by identifying and physically removing
from the system those records that have not been used for a designated period of
time which could be, for instance, ten years. Moving the inactive records physically
out of the storage areas will relieve the congestion problem. If these records are
still needed, they must be transferred to secure, low cost storage provided by the
organisation or maintained as a central facility, in a systematic manner.
Managing Records in Record Centres describes the process of
transferring records to storage in logical and ordered ways.
Where the intent is to introduce computerisation, the phasing of the decongestion
exercise should be timed to coincide and support the development of the electronic
system.
Once the inactive records are housed securely, it will be possible to restore a logical
order to the active records. See the manual on restructuring records systems.
Priority 5: Plan Improvements
Having gathered relevant information and stabilised or repaired the existing
systems, improvements can be carefully planned based on:
the strengths and weaknesses of the existing system
how information flows within the system
what the main stakeholders think about the service being offered
what the stakeholders want to achieve in the area of financial management and what they
intend to change
whether there are plans for automating financial management information systems that will
have an impact upon records management.
At this stage it will be possible to examine possible technological solutions to

support the objectives of the stakeholders and the organisation as a whole.
Although technology is important, it should come last in the planning.
When the planned improvements are finally implemented they are likely to gain
support and be successful because:
users have been consulted
it is possible to demonstrate where problems are occurring and why
it is possible to demonstrate that the changes proposed will bring concrete benefits to
financial management.
Priority 6: Encourage Better Records Management Practices

Before any sustainable progress can be made, it is necessary to establish the
principle that all records, both paper and electronic are to be considered part of the
organisations records management regime. This should not undermine the
authority of any of the stakeholders nor contradict the rules established in the
financial instructions or the accounting manual. It may be necessary to spend some
time with stakeholders to explain the role of the records manager, the benefits
records management can bring to an organisation and the means by which records
management controls reinforce accounting and audit controls.
Training is essential to achieving improvements. Senior managers need to be
sensitised to the issues involved. Records managers need to develop a greater
understanding of financial management requirements. Accounts staff need training
in techniques for controlling the arrangement, retention, movement and storage of
records. An effective way of approaching these issues is to identify and train an
accounts officer (or a team of officers) in records management skills to serve as a
training officer within the accounting cadre.
Finally, a partnership with the audit department will do much to ensure that records
management is a vital part of the governments programme for efficiency and
accountability. Auditors work is all about records, and they readily understand the
significance of records management systems. They should be encouraged to
comment where poor record keeping is harming the effectiveness of financial
management systems and to raise these issues in their reports to the legislature.
Getting Help
Many institutions, particularly in countries with limited resources, have little access
to resources for financial records work. However, there are places you can go to get
more information or to obtain assistance. Following are names and addresses of
agencies that could be contacted for assistance.
See the Additional Resources document for information on other
organisations and associations involved with records and
archives management generally.
International Organisations
International Federation of Accountants (IFAC)
535 Fifth Avenue
26th Floor
New York, NY
10017, US
Tel: +1 212 286 9344
Fax: +1 212 286 9570
Email: mariahermann@ifac.org
Website: http://www.ifac.org/
IFAC is a world-wide organisation of national professional accountancy organisations
that represent accountants employed in public practice, business and industry, the
public sector and education, as well as specialised groups that interface frequently
with the profession. Currently, it represents over two million accountants. IFAC
strives to develop the profession and harmonise its standards world-wide to enable
accountants to provide services of consistently high quality in the public interest.
International Organisation of Supreme Audit Institutions (INTOSAI)

General Secretariat
Austrian Court of Audit
Dampfschiffstrasse 2
A-1033 Wien, Austria
Tel: +43 1 711 71-8350/8478
Fax: +43 1 718 09 69
Email: intosai@rechnugshof.gv.at
Website: http://www.intosai.org
INTOSAI is the professional organisation of supreme audit institutions (SAI) in
countries that belong to the United Nations or its specialised agencies. SAIs play a
major role in auditing government accounts and operations and in promoting sound
financial management and accountability in their governments. As citizens,
international donors and others have increasingly higher expectations of national
governments, these governments depend on SAIs to help ensure public
accountability. INTOSAI supports its members in this task by providing opportunities
to share information and experiences about the auditing and evaluation challenges
facing them in todays changing and increasingly interdependent world.
Regional Branches:
AFROSAI African Organisation of Supreme Audit Institutions
ARABOSAI Arab Organisation of Supreme Audit Institutions
ASOSAI Asian Organisation of Supreme Audit Institutions
CAROSAI Caribbean Organisation of Supreme Audit Institutions
EUROSAI European Organisation of Supreme Audit Institutions
OLACEFS Organisation of Latin American and Caribbean Supreme Audit Institutions
SPASAI South Pacific Association of Supreme Audit Institutions
Information Systems Audit and Control Association (ISACA)

3701 Algonquin Road, Suite 1010
Rolling Meadows, Illinois
60008, US
Tel: +1 847 253 1545
Fax: +1 847 253 1443
Email: chap.coord@isaca.org
Website: http://www.isaca.org/
The ISACA is concerned with IT governance, control and assurance. ISACA does that
by providing value through various services such as research, standards,
information, education, certification and professional advocacy. The Association
helps IS audit, control and security professionals focus not only on IT, IT risks and
security issues, but also on the relationship between IT and the business, business
processes and business risks.
Local chapters are established in the following regions: Africa and Europe; Asia;
North America; Oceania; and South and Central America.
International Consortium on Governmental Financial Management (ICGFM)
Website: www.financenet.gov/icgfm.htm
The ICGFM is a world-wide communication network of financial managers,
accountants, auditors and economists at the municipal state, federal (US) and
international levels to promote better understanding of governmental financial
management. It is the only world-wide international grouping of organisations and
people actively involved in government financial management, representing over
250,000 interested people.
International Federation for Information and Documentation/Archives and
Records Management Special Interest Group (FID/ARM)
FID Secretariat
PO Box 90 402
2509 LK The Hague
The Netherlands
Tel: +31 70 3140671
Fax: +31 70 3140667
Email: fid@python.konbib.nl
Website: http://fid.cibuctt,ck:8000/cttes1.htm
FID/ARM has been formed to acknowledge a need for this topic to be included in FID
activities and to address all aspects of archives and records management,
especially as they relate to information management policy and implementation of
technology. Archives and records in their various media formats will be included in
the coverage.
National or Regional Organisations
Chartered Institute of Public Finance and Accountancy (CIPFA)
3 Robert Street
London WC2N 6BH
United Kingdom
Tel: +44 20 7543 5600
Fax: +44 20 7543 5700
Website: http://www.cipfa.sift.co.uk/
CIPFA offers specialised training for accountants in the public services. It also
provides cost effective, relevant support services designed to keep financial
professionals informed with the latest thinking on key public sector issues.
The Institute of Chartered Accountants in England and Wales (ICAEW)
Chartered Accountants Hall
PO Box 433
Moorgate Place
London EC2P 2BJ

United Kingdom
Tel: +44 20 7920 8100
Fax: +44 20 7920 0547
Website: http://www.icaew.co.uk/
The Institute of Chartered Accountants in England and Wales is the largest
professional accountancy body in Europe and its qualification is recognised around
the world as a prestigious business qualification. The Institutes website provides a
Library of Information Services with numerous links to relevant sites.
The Chartered Institute of Management Accountants
63 Portland Place
London W1N 4AB
United Kingdom
Tel: +44 20 7637 2311
Fax: +44 20 7631 5309
Website: http://www.cima.org.uk
The Institute is an independent body whose aim is to promote and develop the
science of management accountancy, to provide a professional organisation for
management accountants and to examine those wishing to enter the profession.
Wide international recognition has been achieved and more than 12,000 of the
Institutes members are working in over 120 countries outside the British Isles. The
uniqueness of the CIMA qualification is maintained by insisting that the skills and
practical experience needed for membership can be acquired by working in a
relevant business situation, with strong emphasis on exposure to the various
management functions.
The Canadian Institute of Chartered Accountants (CICA)
277 Wellington Street West
Toronto, ON
M5V 3H2, Canada
Website: http://www.cica.ca/
The CICA, together with the provincial and territorial institutes of chartered
accountants, represents a membership of 60,000 professional accountants in
Canada and Bermuda. The CICA sets accounting and auditing standards for
business, not-for-profit organisations and government. It issues guidance on control
and governance, publishes professional literature, develops continuing education
programmes and represents the CA profession nationally and internationally.
The Institute of Chartered Secretaries and Administrators
16 Park Crescent
London W1N 4AH
United Kingdom
Tel: +44 20 7580 4741
Fax: +44 20 7323 1132
Website: http://www.icsa.org.uk/icsa
The Institute of Chartered Secretaries and Administrators is the leading professional
body for company secretaries and corporate administrators in the public, private
and voluntary sectors and acts as the professional forum for 46,000 Members and
27,500 students world-wide. The mission of the Institute is the promotion of
professional administration.
Activity 12
Find out if your institution has any information about any of the agencies listed above. Does
your organisation receive publications, participate in conferences or meetings or otherwise work
with any of these groups?
In your opinion, which groups should your institution consider communicating with first, if any,
and what would you expect to achieve by doing so? How would you go about building a
productive relationship?
Other Sources
There are a few publications available about financial records management. This
bibliography includes key works that might be of value, particularly in your
institutions resource centre or library. Some are more easily obtained than others,
and some more up-to-date than others. Core publications are identified with an
asterisk (*).
Core publications are also identified in the Additional Resources
document; refer to that document for information on more
general publications on records and archives management.
ARMA Standards Committee: Filing Systems Task Force. Alphabetic Filing Rules
(Second Edition), (ARMA, 1995).
ARMA Standards Committee: Filing Systems Task Force. Filing Procedures A
Guideline, (ARMA, 1989).
ARMA Standards Committee: Filing Systems Task Force. Numeric Filing A
ARMA Standards Committee: Filing Systems Task Force. Subject Filing A
Australian Taxation Office, Taxation Ruling 96/7, Income Tax: Record keeping Section 262A - General Principles http://www.ato.gov.au/
Australian Taxation Office, Taxation Ruling 97/21, Income Tax: Record keeping Electronic Records http://www.ato.gov.au/
Barrett, Pat, 'The Challenge Facing Auditors in the Changing Public Sector
Environment' Keynote address by, Commonwealth Auditor General to the
Information Systems Audit and Control Association (Canberra Chapter),
26.11.1996.
* Bartel, Margaret, Integrated Financial Management Systems: A Guide to
Implementation. LATPS Occasional Paper Series, No. 19. December 1996.
Available electronically at http://www.worldbank.org/
Bennick, Dr Anne. Active Filing for Paper Records, (ARMA, 1989)
Cox, David. Financial Accounting Tutorial. Osborne Books, 1998.
Parry, Michael. Integrated Financial Management. Training Workshop on
Government Budgeting in Developing Countries, December 1997. Available
electronically at http://www.mcgl.co.uk/I-ept-fm.htm. Look under Technical
Documents section.
PREM Network. Public Expenditure Handbook. Washington, DC: The World Bank,
1998.
Wood, Frank. Business Accounting 1, 7th ed. London, UK: Pitman,1996.
Activity 13
Check your institutions library or resource centre. What books or other resources do you have
about personnel issues in general and financial records care specifically? Are any of the
publications listed above available in your institution? If so, examine two or three of them and
assess their currency and value to your institution. If not, identify two or three publications you
think would be most useful to help develop or expand your library. Devise a plan outlining how
you could realistically obtain copies of these.
Summary
This lesson has provided an overview of the entire module, Managing Financial
Records. This lesson has then discussed how to establish priorities for put into
place the foundations for a financial records management programme. These
include:
Priority 1: assess the existing situation
Priority 2: analyse the information flows
Priority 3: identify the stakeholders and the organisations policy objectives
Priority 4: stabilise existing record-keeping systems
Priority 5: plan improvements
Priority 6: encourage better records management practices
The lesson then outlined ways to find out more information or get help with financial
records issues. The lesson concluded with a discussion of valuable information
resources relevant to financial records management.
Study Questions
1
In your own words, explain the reason why the priorities proposed in this lesson are offered in
the order they are in.
Indicate two of the organisations listed in this lesson that you would choose to contact first and
explain why.
Indicate two of the publications listed in this lesson that you would choose to purchase first and
explain why.
Activity 11
Every institution will find itself at a different stage of development in terms of financial records
management. The priorities established will have to take into account the particular needs of that
institution, the region and the country.
Activity 12
If resources are limited, it is wise to communicate with international organisations first, as they
often obtain and filter information from national or regional associations. Thus valuable
information is passed on to your organisation through the international group, which can save
resources for all. It is also advisable to focus on general information before obtaining specialised
publications or information.
Activity 13
As mentioned in relation to the previous activity, it is important to begin with general
information and ensure you have a good resource library of introductory and overview
publications before developing a more specialised library.
APPENDIX 2
GLOSSARY OF FINANCIAL TERMS

This glossary includes many valuable terms related to financial management.
These terms are not included in the master glossary to the MPSR study programme.
Abstract of Accounts
The term used in government accounting to

describe a shortened form of the annual final
accounts.
Accountant General
The chief accounting officer of the government.
Accounting Officer
Any officer required to account for receipts or

payments of public money.
Advance
A disbursement of public money before it is due,

or before receipt of goods, or a loan to be repaid.
Appropriation
Account
The detailed statements of expenditure and

receipts which show the excess and savings on
each sub-head of the estimates.
OR An end of year account which composes
amounts authorised by parliament in the
estimates with actual payments made and
receipts brought to account and explains any
substantial differences under each sub-head.
Appropriation Law
A law authorising the spending of the total

provided in the expenditure estimates and
appropriating it according to the heads of
expenditure.
Arrears of Revenue
Revenue which has not been collected at the due

time.
Assets
Resources possessed or to be possessed.

OR All things owned having some money value.
Balance Sheet
A statement of assets and liabilities.
Below the Line
Items following after the transactions relating to

revenue and expenditure. Such items relate to
those other than included in the estimates of
revenue and expenditure for example, imprests,
loan repayments, advances and deposits etc.
Capital Expenditure
Non recurrent expenditure. Money spent on

construction works, roads, machinery and plant,
etc., having an expected working life of more
than one year.
OR Expenditure on new construction, land,
extensions of and alterations to existing
buildings and the purchase of any other fixed
assets (e.g. machinery and plant, and vehicles)
having an expected working life of more than
one year. Also includes expenditure on capital
grants and stocks and lending for capital
purposes.
Cash Book
A book in which account is kept of cash/cheques

received and paid out.
Contract
Any legally binding agreement between two

parties, for example, to carry out works or supply
goods on certain terms.
Counterfoil Receipts
A receipt with a serial number issued from a

book of official receipt forms.
Departmental Vote
Book
A book showing the unexpended balance on

certain sub heads of expenditure.
Draft Estimates
The estimates up to the time they are finally

approved.
Establishment
The number of various grades of posts

authorised by the estimates.
Financial Year
Any period of twelve months adopted by an

organisation as its' accounting year.
General Warrant
The authority issued by parliament empowering

the accountant general to make the payments
provided for in the estimates.
Grant in Aid
A grant from voted monies to a particular

organisation or body where any unexpended
balances of the sums issued during the financial
year will not be liable for surrender to the
consolidated fund.
Integrated Financial
Management System
A computer based integrated financial

management system including budgeting,
ledger/stores, cash accounts, with the ability to
produce final accounts.
Imprest
An advance of cash made to an officer who

requires to make payments on the public
service.
Imprest Warrant
A warrant issued by an authorised officer

allowing particular officer to receive an Imprest.
Inventory
A schedule of articles for record purposes.
Ledger
A book, a mechanised, or computer record

containing a number of accounts for
persons/organisations.
Ordinance
A law.
Other Charges
All items in a head of the expenditure estimates

not properly falling under personal emoluments.
Outturn
Actual expenditure, normally in a financial year.
Personal Emoluments
All payments comprising salary, including

allowances etc.
Public Debt
All loans raised by the government and not yet

repaid to the lender(s).
Public Money
Money in the hands of government.
Public Works
All forms of construction provided for from

government funds.
Receipt Voucher
A voucher supporting a payment into public

funds.
Reconciliation
A statement of the entries bringing into

agreement balances from two different sources.
Self Accounting
Department
A department entrusted with the receipt,

custody and disbursement of public money
rendering a monthly account to the accountant
general.
Sinking Fund
A fund set up to provide for the redemption of a

loan or to replace an asset.
Sub Head
Sub divisions of the heads of the revenue and

expenditure estimates.
Special Warrant
A warrant issued by the authority of parliament

permitting payments to be made which have not
been provided for in the estimates.
Suspense Account
A below the line account in which items are

retained pending disposal.
Tender
An offer to supply goods or services at a stated

price.
Tender Board
A board of officers whose duty is to consider

tenders that have been submitted.
Treasury
The central accounting department of a

government (also used to describe the
accountant general's department).
Trial Balance
The balances of the accounts in a ledger which

have been extracted to prove the accuracy of
the ledger postings.
Virement
Treasury sanction permitting savings on one sub

head to meet excesses on another.
Vote, a
An individual estimate for a specific service
Vote, to
To approve provision for expenditure on a

specified service.
Write Off
To strike off charge.
___________________________________________________________________________
2006/ASCC/014
Agenda Item: Session IV
Anti-Corruption and Governance: The Philippine

Experience
Purpose: Information
Submitted by: Philippine Institute for Development Studies; Philippines APEC
Study Center Network APEC Study Center Consortium Conference
Ho Chi Minh City, Viet Nam
23-24 May 2006
___________________________________________________________________________
2006/ASCC/014
Agenda Item: Session IV
Anti-Corruption and Governance: The Philippine

