Public Financial Management:

Public Policy and Management: Planning and Performance Centre for Financial and Management
Studies, SOAS University of London.
First Edition 1998, Third Edition 2006, revised 2007, 2011, 2014, 2015 .
Public Financial Management: Planning and Performance Course Introduction and Overview Contents
1 Introduction
2 An Overview of the Course
3-Learning Outcomes
4- Study Materials
5- Assessment
COURSE MODULES The course consists of the following 10 thematic modules: Introduction
Financial management in general Planning and budgeting Budget execution Accounting and financial
reporting Internal control and auditing Impact of recession and government responses Public financial
management reform Action planning Excursions.
The objective of the introductory module is to ensure that participants are familiar with the course
objectives and content, and are able to use the facilities and understand the roles and responsibilities of
DFC and Ramboll. The module is divided into two sessions, the first session provides an introduction to
the course, the study place and provides an introduction to DFCs activities. The second session
introduces the case study that forms a red thread throughout the course. Participants will understand the
logic and structure of the training programme, their tasks and responsibilities, the facilitators, and be
familiar with the facilities provided. The objective of the module on financial management in general is
for participants to be able to explain the key elements of a public financial management system. The
module is divided into three sessions (three hours each). The first session public financial management
enables participants to understand the relations between governance forms, financial management
principles and socio-economic development (including local economic development). The second session
on Practical tools to performance measurement will provide participants with concrete tools to measure
financial management performance and how to formulate guidelines to strengthen the financial
management system. The third session on Capacity Assessment will enable participants to understand and
explain the concept of capacity development in a public sector reform context. The objective of the
module on Planning and budgeting is for participants to be able to explain the steps involved in drafting a
national budget, understand and apply the different types of budgeting approaches. The module is divided
into three sessions. The first session gives an introduction to relevant planning tools for participants to be
acquainted with the main tools and approaches used today in the planning of a national budget. The
second session on planning and budgeting gives participants a systematic overview of the categories and
concepts of planning, budgeting and budget execution. The final session covers decentralisation, public
expenditure and budgeting. The objective of the module, Budget execution is for participants to be able to
explain the key principles of budget execution work streams. The module is comprised of two sessions.
The first session seeks to provide participants with an understanding of the main features of two basically
different ways of budgeting (centrally managed and decentralized budgeting) and their impact on budget
execution The second session aims at providing participants with an understanding of the concept of
Internal controls and its separating conceptually from internal audit, internal control mechanisms
functions and introduction in an organization, MOF and line ministries typical functions in budget
execution, combination of financial and progress reporting, monitoring and evaluation, and brief on
overall establishment and role of internal audit. The objective of the module on Accounting and financial
reporting is to enable participants to create a chart of account that reflects the planning and budgeting and
which connects to the national budget. The module is made up of three sessions. The first session on
accounting and financial reporting seeks to provide participants with an understanding of the main
features of accounting and financial reporting, decentralization and financial reporting in practical life and
obstacles and possible approaches in decentralization of accountability. The second session is focused on

Public Expenditure Reviews (PER) Public Expenditure and Financial Accountability (PEFA). The session
provides participants with an understanding of the overall purpose of PERs in the reform of public sector
expenditures in view of their links to other parts of the economy. The third session on Public Expenditure
Tracking Surveys (PETS) aims to provide participants with knowledge and understanding of the use of
tracking surveys. The objective of the module on internal control and auditing is to enable participants to
identify the measures of an internal control system for securing timely, accurate and reliable financial
information. The module is composed of three sessions. The first session aims to enable participants to
understand the principles of results based management. Participants will be able to understand the
linkages between levels of results and from national down to operational levels (agency, sector, or subnational). The second session focuses on providing participants with an understanding of the different
functions and roles of Internal and external audit, how to establishment of Internal Audit, preparing an
annual audit plan, procedures of and what to cover in an audit, the role of internal audit committee and the
differences between private and public EA. The final session in this module deals with procurement
planning, corruption issues and anti-corruption measures. The objective of the module Impact of
Recession and Government Responses is to enable participants to describe and explain how worldwide
recession can affect a country, and analyse the possible responses of governments to avert the
consequences of recession. The module is comprised of two sessions. The first session, Impact of
Recession in development countries aims to provide participants with an understanding why the financial
crisis in Europe and USA has different impacts on different categories of developing countries, and how
this is shaping a new global economy. The second session, Government responses to recession, provides
participants with a basis for understanding the responses of governments to revenue shortfalls due to
changes in macroeconomic private-sector performance. The objective of the Public financial management
reform module is for participants to be exposed to key points regarding PFM reform programmes. The
module is made up of two sessions. The first session, Public Financial Management Reform, seek to
provide participants with an understanding of the concept and range of PFM reforms and the challenges
with a wide range of areas, sources and reasons for resistance. The second session, Change management,
aims to provide participants with an understanding of the changing ideas behind public finance
management and development cooperation. The module on action planning is comprised of three sessions.