Experience
Purpose: Information
Submitted by: Philippine Institute for Development Studies; Philippines APEC
Study Center Network APEC Study Center Consortium Conference
Ho Chi Minh City, Viet Nam
23-24 May 2006
JOURNAL OF RESEARCH IN NATIONAL DEVELOPMENT VOLUME 8 NO 1, JUNE, 2010
THE ROLE OF AUDITORS IN FRAUD DETECTION, PREVENTION AND REPORTING IN NIGERIA

Akinyomi Oladele John
Department of Financial Studies, Redeemers University, Mowe
E-mail: delejohn21@yahoo.com
Abstract
This study investigates the role of auditors in the detection, prevention and reporting of fraud. Data were obtained from 184
respondents in Nigeria. The findings revealed that the respondents are very concerned about the problem of fraud. In addition,
the respondents placed very high expectation on auditors duties on fraud prevention and detection. This perception is in contrast
with the stated primary objective of an audit, as stipulated in ISA 200, which merely required auditors to form an opinion on the
financial statements, but not of fraud detection.
Keywords: Auditors, fraud, detection, prevention
Introduction
That an auditor has the responsibility for the prevention, detection and reporting of fraud, other illegal acts and errors is one of
the most controversial issues in auditing, and has been one of the most frequently debated areas amongst auditors, politicians,
media, regulators and the public (Gay et al 1997). This debate has been especially highlighted by the collapse of both small and
big corporations across the globe. The auditing profession in Nigeria has caught the medias attention following financial
scandals in some of the Nigerian banks such as Intercontinental Bank, Oceanic Bank, Afribank, and Bank PHB among others.
There seems presently to be a misconception that auditors duties are largely the preventing, detecting and reporting of fraud, for
example, Idris (2009). The aim of this paper is to identify financial report users perceptions of the extent of fraud in Nigeria, and
to determine their perceptions of the auditors responsibilities in detecting fraud and the performance of related audit procedures.
The paper also aims to ascertain whether the report users perceptions of auditors responsibilities on fraud are consistent with
those of the auditing profession as expressed in auditing standards in Nigeria.
Literature review
Fraud
Fraud, according to Adeniji (2004:354) and ICAN (2006:206), is an intentional act by one or more individuals among
management, employees or third parties, which results in a misrepresentation of financial statements. Fraud can also be seen as
the intentional misrepresentation, concealment, or omission of the truth for the purpose of deception/manipulation to the financial
detriment of an individual or an organization which also includes embezzlement, theft or any attempt to steal or unlawfully
obtain, misuse or harm the asset of the organization, (Adeduro, 1998 and, Bostley and Drover 1972). Fraud has increased
considerably over the recent years and professionals believe this trend is likely to continue. According to Brink and Witt (1982),
fraud is an ever present threat to the effective utilization of resources and it will always be an important concern of management.
ISA 240 The Auditors Responsibilities to Consider Fraud in an Audit of Financial Statement (Revised) refers to fraud as an
intentional act by one or more individuals among management, those charged with governance, employees or third parties,
involving the use of deception to obtain an unjust or illegal advantage. Aderibigbe and Dada (2007) define fraud as a deliberate
deceit planned and executed with the intent to deprive another person of his property or rights directly or indirectly, regardless of
whether the perpetrator benefits from his/her actions.
Weirich and Reinstein (2000 cited in Allyne & Howard 2005), define fraud as intentional deception, cheating and stealing.
Some common types of fraud include creating fictitious creditors, ghosts on the payroll, falsifying cash sales, undeclared stock,
making unauthorized write-offs, and claiming excessive or never-incurred expenses. Pollick (2006) regards fraud as a
deliberate misrepresentation, which causes one to suffer damages, usually monetary losses. Albrecht et al (1995 cited in Allyne
& Howard, 2005:287) classified fraud into employee embezzlement, management fraud, investment scams, vendor fraud,
customer fraud, and miscellaneous fraud. Fraud also involves complicated financial transactions conducted by white collar
criminals, business professionals with specialized knowledge and criminal intent (Pollick 2006).
Auditors responsibilities in fraud detection
The role of auditors has not been well defined from inception (Alleyne & Howard 2005). Porter (1997) reviews the historical
development of the auditors duty to detect and report fraud over the centuries. Her study shows that there is an evaluation of
auditing practices and shift in auditing paradigm through a number of stages.
Porter study reveals that the primary objective of an audit in the pre-1920s phase was to uncover fraud. However, by the 1930s,
the primary objective of an audit had changed to verification of accounts. This is most likely due to the increase in size and
volume of companies transactions which in turn made it unlikely that auditors could examine all transactions. During this period,
the auditing profession began to claim that the responsibilities of fraud detection rested with the management. In addition,
management should also have implemented appropriate internal control systems to prevent fraud in their companies.
In the 1960s, the media and public were generally unhappy that auditors were refusing to accept the duties of fraud detection.
The usefulness of an audit was frequently called into question as they generally failed to uncover fraud. However, despite the
criticism, auditors continued to minimize the importance of their role in detecting fraud by stressing that such duty rested with the
management. Due to the advancement of technology in the 80s, the complexity and volume of incidents of fraud have posed
severe problems for businesses. Porter (1997) asserts that, even though the case law has determined that in some circumstances
auditors have a duty to detect fraud, the courts have attempted to maintain the auditors duties within reasonable limits. In
contrast, Boynton et al (2005) argue that since the fall of Enron, auditing standards have been revamped to re-emphasise the
auditors responsibilities to detect fraud. Their assertion is based on ISA 315 Understanding the Entity and Its Environment and
Assessing the Risks of Material Misstatement and ISA 240 The Auditors Responsibilities to Consider Fraud in an Audit of
Financial Statement (Revised).
ISA 315 requires auditors to evaluate the effectiveness of an entitys risk management framework in preventing misstatements,
whether through fraud or otherwise, in the course of an audit. Boynton et al (2005) stress that this requirement was not previously
necessary. They further explain that such an evaluation was only required previously when they chose to place reliance on that
framework and to reduce the extent of the audit investigation. In addition, all staff members engaged on an audit is now required
to communicate their findings with each other, to prevent situations where staff members, working independently on their own
sections of the audit, have failed to appreciate the significance of apparently minor irregularities that, if combined, take on a more
sinister meaning.
Additionally, Boynton et al (2005) and Oremade (1988) claim that auditors are required to be more proactive in searching for
fraud during the course of an audit under ISA 240 (Revised). Their duties now include considering incentives and an opportunity
presented to potential fraudsters, as well as rationalizations that the fraudulent act is justified. Auditors are also expected to
inquire more closely into reasons behind such matters as, for example, errors in accounting estimates, unusual transactions that
appear to lack business rationale, and a reluctance to correct immaterial errors discovered by the audit.
Empirical studies on fraud detection
Extensive studies have been conducted in many countries into the perception of financial report users of auditors responsibilities
in fraud prevention and detection [For example, Monroe and Woodliff (1994) in Australia; Epstein & Geiger (1994) in the US;
Humphrey et al (1993) in the UK; and Low (1980) in Singapore; Leung and Chau, (2001) in Hong Kong; Dixon et al (2006) in
Egypt; Fadzly and Ahmad (2004) in Malaysia]. These studies found that many financial report users believe that the detection of
irregularities is a primary audit objective and that the auditors have a responsibility for detecting all irregularities. This is a
misconception and shows the existence of an audit expectation gap between auditors and financial report users with respect to the
actual duties of auditors.
Despite the extensive international research on fraud, very few studies have been conducted on the issue of fraud in Nigeria. The
extensive international findings may not be applicable in Nigeria as research methods and results are influenced by and usually
reflect economic, social or legal factors unique to those countries in which the studies took place. It is hoped that the findings of
this study will provide insight into the financial report users perceptions on the extent of fraud in Nigeria and their perceptions of
auditors responsibilities for and procedures in detecting fraud.
Research methodology
The primary data used for this study were obtained through the administration of well designed questionnaire to respondents. The
questionnaire is adapted from that used by Alleyne and Howard (2005). Using convenience sampling methodology, the
questionnaire was handed to 200 respondents in Nigeria. The respondents were bankers, managers, investors and accountants.
184 questionnaires were returned, yielding a 92 per cent response rate. Furthermore, more than 90 per cent of the respondents
claimed that they were aware of what auditors do. The high level of awareness combined with their accounting qualifications and
audit experience should add credibility to the findings of the research
Findings and discussion
Extent of fraud
Table 1: Perceptions of extent of fraud
Users of financial reports N = 184
Questions
Strongly
Disagree
Disagree
Neutral
Agree
Strongly
Agree
Is fraud a major concern for business in Nigeria?
4
(2.2%)
24 (13.0%)
40 (21.8%)
86 (46.7%)
30 (16.3%)
Do you think that the discovery of fraudulent activity

would have a negative impact on users?
4
(2.2%)
20 (10.9%)
34 (18.5%)
88 (47.8%)
38 (20.6%)
The results in Table 1 show that 46.7 per cent of the respondents agreed and 16.3 per cent strongly agreed that fraud is a major
concern for business in Nigeria. However, 21.8 per cent have a neutral opinion while 13 per cent disagreed and 2.2 per cent
strongly disagreed with this statement. That the majority of responses agreed with the statements may be due to the high publicity
of fraud cases in Nigeria.
Overall the responses in this study show that fraud is an area of concern in Nigeria. When respondents were asked whether the
discovery of fraudulent activity would have a negative impact on users, 20.6 per cent strongly agreed and 47.8 per cent agreed to
this statement. Such responses reflect the common market reaction to negative publicity.
Auditors responsibilities for fraud detection

Questions
Strongly
Disagree
Neutral
Agree
Strongly
Disagree
Do you feel that it is the responsibility of the auditor to
uncover fraud and to report this to the appropriate
authorities?
14
(7.6%)
Do you think that there should be legislation to this effect? 16

(8.7%)
Agree
28 (15.2%)
38 (20.6%)
62 (33.7%)
42 (22.9%)
16 (8.7%)
36 (19.5%)
68 (37.0%)
48 (26.1%)
Table 2 shows that 33.7 per cent and 22.9 per cent of the respondents respectively agreed and strongly agreed that the
responsibility of the auditor is to uncover fraud and to report this to the appropriate authorities. In comparison only 15.2 per cent
disagreed and 7.6 per cent strongly disagreed with this statement. The results are in contrast with the requirements of the
Approved Nigerian Standard on Auditing. According to ISA 200 Objective and general principles governing an audit of financial
statements, the objective of an audit of financial statement is to enable the auditor to express an opinion whether the financial
statements are prepared, in all material respects, in accordance with an applicable financial reporting framework. However, ISA
200 also requires an audit to be designed so that it provides reasonable assurance of detecting both material errors and fraud in
the financial statements. To accomplish this, the audit must be planned and performed with an attitude of professional skepticism
in all aspects of the engagement. Professional skepticism is an attitude that includes a questioning mind and a critical assessment
of audit evidence. The auditor should not assume that management is dishonest, but the possibility of dishonesty must be
considered. The auditor also should not assume that the management is unquestionably honest.
According to ISA 240 and NSA 5, the primary responsibility for the prevention and detection of fraud rests with both those
charged with the governance of the entity and with the management of the entity. ISA 240 and NSA 5 requires the management
and those charged with governance to place a strong emphasis on fraud prevention (to reduce opportunities for fraud), and fraud
deterrence (to persuade individuals not to commit fraud by increasing the likelihood of detection and punishment).
Most of the respondents (37 per cent agreed and 26.1per cent strongly agreed) are of the opinion that there should be legislation
to hold auditors responsible for preventing, detecting and reporting fraud. Though it is not a statutory requirement for auditors to
prevent and detect fraud (Aderibigbe, 1997), however, once fraud is detected auditors are required to report such fraudulent
activities to the relevant authorities.
Overall, the results of the study are similar to previous studies by Chowdhury et al (2005); Epstein and Geiger (1994); Gloeck
and De Jager (1993); Humphrey et al (1993); Leung and Chau (2001); Lin and Chen (2004) and Dixon et al (2006) that auditors
have a responsibility for preventing, detecting and reporting fraud. The findings indicate that an expectation gap does exist
between the respondents and the present statutory requirements of auditors with respect to fraud detection.
Audit procedures
Table 3: Audit procedures
Questions
Strongly
Disagree
Disagree
Neutral
Agree
Strongly
Agree
Should the auditor assess internal controls used by the 6

company to prevent or detect the theft of assets?
(3.3%)
12 (6.5%)
32 (17.4%)
92 (50.0%)
42 (22.8%)
Should the auditor assess the role of the internal

auditors?
4
(2.2%)
20 (10.8%)
30 (16.3%)
92 (50.0%)
38 (20.7%)
Should the auditor work to uncover all related party

transactions?
10
(5.4%)
10 (5.4%)
38 (20.7%)
90 (48.9%)
36 (19.6%)
Should the auditor evaluate whether there is

substantial doubt about a companys ability to
continue as a going (viable) concern?
8
(4.4%)
16 (8.7%)
32 (17.4%)
74 (40.2%)
54 (29.3%)
26
(14.1)
16 (8.7%)
100 (54.3%)
36 (19.6%)
22 (12.0%)
22 (12.0%)
90 (48.9%)
34 (18.4)
Should the auditor assess managements style, to

6
determine if the style might lead to fraudulent financial (3.3%)
reporting?
Should the auditor ensure that the management
conveys the findings of the audit to the board of
directors or audit committee, (whichever is
applicable)?
16
(8.7%)
This section reports the responses to the question whether auditors should perform additional audit procedures in an attempt to
uncover fraud. 50 per cent and 22.8 per cent of the respondents agreed and strongly agreed that auditors should assess internal
controls used by the company to prevent or detect the theft of assets. Based on ISA 400 Risk assessment and internal control,
auditors are required to obtain an understanding of the accounting and internal control systems sufficient to plan the audit and to
develop an effective audit approach. However, ISA 400 does not particularly require an assessment of the internal control as to
whether or not such internal control system enables prevention or detection of theft of assets.
Respondents were also asked whether auditors should assess the role of internal auditors. Based on the auditing standard in
Nigeria auditors are not required to assess the role of internal auditors. However, ISA 610 Considering the work of internal
auditing requires auditors to perform a preliminary assessment of the internal audit function when it appears that internal
auditing is relevant to the external audit of the financial statements in specific audit areas. This study shows that most of the
respondents agreed that auditors should perform the assessment of internal auditors (50 per cent and 20.7 per cent of the
respondents agreed and strongly agreed).
According to ISA 550 Related Parties, an audit cannot be expected to detect all related party transactions. Nevertheless, auditors
should perform audit procedures designed to obtain sufficient appropriate audit evidence regarding the identification of and
disclosure by management of related parties and the effect of related party transactions that are material to the financial
statements. The study found respondents to have higher expectation with respect to this issue as 48.9 per cent and 19.6 per cent of
them agreed and strongly agreed that auditors should detect all related party transactions.
ISA 570 Going concern stipulates that auditors are required to consider appropriateness of managements use of the going
concern assumption in the preparation of the financial statements, and must consider whether there are material uncertainties
about the entitys ability to continue as a going concern that need to be disclosed in the financial statements. However, auditors
are not required to predict future events or conditions that may cause an entity to cease to function as a going concern.
Accordingly, the absence of any reference to going concern uncertainty in an auditors report cannot be viewed as a guarantee as
to the entitys ability to continue as a going concern. However the statutory requirement of auditors with respect of this issue is in
contrast with the findings of the study, as the majority of respondents expected auditors to perform this duty (40.2 per cent agreed
and 29.3 per cent strongly agreed).
Finally, the results show 54.3 per cent of the respondents agreed and 19.6 per cent strongly agreed that auditors should assess the
management style so as to determine if such style may lead to fraudulent financial reporting. In response to the question whether
auditors should ensure that management conveys the findings of the audit to the board of directors or audit committee, 48.9 per
cent agreed and 18.4 per cent strongly agreed.
Overall, the findings of this section reveal that there is a gap between the respondents expectation and the present statutory
requirements for auditors. This may in turn suggest the perception that the auditing standards in Nigeria are deficient.
Conclusion and recommendations
This study explores the financial report users perceptions of the extent of fraud in Nigeria and of auditors responsibilities in
detecting fraud. It also investigates the perceived extent of the related audit procedures. The study also aims to ascertain whether
the report users perceptions of the auditors responsibilities on fraud detection is consistent with the Nigerian auditing
professions published standards.
The study found that respondents are very concerned about the problem of fraud in Nigeria. In addition, the results show that
respondents perception of the official objective of an audit is incorrect, as they placed a very high expectation on auditors duties
on fraud prevention and detection. This perception is in sharp contrast with the stated primary objective of an audit, as stipulated
in ISA 200, which merely required auditors to form an opinion on the financial statement, but not of fraud prevention and
detection efforts of the company. The study also found a lack of understanding among respondents of the statutory duties of
auditors. The lack of understanding is because the users may not have read the statutory provisions for auditors, or have chosen to
ignore or forget them.
The present situation may be improved through several strategies, the two most likely to succeed being: i) educating the users on
the role and the actual duties of auditors, through better communication by auditors; and ii) by expanding the scope of the audit to
meet market expectations. Porter (1997) believes that education may help in solving the misconception problem as it may reduce
the misunderstanding gap caused by ignorance. On the other hand, expanding the scope of an audit may help to mitigate the
expectation gap problem as auditors would then be performing additional duties not previously required. It is hoped that by
implementing both approaches, the publics expectation and auditors duties will be brought into closer accord.
References
Adeduro, A.A. (1998): An investigation into frauds in banks. An unpublished thesis of
University of Lagos.
Adeniji, A. (2004): Auditing and Investigation. Lagos, Value Analysis Publishers
Aderibigbe, P. (1997): Auditing: Conceptual Emphasis. Ibadan, Lyons Ltd
Aderibigbe, P. and Dada, S. O. (2007): Microauditing Principles. Lagos ICAN Students Journal,
Vol 11 No 1, Jan/March.
Alleyne, P. & Howard, M. (2005): An exploratory study of auditors responsibility for fraud detection in
Barbados. Managerial Auditing Journal. 20(3):284-303.
Bostley R.W.B. and Dover C.B. (1972): Sheldons practice and law of banking, 10th ed, London, Macdonald and Evans.
Boynton, W., Johnson, R. & Kell, W. (2005). Assurance and the integrity of financial reporting. 8th edition.
New York: John Wiley & Son, Inc.
Brink, V.Z. & Witt, H. (1982), Internal Auditing. New York, John Wiley & Sons:
Chowdhury, R., Innes, J. & Kouhy, R. (2005). The public sector audit expectation gap in Bangladesh.
Managerial Auditing Journal. 20(8):893-905.
Dixon, R. & Woodhead, A. (2006). An investigation of the expectation gap in Egypt. Managerial Auditing
Journal. 21(3):293-302.
Epstein, M. & Geiger, M. (1994). Investor views of audit assurance: Recent evidence of the expectation gap.
Journal of Accountancy. 177(1):60-66.
Fazdly, M. & Ahmad, Z. (2004). Audit expectation gap. Managerial Auditing Journal. 19:897-915.
Gay, G., Schelluch, P. & Reid, I. (1997): Users Perceptions of the Auditing Responsibilities for the
Prevention, Detection and Reporting of Fraud, other illegal acts and error. Australian Accounting Review. 7(1):51-61.
Gloeck, J.D. & De Jager, H. (1993). The audit expectation gap in the Republic of South Africa. School of
Accountancy Research Series. Research Report 93 (1). University of Pretoria.
Humphrey, C., Moizer, P. & Turley, W. (1993): The audit expectation gap in Britain: an empirical
Investigation. Accounting and Business Research. 23:395-411.
ICAN (2006): Financial Reporting and Audit Practice. Lagos, VI Publishing Ltd
Idris, J. (2009): Nigerian Auditors are Toothless Bulldogs. October 3
http://www.saharareporters.com/articles/external-contrib/3872-nigerias-bank-auditors-are-toothless-bull-dogs.html
Leung, P. & Chau, G. (2001). The problematic relationship between audit reporting and audit expectations;
some evidence from Hong Kong. Advances in International Accounting. 14:181-206.
Lin, Z. & Chen, F. (2004). An empirical study of audit expectation gap in The Peoples Republic of China.
International Journal of Auditing. 8:93-115.
Low, A.M. (1980). The auditors detection responsibility: is there an expectation gap?
Journal of Accounting. Singapore. October:65-70.
Monroe, G. & Woodliff, D. (1994): An empirical investigation of the audit expectation gap: Australian
evidence. Australian Accounting Review. November, 42-53.
Oremade Tunde (1988): Auditng and Investigation. Lagos, West African Book Publishers
Pollick, M.Y. (2006). What is Fraud: http://www.wisegeek.com/what-is-fraud.htm
Accessed: 15 February 2010.
Porter, B. (1997): Auditors responsibilities with respect to corporate fraud: a controversial issue, in Sherer,
M. and Turley, S. (Eds), 3rd ed., Current Issues in Auditing, Paul Chapman Publishing. London, Ch. 2:31-54.
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Copyright (c) 2008 - 2010, Transcampus Interdisciplinary Research and Study Group
Arabian Journal of Business and Management Review (Nigerian Chapter) Vol.