The objective of the action planning is for participants to apply the theories, skills and knowledge that
they have acquired to a particular area of PFM to the participants. The purpose of the action plan is to
enable participants to be equipped to engage in informed dialogue about current and future PFM reform
work in their respective home organisation. The module is comprised of several sessions, starting with an
introduction to the action plan exercise and intended outcome. During the following sessions, the course
facilitators will assist the participants in developing their action plans through individual counselling. The
final part of the module allows participants to present their action plan and receive feedback from both the
lecturers and fellow participants. During the course a number of excursions has been planned to expose
participants to different types of public institutions involved in public financial management. The
objective of the excursions is to enable participants to learn best practices from a key Danish government
institution. It is anticipated that participants will visit the Ministry of Finance, Office of the Accountant
General and the Municipality of Gladsaxe.
Good practice in public financial management indicate that sound economic, fiscal and budget policies are
critical for making effective use of domestic revenue, domestic and external debt and foreign grants. This
is vital not only to attaining the goals identified in our medium and long term development plans, but also
to achieving internationally agreed targets such as the Millennium Development Goals (MDGs). To attain
the developmental goals, improving the effectiveness and efficiency of spending will require further
strengthening of our fiscal institutions, including the entire PFM system. By promoting transparency and
accountability, and enhancing governance and results orientation, a more effective PFM system reduces
wasteful spending, enhances value for money, and makes our citizens and other stakeholders more assured
that public expenditure is used for its intended purposes.

The PFM reform strategy for Jordan has applied a holistic, systemic view of the public financial
management system in order to consolidate macroeconomic stability. Structural reforms under the Public
Sector Reform Programme are focused on the creation of more fiscal space, improvement of public
expenditure and financial management as well as of tax administration, and expansion of the tax base. The
ultimate goal of the PFM reform strategy is to ensure efficient, effective and accountable use of public
resources as a basis for economic development and poverty eradication through improved service
delivery. Improvements with regards economic management, revenue mobilization, public expenditure
and financial management, budget execution as well as fiscal decentralization all contribute towards the
macroeconomic objectives. Furthermore, enhanced financial management systems and standards promote
good corporate governance practices in the public service, and therefore strengthen state legitimacy and
enhancement of democratic structures in Jordan
Public Financial Management refers to the legal and institutional framework for supervising all phases of
the budget cycle, including formulation and preparation of the budget, budget execution and expenditure
management, internal controls and audit, procurement, monitoring and reporting arrangements, and
external oversight and audit. The broad objectives of public financial management are to achieve overall
fiscal discipline, allocation of resources to priority needs, and efficient and effective delivery of public
services. A solid and strong PFM system, thus, provides a framework through which its possible to
reduce and avoid wastage in the use of public resources, and ensure that public funds are used
appropriately for the intended purpose.