1, No. 1, 2012
21
AN EVALUATION OF EFFECTIVENESS OF ECONOMIC AND

FINANCIAL CRIME COMMISSION (EFCC) IN CHECKMATING
PUBLIC SECTOR ACCOUNTANTS OPERATION IN NIGERIA
DR. (MRS.) EZEANI NNEKA SALOME (FABEN)
Department of Educational Foundation and Management
Ekiti State University, Ekiti State
Abstract
The study aimed at evaluating the effectiveness of the EFCC in checkmating the
accountants in rendering accountability in the public sector. The population of the study
was made up of 80 accountants from PPSSC and LGSC in Anambra State. The study is a
survey design and adopted system theory. Purposive sampling technique was adopted.
Three research questions and three hypotheses were formulated for the study. Twenty
seven (27) item questionnaires were designed for data collection. Mean score and t-test
statistical tools were used to analyze the data collected. The findings of the study
revealed that the accountants are to enforce financial accountability. There are a lot of
accounting and financial failures in the public sector hence an accountant is rated as one
of the most perpetrators of crime. Therefore, EFCC plays a remarkable role in the public
sector accountability. The paper concluded that positive changes in the accounting
profession will impact largely to the success of the EFCC in Nigeria. Based on the
findings of the study, it was recommended that the government should install good
accountability control to avoid embezzlement or mis-management of funds in the public
sector, and as well as a code of ethics to engender accountability and transparency in the
conduct of the public office holders.
Key words: Evaluation, Accountants, Effectiveness, Financial Accountability,
Transparency
Introduction
In Nigeria, the public sector accounting is properly planned within the cycle of financial
management which is organized around laws, rules, regulations, and processes. According to
Mbah (2009), public sector accounting system flows in a definite system from the enabling
legal instruments that gives rise to transactions and bounding off from the reports that form
basis for auditing, investigating and legislative review, back to a continuous enactment of
further legal instruments.
Public sectors accounting is a process of recording, communicating, summarizing,
analyzing and interpreting government financial statement in aggregates and details. This reflects
all levels of transaction involving the receipts, custody and the disbursement of government
funds and resources (Adams, 2010). In a nutshell, public sector accounting (government
accounting) involves the recording and presentation of government financial transactions to
1, No. 1, 2012
22
comply with statutory requirement as well as assist the management in efficiently utilizing the
government funds. The number and monetary value of public sector activities have increased
substantially. This increase in activities has brought additional demand for accounting ability.
Officials and employees who manage these activities needed to render adequate accounts of their
activities to the public (Emechele, 2009). On the other hand, the public needs to receive
accountability reports in orders to asses the performance of those entrusted with the public sector
resources.
Public sector is all organizations established, financed and operated by the government
on behalf of the public. Its primary motive (Nwabueze, 2005), is not for profit but to render
services to the civil service, parastatals and government aimed companies. The services rendered
by these organizations are influenced mainly by political consideration rather than by market
related demands. Accountability in the public sector had degenerated over the years in such a
way that, the unusual and disturbing behaviour openly suggestive of large scale corruption in the
polity are out- rightly condemned but treated with utmost cynism and defended to be the fathers
of the nation. The menace of these crimes and the recognition of the situation led to the
establishment of the EFCC (Economic and Financial Crime Commission).
As the name implies, the EFCC is a Nigerian law enforcement agency set up mainly to
investigate and recover funds and property of the government that have been illegally diverted
into private pockets through private and public sectors of the economy by some dubious and
unscrupulous citizens (Nwali, 2010). As the EFCC is to combat financial and economic crimes,
the need for public accountability has caused demands for more information about public sector
programmes, projects and services.
Statement of the Problem
In Nigeria, the law stipulated that accountability reports be produced by public and other
persons entrusted with national resources. The reporting of the accounts is instituted and dictated
so that the accounts are made up as the government would desire (Bode, 2009).
With special reference to Nigeria, an obviously corrupt nation, where the wealth of the
nation is being regarded as the national cake, where every official has a target of the amount to
steal, therefore, a number of irregularities have been the order of the day.
Regardless, politicians particularly the state governors, legislators, ministers and other
public office holders at all tiers of government have transformed treasury looting into serious
business. They simply divert statutory allocations (Emechele, 2009) meant for development
projects into money laundering and currency trafficking and brazenly place public funds in their
private bank accounts; acquiring choice properties and investments at home and aboard. Hence,
corruption is a major issue in Nigeria. These practices have greatly affected the people
negatively.
Accounting as it encompasses inputs from the related disciplines (such as law,
management, economics, sociology, etc) will equip accountants for the task of providing
directive, detective and other information services or roles for the economic growth and well
being of persons, groups and the society at large (Okoli, 2010).
EFCC has been involved in the investigation, prevention and prosecution of offenders
who engage in high corruption cases (Nwali, 2010) without much success because EFCC
investigation are not carried out by qualified accountants, hence their findings may not meet up
with expectations. It is on this ground that the researcher tries to identify the need for EFCC to
checkmate the effectiveness of the accountants in rendering accountability in the public sector.
1, No. 1, 2012
23
Objective of the Study
The main objective of the study is to evaluate the need of EFCC in checkmating the
effectiveness of accountability of accountants in the public offices.
Specifically, the study seeks to:
1. Determine whether the accountants play any significant role in the accountability of
public offices.
2. Ascertain the perpetrators of crimes in the public sector.
3. Identify the functions of EFCC in the accountability of public sector.
Research Question
The following research questions guided the study:
1. What are the roles of accountants in the accountability of public offices?
2. Who are the perpetrators of crimes in the public offices?
3. What are the functions of EFCC in the accountability of public sector?
Statement of Hypotheses
The following null hypotheses tested at 0.05 level of significance were used:
Ho1: Accountants in Post Primary School Service Commission and Local Government
Service Commission do not differ significantly in their rating regarding the roles
of accountants in the accountability of public offices.
Ho2: Local Government Service Commission and Post Primary School Service
Commission accountants do not differ significantly in their rating regarding the
perpetrators of crimes in the public sector.
Ho3: Accountants in Local Government Service Commission and Post Primary School
Service Commission do not differ significantly in their rating as to the functions
of the EFCC in the public sector.
REVIEW OF RELATED LITERATURE
The acronym, EFCC stands for Economic and Financial Crimes Commission. As the
name implies the EFCC is a Nigerian law enforcement agency set up mainly to investigate,
recover funds and property of the government that have been illegally diverted into private
pockets through private and public sectors of the economy by some dubious and unscrupulous
citizens.
The EFCC was inaugurated in April 2003 by the Olusegun Obasanjo administration but
began operation in 2004. The legal instrument backing the commission is the attached EFCC
(Establishment) Act 2004 and charged with the responsibility of investigating and enforcement
of all laws against economic and financial crimes in all its ramifications in Nigeria. The Act
mandates the EFCC to combat financial and economic crimes and is charged with the
responsibility of enforcing the provisions of other laws and regulations relating to economic and
financial crimes.
EFCC publication units (2003) defines Economic and Financial Crimes (EFC) as non
violent criminal and illicit activity committed with the objective of earning wealth illegally either
individually or in a group or in an organized manner, thereby violating existing legislation
governing the economic activities of government and its administration.
1, No. 1, 2012
24
Several ways through which economic and financial crimes can be committed in public
sector (Aroh, 2009; Emechele, 2009 and Idaewor, 2010) include manipulation of records, abuse
of office, misappropriation and diversion of funds, over invoicing, money laundering, smuggling,
illegal arms deals, foreign exchange malpractice including round tripping crime counterfeiting of
currencies theft of intellectual property and piracy, open market abuse, false declarations, bribery
of government officials, kick backs, conventional and fraudulent trade practices, embezzlement,
tax evasion, (Momoh, 2010 and Okoli, 2010) oil bunkering and illegal mining, establishment of
dummy company, establishing real companies using another persons name or secret banks
transfers or physical carrying of foreign exchange abroad through the airports, etc.
The review deals with the studies related to the topic of the study. The review will cover
information in journals, text books, magazines, internet, etc. Specifically, the review was done
under the following sub-headings:
Academic Review
The Role of Public Sector Accountant
Functions of EFCC in the public sector
Theoretical frame work
Empirical and Academic Review
A study carried out by Idaewor (2010) on the Roles and Responsibilities of Banks in the
implementation of money laundering, Economic and Financial Crimes in Nigeria sought to find
out the strategies for combating money laundering, terrorist financing, Economic and Financial
Crimes. Six research questions were raised for the study while four (4) hypotheses were
formulated. The descriptive research design was adopted for the study within a sample size of
44. The simple random sampling technique was the main instrument used for data collection.
The data collected was subjected to validity and pilot test reliability. The analysis of the data was
based on statistical frequency (percentage distribution) tables, Pearson product moment
coefficient of correlation, and t-test statistical tool was used to test the hypotheses formulated for
the study, (at 0.05 level of significance). The statistical tools used for the study were similar to
that used in the present study although the tools differ in a away. In the present study, the
researcher used mean and grand mean in analyzing the research questions and t-test in analyzing
the hypotheses. While Idaewors study employed simple percentages, Pearson product moment
correlation coefficient and t- test statistics. The researcher observed that the challenges posed by
Economic and Financial Crime to banks are gargantuan. Also, government has demonstrated
strong political will to fight corruption and other economic and financial crimes in Nigeria, e.g
the EFCC is the financial watch dog of Nigerian business environment. The researcher further
recommended that financial institutions should have adequate measure in place for internal
controls, compliance and audit.
In another study carried out by Nwali (2009), on Making Effective use of Accountants
in the fight against corruption by the EFCC, aimed at identifying how the agency EFCC uses
accountants in the fight against corruption. The methodology adopted for the work is the
exploratory research method leading to deductive conclusions using, secondary data and papers
presented at various seminars and the internet. The researcher discovered that EFCC is one of the
anti corruption establishments by the government to fight economic and financial crimes in
Nigeria. The researcher also concluded that positive changes in the accounting profession will
impact largely to the success of the EFCC in Nigeria. The EFCC should partner more with
bodies like ICAN, ANAN in the area of training of the operatives.
1, No. 1, 2012
25
Also, Emechele (2009) on the study titled A critical Review of the Role of Economic
and Financial Crime Commission (EFCC) in Public sector Accountability focused on effective
and efficient system of managing and accounting of public funds. The data for this study were
collected through observations, questionnaires and interviews. The population of the study
consisted of 50 staff. Stratified random sampling technique was adopted in selecting the staff.
Data generated were analyzed using the percentage analysis; the hypotheses formulated were
tested using product moment correlation coefficient. It was discovered that not much is done
about accountability in Nigeria. Financial statements are usually in arrears and public office
holders tend to use the laxity to get with away financial control failures. The researcher
recommended that everybody must be ready to collaborate with the EFCC if the move to rid the
country of the criminals must succeed.
Gap in the Literature
It is observed from the above studies that none of the researchers looked at the need of
EFCC in checkmating the effectiveness of the accountants in rendering accountability in the
public sector instead they concentrated their studies on the role/function of EFCC in the fight
against corruption in Nigeria.
The Role of Public Sector Accountants
The major aspect of accounting that comes to the fore in this area is the area of auditing
and investigation. Government accountants and auditors working in the public /private sector
maintain and examine the records of government agencies, auditing private businesses and
individuals whose activities are subject to government regulations /taxation. In Nwali (2010),
accountant in public sector are very much interested in issues such as accountability, probity and
ensuring that due process is adhered to in the discharge of duties. They however, ensure that
revenues are received and expenditures are made in accordance with financial management laws
and regulations.
A board of an organization, an accountant is responsible for establishing, overseeing and
maintaining audit functions which:
(a) Effectively test and monitor internal controls to see if they are in place.
(b) Ensure reliability of financial statements and reporting practice.
The audit programmes (Emechele, 2009) must test financial statements to identify:
- Deviation from institutionalized policies and practices.
- Inaccurate, incomplete or unauthorized transactions.
- Violations of laws and regulations.

- Deficiencies in the safeguarding of assets.
Nwali (2010) supporting the above view added that accountants do analyze and interpret
the financial information that corporate executives needed to make sound business decisions.
They also prepare financial reports for other groups, including creditors, stock holders,
regulatory agencies and tax authorities.
Other roles according to Emechele (2009) include to:
- Promote cost effectiveness
- Ensure financial accountability
- Ensure good stewardship of assets or resources
- Improve transparency in government accounts, of government agencies, etc.
- Detect and prevent errors and fraud, etc.
Functions of EFCC in the Public Sector
1, No. 1, 2012
26
The establishment of this economic and financial crime commissions Act No. 1 of 2004
stipulated the functions of the EFCC which includes the following:
1. Fight corruption; minimize waste, dishonesty and extravagance.
2. To apprehend dishonest corrupt civil public servants and deter potential ones.
3. The co-ordination and enforcement of all economic and financial crime law.
4. The co-ordination of all existing, economic and financial crimes investigation units in
Nigeria
5. The examination and investigation of all reported cases of economic and financial crimes
with a view to identifying individuals, corporate bodies or group involved.
6. To appraise the performance of ministers, agencies, boards, etc.
7. To ensure carrying out operations economically, efficiently and effectively, etc.
(Emechele, 2009; Idaewor, 2010 and Nwali, 2010).
Perpetrators of Crimes in Public Sector
The most known perpetrators of crimes in the public sector are the officials who move in
and out of the offices as well as the outsiders who delve in into this ugly business. Outsiders
include: those who commit fraud using forged signature and/ or documents of recognized
personnel to commit financial crimes e.g. Signature forgers. And those who connive with the
officials in the public sector to commit fraud e.g. contractors (Emechele, 2009). There also exist
the opportunitistic or occasional crime perpetrators who commit crime when there is any
available loop-hole discovered in the course of working, while professional crime perpetrators
create loop-holes themselves either by individual effort or through officials in the public sector.
In Nigeria today, corrupt practices are many. Corrupt practices is the (Aroh, 2009)
involvement of a public or private official to accomplish an act called corruption. Corruption is
an attitude that is not the norm of the society. The following are involved in corrupt practices:
- A judge who thwarts the cause of justice is corrupt.
- A president who doesnt follow due process in the administration of Government
business is among.
- A lecturer who sells mark or extorts money from students is involved.
- An accountant who adds figures to approved ones is not left out in corruption.
- A clergyman or woman who collects money for salvation is included.
- A security personnel such as police, Army, Custom, Road Safety, Corps etc, who extorts
money from innocent citizens for services not rendered is corrupt.
- A contractor who inflate contract costs or the one who collect contract funds and abandon
the job is a corrupt person.
- A journalist who collect bribe to report in favour of a leader, when what he or she is
reporting is not correct is corrupt.
- A minister and his officials who share unspent budget to their personnel gains are corrupt
- A legislator who approves money not appropriated for is involved
- A student who seduces his or her teacher to curry favour is among
- Children who dupe their parents are deep in corrupt practices
- A head of institution who issues certificate to unqualified candidates for a fee is corrupt.
- An administrator who signs false documents for a fee is deep necked in corruption.
- A businessman who sells fake product to people is corrupt.
It is essential to state here that we are all victims and perpetrators. However, the people
involved most times in the public sector are the secretaries, nurses, accountants, ministers,
1, No. 1, 2012
27
chairman, commissioners, cashiers, directors, treasurers, assistants at various level,
administrators, legislators, friends, councilors and associates law enforcement officers, etc.
In a situation, where all these corrupt practices are deep rooted, it becomes difficult for
development to take place and so there is need for EFCC to work hard in the fight against
economic and financial crimes (corruption).
Theoretical Framework
In the course of this research, the researcher employed the system theory as the right
theory that supports the work.
The system theory or approach was devised by David Easton who drew heavily from
works done in biology. This theory contributed to our understanding of politics. The system
theory has it that the system cannot operate effectively without the support of its sub-systems or
its component units. A proper functioning of a part of the system affects the whole system, each
unit of a system perform series of needed activities in any large and complex establishment these
activities are usually attached to specialized units.
The idea of looking at complex entities as system originated from biology. Living entities
are complex and highly integrated. The heart, lungs, blood, digestive tract and brain perform
their functions in such a way to keep the animal active, take away one organ and the other
compensates for the system, alter their functions to compensate and keep the animal alive. This
is applicable to the political system of any given country.
The theme of this theory is that, in every organization, institution, country, governmental
or political set up, there are various parts or sub-systems or units that makes up the (system)
organization. These units work collectively dependent upon the effective and efficient
functioning of the entire (organization) system. A part or unit of the whole system cannot
function in isolation of the other parts. The functioning of a part of the system, affects the whole
system. Each unit of a system, perform a series of needed activities. In any large and complex
establishment or organization, these activities are usually attached to specialized units.
Nigeria as a political system cannot operate effectively in isolation of the help or
contribution of its sub-systems as supra-system; it needs the support of the sub-system to
maintain a stable political system or society. Therefore, to fight cases of crimes and corruption in
this system, units or sub-system of the supra-system is charged with these responsibilities.
However, to maintain crimes and corruption free system in Nigeria, the economic and
financial crimes commission (EFCC) which is a unit of the government or a sub-system of the
supra-system is charged with this responsibility, if it fail in its mandated fluid to fight crimes and
ensure that defaulters are properly sanctioned, its inability or failure will increase cases of crimes
which will cause inefficiency to the entire system.
METHODOLOGY
The population of this study was 118 respondents consisting of 85 accountants of Local
Government Service Commission (LGSC), Awka, and the remaining 33 were accountants from
post primary school Service Commission (PPSSC), Awka. Only an officer, designated
accountant was considered for this study. As the respondents were very few, the population
remained the sample. Ogbazi and Okpala (200) recommended the study of the entire population
when the population is very few. The study is a survey design and adopted system theory.
Purposive sampling technique was adopted. Questionnaire was the main instrument used for data
collection. There were 27 item questionnaire rated with (5point Likert type of scale) 5, 4, 3, 2,
1, No. 1, 2012
28
1, indicating, 5 Strongly Agree, 4 Agree, 3 Neutral, 2 Disagree and 1 Strongly Disagree
respectively. The questionnaire was subjected to face and content validation by six experts in
accounting and business related courses. Two accountants each from PPSSC and LGSC
respectively and finally two accounting lecturers were drawn from Madonna University, Okija.
The questionnaire was also subject to reliability test and correlation coefficient was 0.79,
which was regarded as high. The questionnaire were personally administered and collected by
same source. Eighty questionnaires were retrieved and useable. The response rate was 68% while
the mortality rate was 32%. Data generated from this study were 32%. Data generated from this
study were analyzed using mean scores and t-test statistical tools.
An item on the questionnaire yielding a mean of 3.5 and above was accepted as Agree
while any item below 3.5 is regarded as Disagree. For the t-test, a null hypothesis was accepted if
the calculated t-value is less than the critical t-value and vice visa. The research question were
first analyzed and presented below, followed by the hypotheses.
Research Questions One
What are the roles of Accountants in the accountability of Public Sector?
Question item 1-8 were used to analyze the first research question. The analysis of data
collected for this research question are presented in table 1
Table 1: Mean (x) scores rating of the role of accountants in the accountability of public
sector
S/No Role of Accountants Mean (x) SD Decision
1 To enforce financial Accountability 4.87 0.33 Accepted
2 To ensure efficient financial administration of
the system of internal control and
management
4.76 0.42 Accepted
3. To improve transparency in govt. account &
accounts of govt. agencies
4.18 0.59 Accepted
4. To ensure good stewardship & assets

resources
3.22 0.71 Rejected
5. To detect and prevent errors & fraud 4.06 0.58 Accepted
6 To ensure that operations are economically,
efficiently & effectively carried out
2.82 0.67 Rejected
7 To promote cost effectiveness 2.81 0.63 Rejected
8 To ensure that financial statement are in
agreement with the records
4.67
0.47
Accepted
Grand Mean (x)
3.92
0.55
Accepted
Source: field survey
1, No. 1, 2012
29
From table 1 above, all the roles for accountants were accepted, hence the perform these
roles because their mean rating were greater than 3.5 except the following three roles: ensure
good stewardship of assets or resources (3.22), ensure that operations are economically,
efficiently and effectively carried out (2.82) and to promote cost effectiveness (2.81). Thus, out
of the 8 roles, 5 were accepted and 3 rejected.
Research Question Two
What are the functions of EFCC in accountability of Public Sector?
Questions 9 16 were used to analyze the second research question. This research question was
answered using the rating given by the accountants of PPSSC and LGSC Awka. The analysis of data for
research question 2 was presented in table 2.
Table 2: Mean (x) scores rating of the functions of EFCC as regards
checkmating of Accountants in Public Sector
S/No Functions of EFCC Mean (x) SD Decision
9 Fight Corruption, minimize waste dishonesty &
extravagance attitude
4.12
0.73
Accepted
10 Apprehend dishonesty corrupt civil servant & deter
potential ones
4.16
0.56
Accepted
11 Appraise the performance of ministers, agencies,
boards, etc
4.21 0.54 Accepted
12 Enhance economic co-ordination of all the economic &

financial crime laws
3.95
0.47
Accepted
13 Examination & investigation of all cases to identify
individuals, corporate bodies or group
4.71 0.45 Accepted
14 Advises govt. on appropriate intervention measures, for
combating financial & economic crime
4.30
0.66
Accepted
15. Collect all reports relating to suspicious financial
transactions
4.61
0.54
Accepted
16 Ensures that public funds are judiciously spent within
statutory power
4.00
0.47
Accepted
Grand mean (X)
4.20
0.55
Accepted
1, No. 1, 2012
30
The data in table 2 above depicts that 8 functions performed by the EFCC received mean
ratings of 3.5 and above and the grand mean of 4.20. Thus, they were all accepted as the
functions performed by the EFCC. Research Question Three
Who are the perpetrators of crimes in the Public Offices?
Question 17-27 were used to analyze the third research question. The analysis of data collected
for this research question was presented in table 3.
Table 3: Mean (x) scores rating of the perpetrators of crimes in the public
offices
S/No Perpetrators Crime Mean (x) SD Decision
17 A Lecturer 4.38 0.49 Accepted
18 Children 4.13 0.60 Accepted
19 A security personnel e.g. Police, custom 4.09 0.58 Accepted
20 A Judge 4.26 0.59 Accepted
21 A legislator 4.06 0.58 Accepted
22 A business man 4.08 0.57 Accepted
23 A Minister 4.06 0.58 Accepted
24 A contractor 4.13 0.64 Accepted

25 A president 4.70 0.50 Accepted
26 An accountant 3.94 0.58 Accepted
27 A student
Grand mean (x)
4.22
0.56
Accepted
From table 3 above, all the eleven perpetrators of crime were rated 3.5 and above with a
grand mean (x) of 4.22. This indicates that they were accepted as the perpetrators of crimes in
the public sector.
Hypothesis One (Ho1)
Accountants in PPSSC and LGSC do not differ significantly in their rating regarding the
role of accountants in the accountability of public offices.
The above hypothesis was tested using questionnaire items 1-8. The results of the t-test
statistical tools used were shown on table 4.
Table 4: Result of t-test difference between the mean ratings of PPSC and LGSC
accountants regarding the roles of accountants in the accountability of public
offices
Group Sample Mean (x) SD SD Error T-Cal T-Crit
Remark
PPSSC
Accountants
25
4.24
0.24
0.04
4.26
1.99
Significant(s)
Rejected Ho
LGSC
Accountants
55
4.04 0.18 0.02
Table 4 above depicts the t-test analysis between the responses of PPSSC and LGSC
accountants on the role of accountants in the accountability of public offices. The two groups of
1, No. 1, 2012
31
respondents had t-calculated value 4.26 and critical value of 1.99. Since the t-calculated value
(4.26) was more than the t-critical value (1.99) at 0.05 level of significance, the null hypothesis
was therefore rejected and the alternative hypothesis accepted.
Hypothesis Two (Ho2)
LGSC and PPSSC Accountant do not differ significantly in their ratings as to the
functions of the EFCC in public Sector. The hypothesis above was tested using questionnaire
item 9-16. The result of the t-test statistical tool used was presented on table 5 below.
Table 5: Result of t-test difference between the mean ratings of LGSC and PPSSC
Accountants as to the functions of EFCC in the public sector
Group Sample Mean
(x)
SD SD
Error
T-Cal T-Crit
Remark
PPSSC
Accountants
55 4.02 0.16 0.02
4.25
1.99
Significant(s)
Rejected Ho
LGSC
Accountants
25 4.20 0.22 0.04
Data in table 5 above shows the t-test analysis between the opinions of LGSC and PPSSC
accountants as to the functions of EFCC in the Public Sector. The two sets of respondents had
tcalculated
value of 4.25 and t-critical value of 1.99. Since the t-cal. Value was more than the tcrit.
value (t-cal 4.25 > t-crit 1.99 at 0.05 level of significance), the decision rule which states
that if the calculated t-value is less than the critical t-value, accept the null hypothesis is rejected.
Hypothesis Three (Ho3)
LGSC and PPSSC Accountants do not differ significantly in their rating regarding the
perpetrators of crime in the public sector. This third hypothesis (Ho3) was tested using
questionnaire items 17-27 totaling II items. The results of the t-test statistical tool were shown on
table 6 below.
Table 6: Results of t-test difference between mean ratings of the LGSC and PPSSC
Accountants regarding the perpetrators of crime in the public sector
Group Sample Mean (x) SD SD Error T-Cal T-Crit
Remark
PPSSC
accountants
55 4.03 0.23 0.03
8.16
1.99
Significant(s)
Rejected Ho
LGSC
accountants
25 4.58 0.32 0.06
Table 6 indicates the t-test analysis between the opinions of LGSC and PPSSC
accountants on the perpetrators of crime in the public sector. The two groups respondents had
tcalculated
value of 8.16 and t-critical value of 1.99. Since the t-calculated value (8.16) was more

1, No. 1, 2012
32
than the t-critical value (1.99) at 0.05 level of significance, the null hypothesis was rejected and
the alternative hypothesis accepted.
Discussion of Findings
The results of table 1 and 4 showed the results from the findings which followed the
research question answered and the hypotheses tested. The study revealed that respondents
strongly agreed that they perform 5 out of the 8 roles outlined. The roles are:
1. To enforce financial accountability
2. To ensure efficient financial administration of the system of internal control and
management
3. To ensure that financial statement agrees with the records
4. To Improve transparency in government accounts/government agencies
5. To detect and prevent errors and fraud.
The result of this research revealed that to enforce financial accountability is the most
patronized role of accountants; hence, the very high rating was attached to it. Supporting,
Idaewor (2010) said that government has demonstrated strong political will to fight corruption
and other economic and financial crimes in Nigeria hence EFCC is regarded as financial watch
dog of Nigerian business environment. Accountants in public sector are very much interested in
issues such as accountability, probity and ensure that due process are received and expenditures
are made in accordance with financial management laws and regulations (Nwali,2010).
All the accepted roles in this section received mean ratings of 3.5 and above. EFCC is the
anti-corruption body established by the government to fight economic and financial crimes in
Nigeria; positive changes in accounting profession brought large impact to the success of the
EFCC in Nigeria (Emechele, 2009). The result of the analysis showed that the t-calculated values
were in the rejection region of all null hypotheses.
However, item by item mean rating of the respondents revealed that PPSSC accountants
rated each role in this section higher than the LGSC accountants hence the existence of a
significance difference in the rating.
The results in tables 2 and 5 depicted the functions of EFCC in the public sector. The
ratings of 3.5 and above indicated that they were all performed by the agency (EFCC).
Examination and investigation of all cases to identify individuals, corporate bodies or groups was
rated the mean scores of 4.71 which shows that, it is one of the most function performed by the
EFCC. This is followed by collecting all reports relating to suspicious financial transactions
(4.16). Buttressing the above points, EFCC Act No. 1 of 2004 stipulated the functions of EFCC
as thus, fight corruption, minimize waste, dishonesty and extravagance, apprehend dishonest
corrupt Civil/Pubic Servant and deter potential ones, investigate cases relating to economic and
financial crimes, etc. The result of the t-test showed that the t-calculated value was more than the
t-critical (t-cal. 4.25 > t-crit. 1.99 at 0.05 level of significance) thus, the rejection of the null
hypothesis. The item by item mean rating of LGSC accountants rated each function higher than
the PPSSC accountants, hence the significant difference in their mean ratings.
The data in tables 3 and 6 above indicated the ratings of LGSC accountant and the
PPSSC accountant regarding the perpetration of crime in the public sector. The result in these
tables showed the results from the findings which followed the research question and the
hypothesis tested. The study revealed that all are perpetrators of crime but most ones are thus;
accountants (4.70), president (4.58) and lecturers (4.26). Among the three rated the highest
perpetrators of crime, the accountant was rated highest (4.70). Supporting the above assertion,
Aroh (2009) said that the accountants add figures to approved ones collect fraudulent receipt of
1, No. 1, 2012
33
property and make false statements of returns, etc. Also, a president who dont follow due
process in the administration of government business is among the perpetrators of crime, as well
as the lecturer who sells mark or extorts money from a student or who lurred a female student
into prostitution in the name of awarding marks. The result of analysis of data depicts that the
tcalculated
value was more than the t-critical value (t-cal. 8.16> t-crit. 1.99 at 0.05 significance
level). This resulted in the rejection of the null hypothesis. However, item by item mean rating of
LGSC accountants rated each perpetrators of crime higher than the PPSSC accountants; hence
the significant difference existed in their mean rating.
In summary, accountants recognized that they are to enforce financial accountability.
Accountability is synonymous with stewardship. There appears to be great demand for regular
appraisal and review of the financial performance of the public sector. Financial statements are
usually in arrears and public office holders tend to use the laxity to get away from their
responsibilities. Lots of accounting and financial control failure exists and public office holders
use these lapses as a shield in their shady deals. This is why there was high rating of the EFCC
functions regarding the examination and investigation of all cases to identify individuals,
corporate bodies or groups to mis-manage the public funds entrusted on them.
On the other hand, the accountant who supposes to render proper accounts of his/her
stewardship was rated as one of the highest perpetrators of crime. With this, where are
accountability, probity and ensurance of due process in discharging their duties?
Conclusion
Based on the findings of the study, the following conclusions were drawn.
Positive changes in the accounting profession will impact largely in the success of the
EFCC in Nigeria with its attendant effects on the economy of the country.
For a country to be successful there should be accountability in the public sector and
transparency of accounts among the executives as well as the spirit of prudence,
efficiency and deep rooted acceptability in public money management. Remember how
Cain and Abel rendered the account of their stewardship Genesis 4 v 35. God accepted
that of Abel for proper accountability because he injected transparency and probity while
that of Cain was rejected.
The agency EFCC have carried out varied functions in seeing that embezzled public
funds are paid back into the government purse.
Recommendations
The following recommendations were made:
The government should:
Install good accounting control to avoid embezzlement or mismanagement of funds in the
public sector.
Identify illegally acquired wealth and confiscate them.
Publish a code of transparency/conduct for public office holders
Everybody should remain law abiding so that the society could become a better place for
all.
The EFCC should imbibe the attitude of objectivity to assure Nigerians that no one is
above or below the law as the commission continues to enjoy the support of majority of
Nigerians.
The EFCC should partner more with professional bodies such as ANAN, ICAN in the
area of training of their operations (accountants).
1, No. 1, 2012
34
There should be a speedy trial of suspects to avoid undue detention of people without
trial
REFERENCES
Adams, R.P. (2006). Public Sector Accounting and Finance made Easy.
Oba:Ifevic Publisher.
Aroh, E.C. (2009). Corrupt practices and National Development Business Search.
1st Annual Conference Journal of School of Business and Management
Technology 1 (1), 273-279.
Bode, O. (2009). Government Accounting: Its Reporting and its implication on the
Nation Unpublished Thesis, Madonna University, Okija
Emechele, O.J. (2009). A critical Review of the Role of Economic and Financial Crime
Commission (EFCC) in Public Sector Accountability. Unpublished Thesis,
Madonna University, Okija.
Idaewor, D. (2010). Role and Responsibility of Banks in the implementation of
money Laundering, Economic and Financial Crimes in Niegeria. Unpublished
Thesis, Madonna University, Okija.
Mbah, F. (2009). The Effectiveness of Public Sector Accountability in maintaining
Accountability Unpublished Seminar Report, Madonna University Okija.
Momoh, D.Y. (2010). The impact of Economic and Financial Crime Commission
(EFCC) in Nigeria. Unpublished Seminar Paper, Madonna University, Okija.
Nwabueze, P.B.C. (2000). Basic Principles of Auditing. Enugu: Mical
Communication International
Nwali, N.B. (2010). Making Effective use of Accounts in the fight Against Corruption
By EFCC. A seminar paper presented at the Accountancy Department.
Ebonyi State University, Abakiliki
Ogbazi, N.J and J. Okpala (1994). Writing research report: guide for
researchers in education, the social science and the humanities. Owerri:
prime Time Ltd,
Okoli, M. (2010). Impact of EFCC in the fight against corruption in Nigeria.
Unpublished Seminar Paper, Madonna University, Okija.
THE EFFECT OF INTERNAL CONTROLS ON REVENUE