Budget formulation And on the first day they created the budget ... The budget provides the means for a
government to pursue its policy objectives. The word stems from the Middle English word for the kings
purse, budjet, which contained the public funds (Schiavo-Campo and Tomasi, 1999: 33). The budgeting
processhow public actors plan for the spending of finite public resourcesthus lies at the heart of
government activity. Modern budget institutions stem from the rise of the modern state in Western Europe
in the 16th and 17th centuries when the rising costs of warfare were leading to an increase in taxation. A
higher tax burden led to public demand for greater accountability: citizens wanted a way to ensure public
funds served public interests. This oversight role came to be performed by a parliament containing elected
representatives with the responsibility to approve and review the governments use of resources. The
budget A governments forecast of revenue and planned expenditure is laid out in its budget, usually
produced on an annual basis. The budget is enacted into a law by the legislature, which authorises the
government to spend funds in accordance with a set of appropriations. Usually, a collection of PFM laws
and regulations further regulate how the approved budget should be executed. Countries tend to have
legislation and regulations that specify how the budget document should be prepared and what
information it must contain. While some rules and practices differ between countries and continue to elicit
lively debate, a fairly extensive body of best practice has emerged with time. Budget content An
effective budget pursues three (partially competing) objectives: maintaining fiscal discipline, allocating
resources in accordance with policy priorities and efficiently delivering services, or value for money.
Budgets should be comprehensive, transparent and realistic. In order to promote these objectives, a budget
should contain the following elements: a macroeconomic framework and revenue forecast, a discussion of
budget priorities, planned expenditure and past outturns, a medium-term outlook and details on budget
financing, debt and the governments financial position. Budget preparation Preparation of the budget
usually takes many months and involves all public institutions: the Ministry of Finance manages the
process, the Cabinet/President sets or approves the policy priorities, line ministries plan and advocate for
their resource needs and the legislature reviews and approves the final plan. Preparation is at the heart of
the political process: it is the decision on how to allocate the states limited resources to competing
demands. A successful budget preparation process combines top-down direction and bottom-up planning.
The overall budget envelope and sector/ministry spending ceilings are usually set by the Ministry of
Finance and the Cabinet/executive in accordance with policy objectives. These are then communicated to
the line ministries, which are responsible for preparing their respective sector budgets. Through an
iterative process of review, debate and bargaining, a consolidated budget is hammered out. A budget
proposal is then presented to the legislature, where it is debated and negotiated with the executive and

eventually passed into law. In past decades, there have been various innovations in budget formulation,
with the aim of increasing the allocative and operational efficiency of budgets. These ideas and practices
warrant special attention, as there is still a considerable debate among PFM specialists about whether,
when and how implement them. Capital budgets Budgets should distinguish between current and capital
items. Capital investments, which tend to have a longer lifespan, higher unit costs, recurrent cost
implications and (potentially) high A guide to public financial management literature - For practitioners in
developing countries 5 returns, require special consideration. In the 1950s and 1960s, dual budgeting was
common, with a Ministry of Finance preparing the current budget and a Ministry of Planning preparing
the capital or development budget. Dual budgeting has since been widely discredited, as it has been
shown to fragment the budget and weaken the central bargaining process. However, the debate continues
on how to treat capital expenditure in the budget and what special considerations it requires. Public
investment planning (PIP) is a frequently recommended practice for planning capital expenditure.