COLLECTION BY COUNTY GOVERNMENTS IN KENYA
FAITH MAWIA MUSYA
A RESEARCH PROJECT SUBMITED IN PARTIAL
FULFILMENT OF THE REQUIREMENT FOR THE AWARD OF

A DEGREE IN MASTER OF BUSINESS ADMINISTRATION,
UNIVERSITY OF NAIROBI
OCTOBER, 2014
ii
DECLARATION
I declare that this research project is my original work and has never been submitted
to any other University for assessment or award of a degree.
Signature................................ Date.......................................
Name: faith Mawia Musya
D61/80211/2012
This project has been submitted with my authority as the University supervisor.
Signature................................... Date.......................................
Dr.Josiah Aduda
Dean ,School of Business,
University of Nairobi.
iii
ACKNOWLEDGEMENT
This research project is my original work and has not been submitted for any award
in any other university. The success of this study is indebted to many people who
either used their treasured time to give their ideas, support and suggestions or
contributed to my whole well-being which was essential to the completion of this
project.
I am very grateful to the Almighty God for giving me strength and the gift of life to
go through this demanding but rewarding exercise. The completion of this study was
realized through the will of God and the contribution and support of many people who
whole heartedly supported me.
Special thanks go to my supervisor, DR J.O Aduda, who patiently and selflessly
guided me throughout the entire process and assisted me with some very relevant
guidance that helped kick start the project. Many thanks to my colleagues in the
internal audit department, who assisted me, encouraged me and supported me morally
during the entire study period they made me believe I can. I also owe much gratitude
to my fellow students in the MBA Module II program who contributed or supported
this study in one way or another. I also would like to thank all the head of internal
audit in the county governments of Kenya who spent their invaluable time to
respond to my questionnaire I wouldnt have been able to reach this far without their
dedication.
Finally am thankful to my parents Mr. and Mrs. Mati, my brothers and sister for the
encouragement, support and assisting me meet the cost of this degree. To all my
family and friends, I am truly grateful for your support and understanding throughout
my academic journey.
May the Almighty God bless you all.
iv
DEDICATION
I dedicate this research project to my dear parents Mr. and Mrs. Mati for their love,
understanding, and encouragement and support while conducting this study and
throughout the MBA course. I would also like to thank my children, Tanita and
Bryden for their constant support and encouragement and for keeping it fun.
ABSTRACT
This study sought to examine the part played by internal control system inthe
collection of revenue by county governments in Kenya. The objective of this study
therefore was to closely look at the internal controls in revenue collection by county
governments Kenya with a view to establish whether such internal controls have
produced any meaningful results in increased collected revenue. The research was
conducted using both qualitative and quantitative approaches. Questionnaires were
used on a population of 47 respondents in gathering primary data for the study. The
data collected was then analyzed and findings have revealed that the five components
of control environment, risk assessment, control activities, information and
communication and monitoring must be available for internal controls to work. The
study established that weak internal controls activities and lack of proper information
and communication systems have encouraged collusion to fraud, loss of revenue and
embezzlement of collected revenue. The study therefore concludes that internal
controls do function although with hiccups and that there is a significant effect
between internal controls and revenue collection in county governments in Kenya.
vi
TABLE OF CONTENTS
DECLARATION ..........................................................................................................ii
ACKNOWLEDGEMENT....iii
DEDICATION......iv
ABSTRACT...v
TABLE OF CONTENTS..vi
LIST OF TABLES ............................................................................................................ ix
LIST OF ABBREVIATIONS....................................................x
CHAPTER ONE ............................................................................................................1
1.0 INTRODUCTION .................................................................................................. 1
1.1 Background of the Study .........................................................................................1
1.1.1 Internal Control Systems...................................................... 1
1.1.2 Revenue Collection ............................................................................................. 4
1.1.3 Internal Control Systems and Revenue Collection in County Governments........5
1.1.4 County Governments in Kenya.............................................................................8
1.2 Research Problem ................................................................................................... 8
1.3 Objectives of Study............10
1.4 Value of the Study ................................................................................................10
CHAPTER TWO......11
2.0 LITERARURE REVIEW.......................................................................................11
2.1 Introduction............................................11
2.2 Theoretical Review.........11
2.2.1Agency Theory............................ 11
2.2.2Transaction Cost Economics Theory ..................................................................12
vii
2.2.3 Institutional Theory.....13

2.3 Determinants of Revenue Collection in County Governments..........................13
2.3.1 Control Environment...... 13
2.3.2Risk Assessment...............................................................................14
2.3.3 Information and Communication....................................................................... 15
2.3.4 Control Activities............................................................................................... 16
2.3.5 Monitoring...16
2.4 Empirical Studies.......17
2.5 Summary of literature review.18
3.0 RESEARCH METHODOLOGY ..........................................................................19
3.1 Introduction ...........................................................................................................19
3.2 Research Design.....................................................................................................19
3.3 Population ............................................................................................................ 19
3.4 Data Collection.. ............................................................... 19
3.5 Data Analysis ...................................................................................................... 20
3.6 Data Validity and Reliability................................................................................. 20
CHAPTER FOUR ............................................................................................................ 21
DATA ANALYSIS AND PRESENTATION OF FINDINGS .........................................21
4.1 Introduction ...........................................................................................................21
4.2 Response Rate ...................................................................................................... 21
4.3 Internal Control Systems ...................................................................................... 21
4.3.1 Descriptive Statistics on Control Activities........................................................21
4.3.2 Descriptive Statistics on Control Environment...................................................24
4.3.3 Descriptive Statistics on Risk Assessment .........................................................25
4.3.4Descriptive Statistics on information and Communication..............26
viii
4.3.5 Descriptive Statistics on Monitoring.......27

4.4 Inferential Analysis................................................28
4.4.1 Coefficient of Correlation...................................................................................28
4.4.2 Regression Analysis ...........................................................................................28
4.5 Summary and Interpretation of Findings ...............................................................31
CHAPTER FIVE .........................................................................................................33
SUMMARY, CONCLUSION AND RECOMMENDATIONS..................................34
5.1Summary ................................................................................................................34
5.2 Conclusion......34
5.3 Limitation of the Study.......35
5.4 Policy Recommendations.......36
5.5 Suggestions for Further Study........37
REFFERENCES.......38
APPENDICES......44
Appendix 1:Letter of Introduction ............................................................................. 44
Appendix II: Questionnaire..........................................................................................45
Appendix III: List Of Counties In Kenya ....................................................................47
ix
LIST OF TABLES
Table 1 Response Rate................................................................................................ 21
Table 2Mean and Standard Deviation of Control Activities...21
Table 3Mean and Standard Deviation of Control Environment......24
Table 4 Mean and Standard Deviation of Risk Assessment .......................................25
Table 5Mean and Standard Deviation of Information and Communication...............26
Table 6Mean and Standard Deviation of Monitoring..................................................27
Table 7 Coefficients of Correlation............................................................................. 28
Table 8 Model Summary..........29
Table 9 ANOVA Analysis.......29
Table 10 Coefficients of Multiple Regression Analysis......30
LIST OF ABBREVIATIONS
COSO-Committee of Sponsoring Organizations
FASB-Financial Accounting Standards Board
IIA-Institute Of Internal Auditors
KRA-Kenya Revenue Authority
SOX-Sarbanes Oxley Act
SPSS-Statistical Package for Social Sciences
TCE-Transaction Cost Economics
TI -Transparency International
UNES-University of Nairobi Enterprise and Services Limited
1
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
According to Fight (2002), cash is the most liquid of assets and is susceptible to loss
if not properly controlled. Therefore, it is extremely important that, all departments
handling cash implement and adhere to strong internal controls. The recent financial
crisis has put cash collection and its management through effective internal control
system back in the spotlight, forcing treasurers to focus their efforts on ways to
improve their companies cash management.
The embezzlement of funds from public institutions or organizations, particularly in
essential services or monopolistic public institutions, is becoming more common.
Such scandals have raised concerns about their internal control systems. Recent
reports on the mismanagement of funds by the media coupled with exposure of the
complex web of rot and poor control system has raised curtains on internal control
system. These developments have called into question the internal control system
found in public utility provider organizations. According to Gibbs, (1997) most public
institutions do not have efficient internal control system on cash collection which has
often accounted for poor financial management. Accordingly, it is no surprise that,
some public service providers more often than not, views internal controls as
unnecessary and irrelevant.
Any entity of whichever form or size should put in place its own system of controls in
order to achieve its objectives Mwindi (2008). A system of effective internal controls
is a critical component of company management and a foundation for the safe and
sound operation of organizations. However, ineffective internal controls result in
ineffective programs and eventually leading to losses (Olumbe, 2012).
1.1.1 Internal Controls Systems
COSO (1992) defines internal control as a process, carried out at various
organizational levels, aimed at providing reasonable certainty regarding the
achievement of the objectives of efficiency and effectiveness of operating activities,
2
reliability of accounting information, compliance with laws and regulations. In the

light of this definition, an internal control system is effective when it provides
adequate protection against risks that can compromise the achievement of firms
objectives. Internal control is a process, affected by an entity's board of directors,
management and other personnel, designed to provide reasonable assurance regarding
the achievement of objectives in various categories. Internal control is a key element
of the reliability of financial reporting, effective and efficient entity operations, and
compliance with laws and regulations. Internal control increases the efficiency of
operations by applying the standardized procedures; it adds value to control processes,
Standard definitions of processes, job definitions, and regulations therefore,
contributes the promotion of management effectiveness and efficiency. Meanwhile, it
helps to secure an entity's current assets through control mechanisms because it
becomes a systematic approach to secure its assets as the entity grows.
Internal control provides the reliability of financial reporting; supports management in
making right financial decisions and eliminates or identifies fraudulent acts within the
entity. Internal control reinforces and ensures compliance with laws and regulations.
In other words, it prevents the entity from any financial or property loss, inaccurate
decision making, fraud, loss of income and assets. The role of internal controls,
therefore, provides support for management in safeguarding company assets,
elimination of any income and resource loss, making goal-oriented and accurate
decisions, identifying and preventing fraud. To sum up, internal control is a process
affected by an organization's structure, work and authority flows, people and
management information systems, designed to help the organization accomplish
specific goals or objectives. It provides reasonable assurance and is the responsibility
of the entity management.
Failure in reaching organizational goals may be as a result of lack of internal
controls. Internal control has been recognized in most organization as one of the most
essential ingredients, necessary for the survival of the business enterprise and
government agencies. Apart from the problem of scarce resources, organizations run a
high risk of fraud, errors, miss-appropriation funds and inefficient and ineffective
operations. Steps are required therefore to minimize, if not eliminate completely,
these risks, by establishing internal control system. For every organization, there are
3
risks that the organizational goals and objectives are not achieved. All efforts aimed at
preventing such risks or identifying and correcting such risks are viewed as internal
control. Anthony (1998) defined internal control as the process by which managers
assure that resources are obtained and used effectively and efficiently in the
accomplishment of the organization objectives.
Garrison and Noreen (2000) suggested a different definition for internal control as
those steps taken by management that attempt to increase the likelihood that the
objectives set down at the planning stage are attained and to ensure that all parts of the
organization function in a manner consistent with organizational policies. He further
defined internal control as those set of organizational activities which include:
planning, co-ordination, communication, evaluation and decision making as well as
informal processes aimed at enhancing the efficient and effective use of the
organizational resources towards the achievement of the organizational objectives.
According to Hamed (2009), Internal Control System refers to an organized
amalgamation of functions and procedures, within a complete system of controls
established by the management and whose purpose is the successful function of the
business. Internal Control System is all the methods and procedures followed by the
management in order to ensure, to a great extent, as much successful cooperation as
possible with the director of the company, the insurance of the capital, the prevention
and the detection of fraud, as well as the early preparation of all the useful financial
information .Hongming and Yanan (2012), adds that Internal Control System
resembles the human nervous system which is spread throughout the business
carrying orders and reactions to and from the management. It is directly linked to the
organizational structure and the general rules of the business.
Internal Control provides reasonable assurance that the objectives of the organization
are being achieved in the following categories: effectiveness and efficiency of
operations including the use of the entitys resources. Reliability of financial
statement and other report for internal and external use, compliance with applicable
laws and regulation. Internal control was designed to provide reasonable assurance
regarding preventions of or prompt detection of unauthorized acquisition, use or
disposition of organizations assets. Internal Control is not one event, but a series of
4
actions and activities that occur throughout an entitys operations and on an ongoing
basis. Internal control was recognized as integral parts of each system that
management uses to regulate and guide its operations rather than as a separate system
within an organization. Internal control is management tools that are built into the
entity as a part of its infrastructure to help manager run the entity and achieve their
aims on an ongoing basis.
Internal control is affected by people: people are what make internal control work.
The responsibility for good internal control rests with all managers. Management sets
the objectives, put the control mechanisms and activities in place, and monitor and
evaluates the control. However, all personnel in the organization play important roles
in making accountability happen. Internal control provides reasonable assurance, not
absolute assurance; management design and implement internal control based on the
related cost and benefits. No matter how well designed and operated, internal control
cannot provide absolute assurance that all organization objectives will be met. Factors
outside the control or influence of management can affect the entitys ability to
achieve all of its goals. For example, human mistakes, judgment errors, and acts of
collusion to circumvent control can affect meeting organizations objectives.
Therefore, once in place, internal control should be reviewed periodically to ensure
that loopholes are sealed immediately.
1.1.2 Revenue collection
The Financial Accounting Standards Board (FASB) (1985) defines revenue as
inflows or other enhancements of assets of an entity or settlements of its liabilities (or
combination of both) during a period from delivery or producing goods, rendering
service or other activities that constitutes the entitys ongoing major or central
operations. In addition, Hongreen (2002) described revenue as inflows of asset
(almost always cash or accounts receivables) received for products or services
provided to customers.
Government revenue includes all amounts of money (i.e. taxes and/or fees) received
from sources outside the government entity. Large governments usually have an
agency or department responsible for collecting government revenue from companies
5
and individuals. Government revenue may also include reserve bank currency which
is printed. This is recorded as an advance to the retail bank together with a
corresponding currency in circulation expense entry, that is, the income derived from
the Official Cash rate payable by the retail banks for instruments such as 90 day bills.
There is a question as to whether using generic business-based accounting standards
can give a fair and acc0urate picture of government accounts, in that with a monetary
policy statement to the reserve bank directing a positive inflation rate, the expense
provision for the return of currency to the reserve bank is largely symbolic, such that
to totally cancel the currency in circulation provision, all currency would have to be
returned to the reserve bank and cancelled. (Bringham et al, 2008)
1.1.3 Internal Control Systems and Revenue Collection in
County
Governments in Kenya
In the financial year 2013/2014, the total revenue available to the Counties was Kshs.
40.4 billion which consisted of national shareable revenue of Kshs. 32.9 billion
(81.4%), Kshs.4.3 billion(10.8%) as locally collected revenue and a balance brought
forward of Kshs. 3.2 billion(7.8%) which had remained unspent in the previous
financial year. however ,most counties were not able to collect as they had budgeted
and this was attributed to among other factors a weak internal control mechanism.
This therefore calls for the County governments to ensure that internal controls are
well enhanced in the counties so that proper revenue collection can be attained.
An internal control system enables management to deal with quickly changing
economic and competitive environments, market changes such as shifting customer
demands and priorities and restructuring. Similarly Willis (2000) reported that
effective internal control helps an organization achieve its operations, financial
reporting, and compliance objectives. Effective internal control is a built-in part of the
management process (i.e., plan, organize, direct, and control). Internal control keeps
an organization on course toward its objectives and the achievement of its mission,
and minimizes surprises along the way. Internal control promotes effectiveness and
efficiency of operations, reduces the risk of asset loss, and helps to ensure compliance
with laws and regulations. Internal control also ensures the reliability of financial
reporting (i.e., all transactions are recorded and that all recorded transactions are real,
6
properly valued, recorded on a timely basis, properly classified, and correctly