Medium-term expenditure frameworks Although budgets are usually approved on an annual basis, they
should include a multi-year outlook. Many projects and programmes take more than one year to
implement or may have future financing implications, and such costs should be indicated in the budget
and factored into the budget debate. The interest in MTEFs grew out of a concern for the multi-year
considerations of capital budgets, as they offered a comprehensive solution to this problem. MTEFs can
take a variety of forms and be at different levels of sophistication. Some countries operate multi-year
budgets where appropriations are locked in for several years; others provide indicative aggregate budget
estimates for future years. Linking budgets to policy Introducing a medium-term budgeting horizon is
intended to strengthen the link between expenditure projections and budget policy. In response to criticism
that many poverty reduction strategy papers (PRSPs) were wish lists, during the 1990s donors supported
the introduction of MTEFs in a number of developing countries to serve as financial constraints that
would promote the prioritisation of expenditures. Three key features are embedded into MTEF design to
help achieve a stronger link between plans and budgets: An extended budget calendar (strategic budget
phase): This allows spending agencies to formulate a budget framework paper that is discussed at the
strategic level by policymakers before final expenditure ceilings are set and detailed budget estimates are
prepared. The division of budgets into sectors: The clustering of ministries and spending agencies into
sectors makes it easier to translate policies into budget allocations. The integration of all expenditures
into a unified budget: This allows activities and outputs to be fully aligned and traced to policy areas
irrespective of the revenue source (recurrent, capital or donor). It also helps with the tracking of
expenditures and output allocations. Programme budgeting Programme budgeting is a method of
organising and classifying the budget according to programmes with shared objectives, instead of along
administrative and input lines. Programme budgeting has proponents who argue that a programme
approach correctly focuses attention on outcomes rather than inputs. Its opponents argue that it makes the
process more complex and weakens accountability. Performance-based budgeting Responding to concerns
that PFM systems encourage a bureaucratic adherence to rules rather than a pursuit of results or outcomes,
many governments have experimented with budgets that set performance incentives. Approaches range
from radical attempts to outsource government functions against performance contracts to incremental
efforts to consider performance objectives and indicators in the budgeting process. While PFM experts
generally agree that a performance orientation is desirable, whether and how to incentivise performance
through the PFM system is a subject of great debate. Performance budgeting has often been introduced in
combination with an MTEF and usually builds on a programme budget structure.
Budget execution The fine art of spending Once a budget has been approved by the legislature, the
government embarks on the challenging task of spending funds. Spending public funds effectively to meet
stated policy objectives while ensuring value for money is often just as challenging (if not more so) than
planning how to spend it. Several reviews of PFM performance in developing countries show that
countries score significantly better on budget preparation than on budget execution indicators (Andrews,
2008). How to spend a budget in just four steps The general PFM reference material tends to focus on
budget execution from the perspective of the Ministry of Finance. It emphasises the need to ensure the
budget is executed in accordance with the appropriations and rules to prevent corruption and
overspending (arrears accumulation). The budget execution process is usually divided into four steps:

authorisation and allocation of appropriations (the release of funds to spending units); commitment of
funds to specific purchases; verification of deliveries; and payment. Commitment controls Commitments
are a future obligation to make a payment (for instance a signed contract for delivery of a service) but the
exact definition varies between countries, and the practices of recording and tracking commitments are
equally varied. In order to effectively manage the governments cash flow and prevent arrears from
accumulating, it is important to monitor the pipeline of future payments. How commitments are defined
and monitored is therefore a central topic in budget execution literature. Cash management A major
challenge for the Treasury is how to manage the flow in order to ensure that funds are available in time to
meet payment obligations, while preventing arrears accumulation, reducing the need for government
borrowing and maximising returns on cash balances. In order to ensure central control over cash,
governments are advised to operate a Treasury single account. This is a single account or set of linked
accounts where all government revenue is deposited before it is allocated for expenditure purposes. There
are different methods of managing transactions linked to this account: countries may centralise all
payment transactions through the single account, centralise cash balances only but channel funds to
spending agency accounts for payment purposes or operate an imprest system, whereby spending agencies
are given advances which they clear on a regular basis. Budget alterations Another important Ministry of
Finance responsibility is to monitor and manage in-year changes to the budget. Unforeseen circumstances
or poor budgeting may make it necessary to adjust the budget. Rules will govern transfers between budget
categories (virements). Substantial changes to the budget may require a budget supplemental. Preparing a
supplemental is essentially a mini-budgeting process whereby an amendment to the budget is prepared