summarized and posted).
Theoretically, effective internal control system increases efficiency in revenue
collection since its built-in part of the management process (i.e., plan, organize, direct,
and control). Internal control keeps an organization on course toward its objectives
and the achievement of its mission, and minimizes surprises along the way. Internal
control promotes effectiveness and efficiency of operations, reduces the risk of asset
loss, and helps to ensure compliance with laws and regulations. Theoretically
therefore, an Organization with effective system of internal control is expected to
achieve its objective efficiently and effectively.
Internal controls provide an independent appraisal of the quality of managerial
performance in carrying out assigned responsibilities for better revenue generation
(Beeler et al., 1999). According to Fadzil et al. (2005), an effective internal control
system unequivocally correlates with organizational success in meeting its revenue
target level. Effective internal control for revenue generation involves; regular a
review of the reliability and integrity of financial and operating information, a review
of the controls employed to safeguard assets, an assessment of employees' compliance
with management policies, procedures and applicable laws and regulations, an
evaluation of the efficiency and effectiveness with which management achieves its
organizational objectives Ittner et al., (2003). Most organizations no longer set up
internal control system as a regulatory requirement but also because it helps in
ensuring that all management activities are appropriately carried out Kenyon and
Tilton, (2006). Further, organizations are making it a point of duty to train, educate,
and sensitize their employees on how to use these internal control systems since its
effectiveness depends on the competency and dependability of the people using it.
Good internal control systems lead to improved recognition, assumption and
prevention of risks associated with revenue collection, which is of prime importance
in a sector with the particularities of revenue collection. Also competitiveness will be
fostered by appropriate controls not only in the short but also in the long term. It will
also help reduce the impact of unexpected events, or even to avoid them altogether,
for example by means of good early warnings or scenario testing. According Mautz
7
and Winjum (1981) internal control system guarantees some reasonable assurance:
thus accepting the existence of a certain degree of uncertainty that cannot be
completely controlled or absorbed by the undertaking. Accepting the idea that internal
control systems have to be linked with the cost of carrying out control procedures, yet
they have to guarantee a reasonable degree of confidence according to the nature and
extent of risks taken (Van Der Nest, 2000; Mautz and Winjum, 1981; Angelovska,
2010).
From the foregoing analysis of importance of internal control, it could be concluded
that, the overall purpose of the concept is to help an organization achieve its mission,
internal control also helps an organization to: promote orderly, economical, efficient
and effective operations, and produce quality products and services consistent with
the organizations mission, safeguard resources against loss due to waste, abuse,
mismanagement, errors and fraud. Finally is to promote adherence to laws,
regulations, contracts and management directives as well as develop and maintain
reliable financial and management data, and accurately present that data in timely
reports.
The broader nature of public sector governance necessitates an effective internal
control system in order to meet the demanding responsibilities imposed by
stakeholders. Internal controls can help to improve governance processes by focusing
on how values are established to ensure effective and efficient control and
management of public sector entities. Such a value system requires an open
government that is transparent in its dealings with a high sense of ethical behavior and
fairness. The complexity of the public sector operating environment requires that the
internal controls to be properly designed, well approached, and their scope reformed
to ensure open, accountable and prudent decision-making with all public sector
organizations.
8
1.1.4 County Governments in Kenya

County governments were established in 47 Counties (based on the 1992 Districts of
Kenya), County Governments are geographical units envisioned by the2010
constitution of Kenya as the units of devolved Government. Their powers are
provided in Articles 191 and 192, and in the Fourth Schedule of the Constitution of
Kenya and the County Governments Act of 2012. This governments are responsible
for: county legislation, executive functions, functions transferred from the national
government, functions agreed upon with other counties and establishment and staffing
of a public service .counties in Kenya were created as a result of devolution which is
principally meant to take away and re-distribute/share out the power to plan, legislate,
budget and make policies for governing from the highly centralized national executive
and legislature to forty seven county executives and assemblies.
Devolution aims at serving county citizens better by delivering goods and services
that may not be provided by the private sector, at a price that makes them accessible
to all. This is essentially a public good concept and therefore such goods are
recognized as public goods and have the characteristics of non excludability and nonrivalness
.The prices of these public goods or social necessities, like health, education
and mode of public transportation, are not necessarily determined by market forces.
In the financial year 2013/2014, counties cumulatively budgeted for Kshs. 277.4
billion to finance their expenditure. This comprised of Kshs. 210 billion grant from
the National Government, and Kshs. 67.4 billion to be generated from local revenue
sources. In the period under review, the total revenue available to the Counties was
Kshs. 40.4 billion which consisted of national shareable revenue of Kshs. 32.9 billion
(81.4%), Kshs.4.3 billion (10.8%) as locally collected revenue and a balance brought
forward of Kshs. 3.2 billion (7.8%) which had remained unspent in the previous
financial year. However, most counties were not able to collect much revenue as they
had budgeted and this was attributed to among other factors a weak internal control
mechanism.
9
1.2 Research Problem

Organizations continue to experience low levels of revenue generation most of which
are man-made and therefore avoidable. Despite the numerous rules and regulations,
the varying levels in revenue generation occur across all entities in the government
and private sectors. No matter how well it is designed and operated, internal audit can
only provide a reasonable, not absolute assurance that the objectives of the companys
internal control system are met in terms of revenue generation.
Over the years the public sector has been experiencing massive corruption and fraud
related cases where public funds end up in the hands of corrupt individuals Adari,
(2007). And in most instances such lost funds are never recovered despite having
litigations against the perpetrators. Public organizations in Kenya are faced with risks
emanating from internal controls weaknesses which more often than not result to
financial losses for the organizations Njoroge (2003). Weak internal controls also
provide avenues for fraud in these organizations Wagacha, and Ngugi (2009).
According to Wagacha, and Ngugi (2009) these risks need to be identified and
mitigated to ensure that imminent threats are controlled.
Ndungu (2013) studied the effect of internal controls on revenue generation in
University Of Nairobi Enterprises and Services limited (UNES) and concluded that
systems of internal control should be functioning as per the intended plans to help in
enhancing efficiency and accurate data capturing. This will go in a long way in
ensuring that revenue collection targets are attained.
Muio (2012) studied the impact of internal control systems on the financial
performance of private hospitals in Nairobi and established a significant relationship
between internal control system and financial performance.
Njui (2012) investigated the effectiveness of internal control and audit in promoting
good governance in the public sector in Kenya and found that internal control has the
greatest effect on corporate governance within Kenya government ministries followed
by risk management while compliance and consulting had the least
10
The above researchers concentrated on internal controls and revenue collection of

other sectors like Kenya Revenue Authority and University Of Nairobi Enterprise and
Services limited.
This research will be different from all the above mentioned as it will specifically
look at effect of internal controls on revenue collection in county governments in

Kenya.
This study attempts to answer question: What is the relationship between internal
control systems and revenue collection by County Governments in Kenya?
1.3 Objective of Study
The objective of this study will be to establish the effect of internal controls on
revenue collection in county governments.
1.4 Value of the study

The results of the study will help identify gaps within the systems of internal control
in County governments in Kenya. It is also the researchers belief that this study will
benefit:Management and those charged with revenue collection in County Governments since
they will appreciate the internal controls and come up with ways on how to streamline
the systems of internal controls thus ensuring improved revenue collection thus
ensuring attainment of the county objectives.
Researchers and scholars - this study will also add to the existing body of knowledge
regarding internal controls and the group of individuals will be also get to know
whether internal controls add value to revenue collection in county governments and
will also use the findings herein as reference to other studies and further research
General public and donors-This people will be able to understand the role of internal
controls in ensuring that county Governments are able to account properly for the
revenue collected by them.
11
CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction
The chapter explains the theoretical contributions from various authors on internal
audit and revenue collection. It also gives contribution of various research studies as
carried out by various authors and then concludes on the general view of the various
authors.
2.2 Theoretical Review

The main theoretical perspectives that have affected internal audit and revenue
collection in county governments are the agency theory, transaction cost economics,
stakeholders theory and stewardship theory.
2.2.1 Agency Theory

A significant body of work has built up in this area within the context of the principalagent
framework. The work of Jensen and Mecklin (2000) in particular and of Fama
(2001) is important.
Agency theory identifies the agency relationship where one party, the principal,
delegates work to another party, the agent. The agency relationship can have a
number of disadvantages relating to the opportunism or self-interest of the agent: For
example, the agent may not act in the best interests of the principal, or the agent may
act only partially in the best interests of the principal. There can be a number of
dimensions to this including for example, the agency misusing his power for
pecuniary or other advantage ,and the agent not taking appropriate risks in pursuance
of the principals interests because he(the agent) views those risks as not being
appropriate and the principal may have different attitudes to risks. There is also the
problem of information asymmetry whereby the principal and the agent have access to
different levels of information; in practice this means that the principal is at a

disadvantage because the agent has more information.
12
The extent to which principals dont trust their Agents will tend to determine the level
of the monitoring mechanism created for the overview of agents activities and the
extent to which agents compensation levels are determined to be acceptable. Upon
this principle rests the foundation of auditing profession Millichamp and Taylor
(2008). As mentioned in the agency theory, the problem which has always existed
when managers report to owners is can the owners believe the report? The report
may;- contain errors, not disclose fraud, be inadvertently misleading, be deliberately
misleading, fail to disclose relevant information and fail to conform to regulations.
The solution to this problem of credibility in reports and accounts lies in appointing
independent professionals called auditors to investigate the report and report their
findings (Millichamp and Taylor, 2008).
Agency theory provides a useful theoretical framework for the study of the internal
auditing function. It has been proposed that agency theory not only helps to explain
and predict the existence of internal audit but that it also helps to explain the role and
responsibilities assigned to internal auditors by the organization, and that agency
theory predicts how the internal audit function is likely to be affected by
organizational change.
2.2.2 Transaction cost economics Theory

The most well-known translation of the Coasian theory of the firm is that by Olivier
Williamson and his transaction cost economics (TCE). The objective of TCE is to
explain different forms of organization based on the differences in transaction costs.
Williamson describes the firm as a governance structure, rather than as a production
function Williamson (1996).The theory is based two assumptions; the first assumption
relates to bounded rationality Simon (1976), the notion that decision makers
capabilities are bounded in terms of formulating and solving problems and processing
all information during the decision-making process. The second assumption deals
with opportunism, e.g. possible conflict because individuals are promoting their own
self-interest.
Transaction cost economics provides a basis for describing a contractual or
transactional relationship between parties, in which each party expects something
from the other Speckle (2001).This can be a relationship within the organization, but
13
also between organizations. The choice of mechanism depends on a comparative

analysis of the transaction costs characteristics (i.e. asset specificity, uncertainty and
frequency) Williamson (1996). TCE analyses the most economic, value preserving
governance structure to infuse order, thereby to mitigate conflict and realize mutual
gain Williamson (2002).Williamson argues that an internal monitor (a manager, an
internal auditor) has an advantage over external monitors, as he has greater freedom
of action, a wider scope, understands the language of the firm and can rely on less
formal evidence Williamson (1975). With that TCE seems to imply an advantage of
the internal auditor over the external auditor.
2.2.3 Institutional Theory

According to this theory by Fogarty et al. (1997), an organization is designed and
functions to meet social expectations in so far as its operations are visible to the
public. Therefore organizational internal operations, which are often complex and
difficult to identify, may take second place to the issue of external legitimacy. It is
suggested that the external image of the organization may be loosely coupled with its
operating processes and the kind of technology it adopts.
Fogarty et al. (1997) developed this, asserting that the contribution of institutional
theory is in the insight that the actual accomplishments of an organization and what its
structure suggests should accomplish are often different. The organization operates
with internal processes that are not normally visible to those external to it, while other
structures maintained for outsiders do not significantly add to output. Fogarty (1996)
observes that scrutiny by outsiders can be avoided if the right structures are adopted
by organizations. Loose technological coupling enables organizations to show success
in external problems whilst allowing flexibility in operational processes. Thus the
institutions should be ready to meet the high cost of adopting various technologies in
the internal audit department and ensure that the staffs are trained in order for the
department to operate efficiently.
14
2.3 Determinants of revenue collection in county governments

2.3.1 Control Environment
In internal control, the control environment sets the tone of the organization by
influencing the control consciousness of its people Whittington and Pany, (2001).
Control environment is the foundation for all the other components of internal control. It
comprises of factors like; integrity and ethical values of personnel tasked with creating,
administering, and monitoring the controls, commitment and competence of persons
performing assigned duties, board of directors or audit committees, management
philosophy and operating style, and organizational structure.
Internal control systems not only contribute to managerial effectiveness but are also
important duties of corporate boards of directors. Accounting literature likewise
emphasizes the importance of an organizations integrity and ethical values in
maintaining an effective control system Verschoor (1999). A focus on integrity and
ethical values was the principal contribution of Internal Control Integrated Framework
published by the Committee of Sponsoring Organizations of the Treadway Commission
on fraudulent financial reporting.
2.3.2 Risk Assessment

Risk assessment refers to the careful assessment of factors that affect the possibility of
objectives of the organization not being achieved. It refers to the identification and
analysis of relevant risks associated with achieving the objectives of the organization
Karagiorgos et al., (2009). They add that risk assessment is the process of identifying
and analyzing management relevant risks to the preparation of financial statements that
would be presented fairly in conformity with general accepted accounting principle. In
organizations, management must determine the level of risk carefully to be accepted,
and try to maintain such risk within determined levels. It is therefore the managements
responsibility to design internal controls to ensure efficiency and effectiveness,
reliability of financial reporting as well as compliance with laws and regulations. This
is ensured by periodic performance review and evaluation of the adequacy and
effectiveness of the controls designed by the internal audit department.
An organizations system of internal control has a key role in the assessment of risks
15
that are significant to the fulfillment of its business objectives. A sound system of
internal control contributes to safeguarding of organizations assets. Internal control
facilitates the effectiveness and efficiency of operations, helps ensure the reliability of
internal and external reporting and assists compliance with laws and regulations
Whittington and Pany, (2000). A companys objectives, its internal organization and
the environment in which it operates are continually evolving and, as a result, the risks
it faces are continually changing. A sound system of internal control therefore depends
on a thorough and regular evaluation of the nature and extent of the risks to which the
organization is exposed.
2.3.3. Information and Communication
According to Aldridge and Colbert (1994), internal control requires that all pertinent
information be identified, captured, and communicated in a form and time frame that
enable people to carry out their financial reporting responsibilities. Firms should adopt
internal control and information systems that produce operational, financial and
compliance-related information reports to make it possible to run and controls the
business. Effective communications should occur in a broad sense with information
flowing down, across, and up within all the sections of the organization.
The information function is the basis of management activities and the level of
information processing ability is one of the most important symbols of the level of
management. And this information must be delivered timely to those who fulfill its
responsibility and other responsible ones in some form. Completing the information
transmission is communication and it can translate the abstract goal and plans into
language that encourage employees.
2.3.4 Control Activities
Control activities refer to policies, procedures, and mechanisms put in place to ensure
directives of the management are properly carried out Aikins(2011); Rezaee et al.,
(2001). Appropriate and accurate documentation of policies and procedural guidelines
helps to determine how the control activities are to be executed. Is also provides
adequate information for auditors examination of the overall adequacy of control
16
design over financial management practices Aikins (2011). This control activities
ensure that all necessary actions should be taken with the aim to address risks so that
organizational objectives are achieved. According to Rezaee et al. (2001), internal
control activities occur throughout the organization. They include a range of activities
like; approvals, authorizations, verifications, reconciliations, reviews of operating
performance, security of asset and segregation of duties. Most of them are made
possible through the help of the internal audit function.
2.3.5 Monitoring
Monitoring refers to the process of assessing the quality of the internal control structure
over time. Since internal controls are processes, it is usually accepted that they need to
be adequately monitored in order to assess the quality and the effectiveness of the
systems performance over time. By monitoring, the organization gets provided with
assurance that the findings of audits and other reviews are promptly determined
Theofanis et al, (2011); Rezaee et al., (2001). Amudo and Inanga (2009) are of the
view that monitoring of operations ensures effective functioning of internal controls
system. Its through monitoring that an organization determines whether or not its
policies and procedures designed and implemented by management are being carried
out effectively by employees.
According to Bowrin (2004), monitoring can be achieved by regularly supervising and
managing activities like monitoring of customer complaints and feedback and audits
conducted periodically by internal auditors. Internal auditors can investigate and appraise
internal control structure and the efficiency with which the various functions are
performing their assigned duties. This way, they can bring a systematic and disciplined
approach for the evaluation and improvement of risk management activities and good
governance process by examining of the internal controls and evaluating how adequate
and effective the controls are. Monitoring ensures that the findings of audits and other
reviews are promptly resolved (Rezaee et al., 2001)
2.4 Empirical Studies
Case studies on internal controls in Belgium illustrate the importance of the control
environment when studying internal auditing practices. Sarens and De Beelde (2006)
17
found that certain control environment characteristics like tone-at-the-top, level of

risk and control awareness, extent to which responsibilities related to risk
management and internal controls are clearly defined and communicated are
significantly related to the role of the internal audit function and fraud detection
within an organization.
Mwachiro (2013) established that internal controls played an important role in
ensuring revenue collection was carried out effectively. The research was conducted
using both qualitative and quantitative approaches. Questionnaires were used on a
population of 38 respondents in gathering primary data for the study. The data
collected was then analyzed and findings have revealed that the five components of
control environment, risk assessment, control activities, information and
communication and monitoring must be available for internal controls to work. The
study established that weak internal controls have encouraged collusion to fraud, loss
of revenue and embezzlement of collected revenue. The study therefore concludes
that internal controls do function although with hiccups and that there is a significant
effect between internal controls and revenue collection in KRA. The internal auditors
are expected to provide recommendations for improvement in those areas where
opportunities or deficiencies are identified
Ewa and Udoayang (2012) carried out a study to establish the impact of internal
control design on banks ability to investigate staff fraud and staff life style and fraud
detection in Nigeria. Data were collected from 13 Nigerian banks using a Four Point
Likert Scale questionnaire and analyzed using percentages and ratios. The study found
that Internal control design influences staff attitude towards fraud such that a strong
internal control mechanism is deterrence to staff fraud while a weak one exposes the
system to fraud and creates opportunity for staff to commit fraud. In addition, most
Nigerian banks do not pay serious attention to the life style of their staff members and
that most staff members are of the view that effective and efficient internal control
design could detect employee fraud schemes in the banking sector. The study
concluded that effective and efficient internal control system is necessary to stem the
malaise in the banking sector. The study therefore recommended that banks in Nigeria
should upgrade their internal control designs and pay serious attention to the life style
of their staff members as this could be a red flag to identifying frauds.
18
Spira and Page (2003) explored the change in internal control using sociological
perspectives on risk and its conceptualization to frame the debate about internal
control and risk management within the UK corporate governance arena. By using
this method, the paper had been able to show that progresses in corporate governance
reporting requirements offer chances for the misappropriation of risk and its
management by groups, at the same time, enables to evaluate the current changes in
Internal audit.
Ndungu (2013) researched on effects of internal controls on revenue collection by
Kenya Revenue Authority and concluded that internal controls played an important
role in ensuring effective revenue collection.
2.5 Summary of Literature Review
Effective internal controls include; the maintenance of proper accounting records,
employee accountability, timely reporting on financial matters, risk mitigation by
internal employees, effective communication among employees, efficient and
effective utilization of financial and non-financial resources and information and
communication technology in service delivery Emasu (2007). They help to ensure that
the organization is not unnecessarily exposed to avoidable financial risks and that
financial information used within the business and for publication is reliable Simiyu
(2011). They also contribute to the safeguarding of assets, including the prevention
and detection of fraud and misuse of organizational resources (Musa, 2010).
19
CHAPTER THREE
RESEARCH METHODOLOGY
3.1 Introduction
This chapter presented the research design and methodology that was used to carry
out the research. It presented the research design, the population, sampling, data
collection and data analysis.
3.2 Research Design

Research design refers to the way the study is designed, that is the method used to
carry out the research Mugenda and Mugenda (2003).The study adopted a descriptive
cross-sectional research design, which according to Kothari (2004), is used when the
problem has been defined specifically and where the researcher has certain issues to
be described by the respondents about the problem.
3.3 Population
According to Ngechu (2004), a study population is a well-defined or specified set of
people, group of things, households, firms, services, elements or events which are
being investigated The target population for this study was the internal auditors and
accountants in the 47 counties in Kenya .This is because they are more conversant
with the subject matter of study.
3.4 Data Collection
According to Ngechu (2004), there are many methods of data collection. The choice
of a tool and instrument depends mainly on the attributes of the subjects, research
topic, problem question, objectives, design, expected data and results. This is because
each tool and instrument collects specific data. Donald (2006) notes that there are two
major sources of data used by respondents; primary and secondary data.
Questionnaires were used to obtain important information about the population.
According to Sproul (1998), a self-administered questionnaire is the only way to elicit
self-report on peoples opinion, attitudes, beliefs and values. The study used primary
data, Primary data was collected using semi-structured questionnaires. The
20
questionnaires will be used because they will allow the respondents who are auditors
to give their responses in a free environment and help the researcher gather
information that would not have been given out had interviews being used.
3.5 Data Analysis

Data was analyzed using Statistical Package for Social Sciences (SPSS Version 20.0)
program. Both quantitative analysis and regression analysis were used as data analysis
technique. The data collected was run through various models so as to clearly bring
out the effect internal controls on revenue collection in county government in Kenya.
The researcher also used a multivariate regression analysis to determine the
relationship between the independent variables and the dependent variable. The
regression equation was:
R = 0 + 1X1 + 2X2 + 3X3+ 4X4+ 5X5 +
Where,
0, 1, 2, 3, 4 and 5 are the regression co-efficient
R -Revenue collection by County Governments in Kenya (comparison between
budgeted revenue and actual revenue collected)
X1- Control Environment
X2- Risk Assessment
X3- Information and Communication
X4 - Control Activities
X5 - Monitoring
= Error term
3.6 Data Validity and Reliability
Piloting was carried out to test the validity and reliability of the instruments. Validity
indicates that degree to which the instrument measures the constructs under
investigation. Mugenda and Mugenda (2003). A pilot study was conducted by the
researcher taking some questionnaires to the audit staff in county government which
was filled by some respondents at random.
21
CHAPTER FOUR
DATA ANALYSIS, FINDINGS AND INTERPRETATIONS
4.1 Introduction
This chapter discusses the interpretation and presentation of the findings. This chapter
presents analysis of the data on the effects of internal controls on revenue collection
of county governments in Kenya. This chapter also provides the major findings and
results of the study.
4.2 Response Rate

The researcher targeted the heads of internal audit in all the 47 county governments in
Kenya. This is because the people in management are the most conversant with the
subject matter of the study. However, out of 47 questionnaires distributed 40
respondents completely filled in and returned the questionnaires, this represented 77%
response rate. This is a reliable response rate for data analysis as Mugenda and
Mugenda (2003) pointed that for generalization a response rate of 50% is adequate for
analysis and reporting, 60% is good and a response rate of 70% and over is excellent.
Table 1 :Response Rate
Response Rate Frequency percentage
Filled in questionnaires
36 77
Un returned questionnaires
11 23
Total
47 100
4.3 Descriptive Statistics on Internal Control systems.

4.3.1: Descriptive statistics on Control Activities.
Table 2: Mean and Standard deviation of Control Activities.
CONTROL ACTIVITIES
N Min Max Mean
Std.
Deviation
Management is committed to the operation of
the system
36 3 5 4.08 .439
Specific lines of authority and responsibility
have been established to ensure compliance
with policies and procedures
36 2 5 3.75 .967
22
Staff are trained to implement the accounting

and financial management system
36 2 5 3.36 1.046
Revenue collection departments have budget
reviews where actual revenue is compared with
budgeted revenue
36 2 5 4.03 .736
There is clear separation of roles in revenue
collection department.
36 2 5 3.28 1.137
Policies and procedures for authorization are
established at an adequately high level
36 2 5 3.75 .874
Variances between actual and budgeted revenue
are explained by management on a timely basis.
36 2 5 4.00 .828
Valid N (list wise) 36
In table 2 are details of the measures of effectiveness of the control activities under
different key statements obtained from the respondents. The statements have been
ranked in terms of their means and standard deviations so as to deduce meaning out of
the results. Therefore, the details of the table are discussed under sub headings of the
corresponding statements tested.
The study as reflected in table 2 found that the respondents seem to agree that the
management is committed to the operation of the system in place with a mean value
of 4.08 which appears to be close to the maximum rank of 5. However, the
corresponding standard deviation value of 0.439 shows that there is a clear variation
in the responses provided by the respondents about managements commitment.
Managements commitment to the operations of the internal control system is also
supported by Verschoor, (1999) where he notes that Internal control systems not
only contribute to managerial effectiveness but are also important duties of the
corporate boards of directors. Therefore management commitment to the operations
of the system is a fulfillment of their obligation as highlighted by Verschoor
From table 2 above, respondents seemed to agree that revenue collection departments
have budget reviews where actual revenue is compared with budgeted revenue as
reflected by the mean value of 4.03 which is tending towards the maximum point of 5.
23
However, a standard deviation of 0.736 suggests varied responses regarding budget

reviews where actual revenue is compared with budgeted revenue.
.
In Table 2 above, respondents seemed to agree with the statement relating to timely
explanations by management on variances between actual and budgeted revenue as
reflected by a mean of 4.00 which is tending towards the maximum point of 5.
However, a standard deviation of 0. 828 suggests varied responses regarding timely
explanations by management on variances between actual and budgeted revenue
collected.
A greater standard deviation figure of 1.137 raises concerns regarding clear separation
of roles in the revenue collection department, this figure of standard deviation further
reveals that the respondents had varied opinion about role separation in revenue
collection department.
The results of the survey in table 2 suggest that respondents seem to agree that
specific lines of authority and responsibility have been established to ensure
compliance with policies and procedures However, the standard deviation of 0.967
provided by the same respondents suggests that they possess varied understanding
about the aspect of Specific lines of authority and responsibility have been established
to ensure compliance with policies and procedures.
The results of the survey as revealed by Table 2 suggest that policies and procedures
for authorization are established at an adequately high level. This is evident when the
mean of respondents as computed by the system is well above the average (i.e. 3.75).
Nevertheless, the corresponding standard deviation of 0.874 suggests that respondents
had variations in their responses on policies and procedures for authorization are
established at an adequately high level
24
4.3.2: Descriptive statistics on Control Environment.

Table 3: Mean and Standard deviation of Control Environment.
CONTROL ENVIROMENT
N Min Max Mean
Std.
Deviation
Management closely monitors implementation
of internal control system
36 2 5 3.83 .609
Management acts with a great degree of
integrity in execution of their roles
36 2 5 3.64 .833
Management provides feedback to the officers
about the operation of the internal control
system
36 2 5 3.69 .749
Responsibilities are delegated and follow up
action is made to get feedback on results of
performance of all tasks delegated
36 2 5 3.83 .609
In table 3 are details of the measures of effectiveness of the control environment
under different key statements obtained from the respondents. The statements have
been ranked in terms of their means and standard deviations so as to deduce meaning
out of the results. Therefore, the details of the table are discussed under sub headings
of the corresponding statements tested.
The study as reflected in table 3 found that the respondents seem to agree on the
statements that the management closely monitors implementation of internal control
system and responsibilities are delegated with follow up action made to get feedback
on results of performance of all tasks delegated both with a mean of 3.83. The
corresponding standard deviation also revealed a significant value of 0.609, this also
shows that there is a clear variation in the responses provided by the respondents
about the two statements.
25
4.3.3: Descriptive statistics on Risk Assessment.

Table 4: Mean and Standard deviation of Risk Assessment.
RISK ASSESMENT
N Min Max Mean
Std.
Deviation
Revenue loss and risks have been identified by
management
36 2 5 3.92 .604
Management has put in place mechanisms for
mitigation of critical risks that may result from
fraud
36 2 5 3.83 .697
Management has defined appropriate
objectives for the organization
36 2 5 3.83 .609
Revenue collection procedures are well
documented
36 2 5 3.39 .964
Measures have been put in place for risk
identification
36 2 5 3.72 .779
Staff are adequately involved in internal
controls
36 2 4 3.50 .845
Table 4 shows details of the measures of effectiveness of risk assessment under
different key statements obtained from the respondents. The statements have been
ranked in terms of their means and standard deviations so as to deduce meaning out of
the results. Therefore, the details of the table are discussed under sub headings of the
corresponding statements tested.
From the findings, most of the respondents indicated that revenue loss and risks have
been identified by management as indicated by mean score of 3.92, through risk
assessment, the management has put in place mechanisms for mitigation of critical risks
that may result from fraud as depicted by mean score of 3.83. Further respondents
indicated management has defined appropriate objectives for the organization, revenue
collection procedures are well documented ,measures have been put in place for risk
identification including staff are adequately involved in internal controls were effective
as depicted by mean score of 3.83, 3.39, 3.72 and 3.50 respectively.
26
4.3.4: Descriptive statistics on Information and

Communication.
Table 5: Mean and Standard deviation of Information and

Communication.
INFORMATION AND
COMMUNICATION N Min Max Mean
Std.
Deviation
The reporting on organizational structures
spells out all the responsibilities of each
section/unit in the organization
36 2 5 3.97 .560
Communication helps to evaluate how well
guidelines and policies of the organization are
working and being implemented
36 2 5 3.81 .786
Management receives timely, relevant and
reliable reports for decision making
36 2 5 3.75 .841
There is effective reporting of revenue targets
to be achieved in a particular year
36 2 5 3.69 .889
All employees understand the concept and
importance of internal controls, including the
division of responsibility
36 2 5 3.00 .986
The study also sought to establish the extent to which respondents agreed or disagreed
with the above statements relating to information and communication as part of
internal control. From the study findings as shown in table 5, most of the respondents
pointed out that the reporting on organizational structures spells out all the
responsibilities of each section in the organization as indicated by mean score of 3.97,
Communication helps to evaluate how well guidelines and policies of the organization
are working and being implemented were effective as depicted by a mean score of
3.81 in each case, further, management receiving timely, relevant and reliable reports
for decision making and an effective reporting of revenue targets to be achieved in a
particular year were effective as depicted by a mean score of 3.75 and 3.69
respectively.
Further table 5 shows a mean of 3.00 which is slightly below the mean average,
implying that respondents disagree with the statement that all employees understand
the concept and importance of internal controls, including the division of
responsibility, Consequently, a higher standard deviation figure of 0.986 raises
27
concerns as to whether all employees understand the concept and importance of

internal controls, including the division of responsibility, it further reveals that the
respondents had varied opinion about this statement relating to information and
communication.
4.3.5: Descriptive statistics on Monitoring.
Table 6: Mean and Standard deviation of Monitoring.
MONITORING
N Min Max Mean
Std.
Deviation
There are regular and periodic reviews of
collections before the end of financial year
report
36 2 5 3.94 .532
Internal reviews of implementation of internal
controls in revenue collection units are
conducted continuously
36 3 5 3.94 .475
There are independent process checks and
evaluations of control activities on an ongoing
basis
36 2 5 3.81 .668
Management assesses the system of control
from time to time
36 2 5 3.89 .523
Periodically management carries out internal
reviews of internal control systems in place
36 2 5 3.86 .593
..The study sought to establish the extent to which respondents agreed or disagreed
with the above statements relating monitoring as part of internal control. From the
study findings as shown in table 6, most of the respondents pointed out that there were
regular and periodic reviews of collections before the end of financial year report
which was depicted by a mean score of 3.94, internal reviews of implementation of
internal controls in revenue collection units were conducted continuously as depicted
by a mean score of 3.94. In addition, the respondents agreed that the management
assesses the system of control from time to time, there are independent process checks
and evaluations of control activities on an ongoing basis and periodically the
management carries out internal reviews of internal control systems in place as
indicated by a mean score of 3.89, 3.86 and 3.81 respectively.
28
4.4 Inferential Analysis

To establish the relationship between the independent variables and the dependent
variable the study conducted inferential analysis which involved coefficient of
correlation, coefficient of determination and a multiple regression analysis.
4.4.1 Coefficient of Correlation

Table 7 :Coefficient of Correlation
Control
Activities
Control
Environment
Risk
Assessment
Information and
Communication
Monitoring
Control
Activities
Pearson
Correlation
1
Sig. (2-tailed)
Control
Environment
Pearson
Correlation
.053 1
Sig. (2-tailed)
.757
Risk
Assessment
Pearson
Correlation
.243 .039 1
Sig. (2-tailed) .154 .822
Information and
Communication
Pearson
Correlation
-.264 .238 .144 1
Sig. (2-tailed) .120 .162 .402
Monitoring Pearson
Correlation
.291 .389* .151 .055 1
Sig. (2-tailed) .086 .019 .379 .748
*. Correlation is Significant at th0.05 level (2-tailed )
4.4.2 Regression analysis

The coefficient of determination was carried out to measure how well the statistical
model was likely to predict future outcomes. The coefficient of determination, r2 is
the square of the sample correlation coefficient between outcomes and predicted
values. As such it explains the extent to which changes in the dependent variable can
29
be explained by the change in the independent variables or the percentage of variation

in the dependent variable (actual revenue versus budgeted revenue) that is explained
by all the three independent variables (control activities, control environment, risk
assessment, information and communication and finally monitoring).
Table 8 :Model Summary

Model R R Square Adjusted R Square Std. Error of the Estimate
1 .190a .036 .089 3.27318
From the findings in the above table the value of adjusted R squared (co-efficient of
determination) was 0.089 an indication that there was variation of 89% on
actual/budgeted revenue collected by county governments in Kenya due to changes in
aspects of internal control systems that include: control activities, control
environment, risk assessment, information and communication systems and
monitoring at 95% confidence interval.
Table 9: ANOVA Analysis
Model
Sum of
Squares Df Mean Square F Sig.
1 Regression 12.051 5 2.410 .225 .949a
Residual 321.412 30 10.714
Total 333.463 35
Table 9 shows a summary of the analysis of the model. The F critical at 5% level of
significance was 333.463 since F calculated is greater than the F critical (value =
.225), this shows that the overall model was significant .
30
Table 10:coefficient of Multiple Regression Analysis

Model
Unstandardized
Coefficients
Standardized
Coefficients
B Std. Error Beta t Sig.
1 (Constant) .421 5.187 .081 .936
Control Activities -.050 .662 .016 .075 .941
Control Environment .181 .906 .044 .200 .843
Risk Assessment .153 .948 .030 .161 .873
Information and
Communication
-.671 .707 .183 .949 .350
Monitoring .406 1.114 .088 .364 .718
a.Dependent variable: actual/budgeted revenue
Table 10 illustrates results of a linear regression analysis determining the effect of the
independent variables (control activities control environment, risk assessment,
information and communication systems and monitoring) on the dependent variable
(actual/budgeted revenue)
Using the results, we have the regression equation as:
R=.421-.050X1 +.181X2 +.153X3-.671X4+.406X5,where Y is the dependent variable
(revenue generation), X1 is control activities, X2 is control environment, X3 is risk
assessment, X4 is information and communication systems, and X5 is monitoring.
According to the regression equation established, taking all factors into account with
constant at zero, actual /budgeted revenue will be 0.421. The data findings analyzed
also show that revenue generation is greatly monitoring followed by control
environment and risk assessment. Taking all other independent variables at zero, a
unit increase in monitoring will lead to a 0.406 percentage increase in the ratio of
actual /budgeted revenue collected while a unit increase in control environment will
31
result in a 0.181 percentage increase in the ratio of actual/budgeted revenue collected

by county governments in Kenya.
4.5 Summary and Interpretation of Findings

According to Hayes et al. (2005), the internal control system comprises five components
which are: the control environment, risk assessment process, the information and
communication systems, control activities and the monitoring of controls. Internal
controls are essential to an organizations success and survival because they provide
reasonable assurance on the achievement of objective in a number of categories
including: effectiveness and efficiency of operations; reliability in financial reporting; and
compliance with applicable laws and regulations (Chambers, 2009).
The study found that assessment of internal control framework from time to time,
internal reviews of implementation of internal controls in revenue collection units,
independent process checks, regular and periodic reviews of collections before the
end of the financial year were an effective aspect in monitoring due to application of
internal controls. Amudo and Inanga (2009) add that monitoring of operations ensures
effective functioning of internal controls system. Its through monitoring that an
organization determines whether or not its policies and procedures designed and
implemented by management are being carried out effectively by employees. Doyle et al.
(2007) and Millichamp (2002) add that internal control is a whole system of controls
established by the management for the business entity to check the conduct of the
business in terms of internal check, internal audit and other forms of control.
From the findings the study revealed that there was greater variation in revenue
collected by county governments in Kenya due ineffectiveness in the information and
communication systems. a greater variation in revenue collected could be accounted
for by employees not understanding the concept and importance of internal control
systems, including the division of responsibility, presence of an effective reporting of
targets to be achieved in a particular financial year and management receiving timely
,relevant and reliable reports for decision making. This is not in line with Aldridge
and Colbert (1994), who state that internal controls require that all pertinent
information be identified, captured and communicated in a form and time frame that
enable people to carry out their financial reporting responsibilities. The management
32
should therefore enhance the effectiveness of its information and communication

systems for attainment of the revenue targets set.
From the study, it has also been revealed that management has identified individuals
who are responsible for coordinating the various activities within the entity. The
reporting system on the organizational structures spells out all the responsibilities of
each section/unit in the organization. Information must be communicated throughout
the entire organization in order to permit personnel to carry out their responsibilities
with regard to objective achievement Amudo and Inanga, (2009). All employees
understand the concept and importance of internal controls, including the division of
responsibility.
From the study, it was found that control activities as an aspect of internal control
systems were also ineffective in revenue collection by since a decrease in control
activities lead to an decrease in actual /budgeted revenue by county governments in
Kenya by factor of 0.050.this clearly indicated that there existed a negative
relationship between some factors affecting revenue collection by county
governments clearly indicating that there was lack of well-designed system of control
activities and information and communication systems. This implied clearly that the
internal control systems in county governments need to be improved.
From the findings, the element of control environment in the internal control systems
did also contribute effectively in the revenue collected by county governments. A unit
increase in the control environment led to an increase of 0.081 in the ratio of actual
/budgeted revenue by county governments in Kenya. This was facilitated by the fact
that the management did closely monitor implementation of internal control systems,
the management also did act with a greater degree of integrity in their role execution,
there was feedback from the officers about operations of the internal control systems
and finally there was delegation of responsibilities and follow up by management.
33
The study found that close monitoring implementation of internal control systems and
delegation of responsibilities and follow up actions on feedback of results of
performance of all tasks delegated were very significant in influencing the control
environment as indicated both by a mean of 3.83.
From the findings, the study further revealed that revenue loss and risks had been
identified by management as indicated by mean score of 3.92, through risk
assessment, the management had also put in place mechanisms for mitigation of
critical risks that may result from fraud as depicted by mean score of 3.83.
From the findings, the study further revealed that revenue loss and risks had been
identified by management as indicated by a mean score of 3.92,through risk
assessment, the management had also put in place mechanisms for mitigation of
critical risks that may result from fraud as depicted by a mean score of 3.83.this is
consistent with Spira and Page (2003) who found that the internal control systems
evaluates risk exposures relating to the organizations governance operations and
information systems in relation to; effectiveness and efficiency of operations,
reliability and integrity of financial and operational information, safeguarding of
assets and compliance with laws, regulations and contracts. Jackson (2000) also
observed that the idea of risk had become essential to the idea of internal control
systems.
The findings of this study are consistent with those of Ndungu, (2013) where internal
control systems played a significant role in revenue generation in UNES.Mwachiro,
(2013) also concluded that there was a positive relationship between internal control
systems and amount of revenue collected by KRA.
34
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary
The study sought to evaluate the effect of internal controls on revenue collection in
County governments in Kenya. The objective was to establish the effect of internal
controls on revenue collection in county governments in Kenya.
A descriptive cross-sectional design method was preferred for this study. The target
population of this study targeted the heads of internal audit all the 47 county
governments. The research design that was employed in this study is descriptive
design. The study population was the heads of internal audit in the 47 county
governments in Kenya during the financial year 2013/2014.
The study collected both primary and secondary data on the current state of affairs.
The research was both quantitative and qualitative in nature. This implies that both
descriptive statistics and conceptual content analysis were employed. The researcher
also used a linear regression analysis to determine the relationship between the
independent variables and the dependent variable. Collected raw data was cleaned and
edited for completeness and consistency. Statistical Package for Social Sciences
(SPSS, v. 21) was used to aid in quantitative data analysis in this study. The results
were presented in tables. Qualitative data from the open-ended questions was
analyzed through content analysis. The output for this study was presented using
descriptive statistics like the mean score and standard deviation.
The study concludes that monitoring had the greatest effect on revenue collection in
county governments in Kenya government followed control environment while
information and communication l had the least effect. The study recommends that the
county government should recognize contributions of internal control systems.
Additionally, the study recommends that the county governments should apply
internal control systems in their operation to effectively ensure that revenue collected
meets the targets set. Likewise the study recommended that county government
should put in place proper internal control systems as tool for effective revenue
collection so as to realize their objectives set with ease.
35
5.2 Conclusion
The study revealed that monitoring of the internal control system was an important
aspect in ensuring that there was not a big variance between actual and budgeted
revenue by the county governments in Kenya. Monitoring plays a number of roles
in supporting the internal control systems by ensuring that management assesses the
systems from time to time, internal reviews of implementation of internal controls in
revenue collection units are conducted continuously, ,there are independent process
checks and evaluations of control activities on an ongoing basis ,there are regular and
periodic reviews of collections before the end of the financial year report and
periodically, management carries out audit reviews of the internal control systems in
place.
On information and communication as an element of internal control system, the
study concluded that all employees understand the concept and importance of internal
controls, including the division of responsibility, there is effective reporting of
revenue targets to be achieved in a particular financial year ,management receives
timely, relevant and reliable reports for decision making, communication helps to
evaluate how well guidelines and policies of the organization are working and being
implemented and the reporting system on organizational structure spells out all the
responsibilities of each unit/section in the organization making process were not
effective.
The study concluded that revenue loss and risks had been identified by the
management for the benefit of the County governments. Management has put in place
mechanisms for mitigation of critical risks that may result from fraud. Management
had also defined appropriate objectives for the entire organization, revenue collection
procedures were well documented, measures were in place for risk identification and
staff were adequately involved in internal controls.
5.3 Limitations of the Study

The researcher encountered various limitations that were likely to hinder access to
information that the study was looking for. The main limitation of study was its
inability to get information from all the county governments in Kenya. Lack of
36
cooperation and from some respondents this limitation. Reluctance to respond to

questionnaires was also a factor that led to failure of collecting all the required data
for the study. This was due to some reservations held by the target population. This
hence would have led to generalization during the analysis and presentation of the data
made from those who responded to represent the views of the rest of the respondents. The
researchers countered the limitation by making prior arrangements with the respondents
as well as making personal calls and visits to remind the respondents to fill in the
questionnaire.
The information given by respondents was uncontrollable and not sure if it was true or
false. The respondents were explained to that the information would only be used for
education purpose. This allowed them to be confident that they would not be
persecuted of the information they gave.
5.4 Policy Recommendations

Since it was evident in the study, that the control activities were not effective, the
management should ensure that aspects relating to control activities should be
enhanced so as to ensure attainment of objectives .the management should; be
committed to operations of the system, establish policies and procedures for
authorizations at an adequately high level, ensure specific lines of authority and
responsibility have been established to ensure compliance with policies and
procedures, ensure clear separation of roles in revenue collection department, train
staff on implementation of the accounting and financial management system and
finally ensure that variances between actual and budgeted revenue are explained by
management on a timely basis.
Additionally, the study recommended that for the county governments to effectively
attain their revenue collection target, they should ensure that information and
communication system as an element of internal control system is well managed in
the revenue collection departments so as to enable all parties within the department to
freely access and utilize the official information.
37
5.5 Suggestions for Further study

The study suggests that further research to be done on the effect of internal controls
on revenue collection public institutions such as parastatals and the National
government agencies in order to give both negative and positive sides that can be
reliable.
The study also suggested further research to be done on effectiveness of internal
controls on revenue generation of the private organization in order to depict reliable
information that illustrates real situation in both public and private sector
organizations.
The study further recommends that research should be done on the challenges to
effective performance of internal control systems in the Kenyan public sector since
the departments are bogged with myriad challenges.
The study also suggests that research on impact of internal control on operational
efficiency of county governments in Kenya should also be carried out since the county
governments need to be operating efficiently for proper service delivery.
38
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APPENDICES
Appendix 1: Letter of Introduction

Musya Faith Mawia
School of Business,
University of Nairobi,
P.O. Box 30197 Nairobi
Dear Respondent,
RE: REQUEST FOR RESEARCH DATA.
I am a student pursuing a Masters degree in Business Administration at the
University of Nairobi. In partial fulfillment of the requirements to the award of the
Masters degree, I am required to carry out a study on Effects of Internal Controls
on Revenue Collection of County Governments in Kenya.
You have been selected to form part of those to provide the necessary data needed for
this study. You are therefore kindly requested to assist by granting an opportunity for
the filling in of the attached questionnaire at your convenience when contacted for an
appointment. The information you provide will be treated in strict confidence and is
purely for academic purpose. Your assistance and cooperation will be highly
appreciated.
I thank you in advance for your co-operation.
Yours faithfully,
MUSYA FAITH MAWIA
MBA Student UoN
45
Appendix II: Questionnaire

1. To what extent do you agree with the following statements regarding to Internal
Control System? Use a scale of 1-5, Where, 1 = strongly disagree; 2 = disagree; 3 = not
sure; 4= agree; and 5= strongly agree.
CONTROL ACTIVITIES 1 2 3 4 5
Management is committed to the operation of the system
Policies and procedures for authorizations are established at
an adequately high level
Specific lines of authority and responsibility have been
established to ensure compliance with the policies and procedures.
There is clear separation of roles in revenue collection

department
Staff are trained to implement the accounting and financial
management system
Revenue collection departments have budget reviews where
actual revenue is compared with budgeted revenue.
Variances between actual and budgeted revenue are
explained by management on a timely basis
CONTROL ENVIROMENT 1 2 3 4 5
Management closely monitors implementation
of Internal control systems.
Management acts with a great degree of
integrity in execution of their roles
Management provides feedback to the officers about the
operation of the internal control system
Responsibilities are delegated and follow up action is made
to get feedback on results of performance of all tasks

delegated
RISK ASSESMENT 1 2 3 4 5
Revenue loss and risks have been identified by management.
Management has put in place mechanisms for mitigation
of critical risks that may result from fraud
Management has defined appropriate objectives for the
organization.
Revenue collection procedures are well documented
46
Measures have been put in place for risk identification

staff are adequately involved in internal controls
INFORMATION AND COMMUNICATION SYSTEMS 1 2 3 4 5
All employees understand the concept and importance of
internal control systems including the division of
responsibility
There is effective reporting of revenue targets to be achieved
in a particular financial year
Management receives timely, relevant, and reliable reports
for decision-making
Communication helps to evaluate how well guidelines and
policies of the organization are working and being
implemented
The reporting system on organizational structures spells out
all the responsibilities of each section/unit in the
organization
MONITORING 1 2 3 4 5
Management assess the system of control from time to time
Internal reviews of implementation of internal controls in
units are conducted continuously There are independent process checks and evaluations of
control activities on an ongoing basis
There are regular and periodic reviews of collections before
the end of financial year report
Periodically, management carries out reviews of internal
control systems are in place
Thank you for your cooperation
47
Appendix III: List of Counties in Kenya

1) Baringo County
2) Bungoma County
3) Bomet County
4) Busia County
5) Elgeyo Marakwet County
6) Embu County
7) Garrisa County
8) Homa Bay County
9) Isiolo County
10) Kajaido County
11) Kakamega County
12) Kericho County

13)Mombasa County
14) Kirinyaga County
15) Kisumu County
16) Kitui County
17) Kilifi County
18)Kwale County
19) Laikipia County
20) Lamu County
21)Mandera County
22) Machakos County
23) Makueni County
48
24) Marsabit County

25) Meru County
26) Migori County
27) Kisii County
28)Muranga County
29) Nakuru County
30) Nairobi County
31) Kiambu County
32) Nandi County
33) West pokot county
34) Narok County
35)Nyamira County
36)Nyandarua County
37)Nyeri County
38) Samburu County
39) Siaya County
40) Taita Taveta County
41) Tana River County
42) Tharak Nithi County
43) Trans Nzoia County
44) Turkana County
45)Uasin Gishu County
46) Vihiga county
47) Wajir county

Internal Control and Fraud Prevention

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Internal Control and Fraud Prevention

What could have been done to avoid fraud and embezzlement?

1. Review of a sample of all

2. Visits to the clients

Missing documentation is one of the most important symptoms of

A supervisor may regularly review a sample of all new loans issued

Make sure loan documentation is complete: guarantee titles,

Make sure to follow up on the exceptions noted. Be aware of

A supervisor may visit a sample of clients of all new loans issued

authenticity of the loans.

This way a microfinance institution can also identify fraudulent

In general, MFIs must audit a larger number of loans but a smaller

MFIs generally employ a combination of two types of sampling:

For MFIs that use group lending methodologies, a supervisor may

The segregation of duties is the design in the job functions to

Combination of duties may allow a manager or supervisor to

Make sure returned monthly account statements are carefully

People on vacation or on maternity leave should not be allowed to

employees' teller codes.

In smaller MFIs, the supervisory committee often oversees the

Make sure to have clear board approved policies for lending.

Make sure to have mandatory vacation policy policies that require

Inaccurate or incomplete records are often used to hide fraud.

Weak software can be used to hide fraud. One software I know is

9. Resistance to improve the

What I have seen in some cases is a manager of the MFI or some

10. In-transit or suspense

11. Bank reconcilements

13. Audit trails

Review of general ledger in-transit or suspense accounts is very

General ledger suspense accounts or in-transit accounts should be

Process of reconciling the accounts is important. May hide

Bank accounts should be reconciled and checked weekly by a

MIS reports should contain proper information for review by

Management should regularly review MIS reports.

Review reports showing loans by interest rate - reveals unusually

Review loans in arrears. These reports should regularly be

Review reports for new loans disbursed.

Review rescheduled loans reports.

Aberrations and exceptions in any report should be investigated

15. Integration with RM and

Audits (required at least annually) and verifications (required at

Although fraud may be uncovered, the annual audit and regulatory

An example of infraction to reviewing the loans is when the

Internal control mechanisms can be integrated into a larger risk

During Mibancos client visits in Peru, for example, the internal

management, including commonly suggested improvements to

In addition, Mibancos auditors treat client visits as a component

16. Technical assistance

17. Donor role

Donors should require MFIs to have some type of internal control

18. Regulatory requirements

Regulators should become familiar with microfinance and

The ultimate tests of the effectiveness of an MFIs internal control

Furthermore, MFIs that mobilize client savings can apply risk

The lack of effective internal controls is one of the remaining

- Designing monitoring processes including internal control and external audit

INTERNAL CONTROL SYSTEM, MANAGERIAL COMPETENCE AND

1.3 PURPOSE OF THE STUDY ............................................................................................................ 3

CHAPTER TWO ................................................................................................................................. 8

CHAPTER THREE ............................................................................................................................ 14

CHAPTER FOUR .............................................................................................................................. 19

CHAPTER FIVE ............................................................................................................................... 32

Appendix 1-QUESTIONNAIRE FOR NSSF MANAGERS .......................................................... 42