and submitted for legislative approval. In developing countries, and particularly in fragile states,
underspending is frequently as much of a problem as overspending. A failure to spend funds in a timely
manner and in accordance with the budget points to a failure to deliver planned services. It is therefore
useful to consider the budget execution responsibilities of spending agencies. Public procurement Capital
goods and non-wage recurrent goods and services should be subject to a countrys procurement
regulations. Procurement rules aim to ensure the government receives the best value for money when
buying goods and services, without incurring excessive transaction costs. Procurement resembles a
reverse auction, whereby suppliers compete to offer the lowest price for a good or service. To balance
value for money against excessive transaction costs, procurement procedures vary for different
expenditure categories and the value of the A guide to public financial management literature - For
practitioners in developing countries 11 purchase. While low-cost readily available goods can usually be
procured according to relatively simple procedures, larger and more complex contracts require
competitive bidding. Procurement is a common source of corruption and therefore procurement systems
tend to include controls aimed to detect and deter corruption. In the past, it was common to operate a
centralised procurement system, whereby one government agency procured on behalf of all spending
agencies. Over the past decades, most countries have moved to decentralised procurement, with each
spending agency managing its own procurement. This has increased the need for skilled procurement
personnel across government. Intergovernmental fiscal transfers Political governance structures differ
widely between countries. In unitary governments, subnational governments are subordinate levels of the
same government; federal structures contain sub-national governments that have constitutionally
mandated independence and taxcollecting authority. Yet for most sub-national governments in developing
countries, transfers from the central government are the biggest source of revenue. Countries need to
establish clear mechanisms for determining the allocation of resources to sub-national governments and
the degree of sub-national government autonomy in the management of funds. In many developing
countries, sub-national governments behave much like line ministries: their budgets are incorporated into
the national budget and their spending follows the same rules as other spending agencies. In countries
with a higher degree of decentralisation, sub-national governments have a greater degree of autonomy,
with reporting and accountability structures at a local level rather than to the central government. Internal
control Internal (or management) control systems are the policies and procedures put in place by the
management of a government agency in order to ensure the agency achieves its objectives and complies
with external laws and regulations. Such policies and procedures tend to cover financial accounting and
reporting, performance monitoring, asset management and procurement. Large agencies will have an

internal audit unit comprising internal auditors that independently review and report on the
implementation of management policies to the head of the agency. Internal auditing is a relatively new
function in both advanced and developing countries, and its role is often poorly understood and utilised.
Automation (financial management information systems) In recent years, governments have moved to
automate various financial management processes, usually starting with accounting and reporting
functions. While automation can improve system efficiency, the process can be disruptive and
challenging, as it usually requires significant reform of existing processes and new human resource skills.
Proponents of largescale automation reforms argue that it streamlines procedures and reduces
opportunities for corruption; critics point to the high costs of automation, the failure rate of many
automation projects and the risks of graft shifting from the procurement officer level to those with control
over the new automation system. Several authors argue in favour of phased approaches to FMIS
implementation that reduce the risk of failure.
Accounting and reporting Show me what you did with the money! Accounting Accounting is the practice
of recording, classifying and summarising financial transactions. It is a means of assuring compliance
with budget rules and demonstrating that public funds are being used for their intended purposes. How to
classify transactions is spelt out in a countrys chart of accounts, which provides a system for classifying
and numbering transactions and events. The chart of accounts is consistent with the budget classification
system. The database where all transactions data are stored is called the general ledger. Cash versus
accrual accounting Most developing countries have cash-based accounting systems, which means that
transactions are recorded only when cash is received or disbursed. An accrual basis, in contrast,
recognises transactions when they occur, regardless of when the cash is disbursed or received. Accrualbased accounting systems thus record liabilities and assets. Between cashbased and accrual accounting are
a variety of intermediate systems that incorporate various elements of accrual accounting. Cash
accounting is far simpler to implement than accrual accounting. To understand the benefits of the latter it
is useful to think about why it is used in the private sector. It gives a more accurate picture of the value of
an enterprise as it measures liabilities and assets. By accounting for the depreciation of assets it can also
provide a more accurate picture of production costs, which is vital to private enterprises looking to make a
profit. However, as the public sector is not sold or traded on a stock exchange, nor does it sell its services,
such information is not crucial. Governments need to weigh the value of accrual-based accounting
information against the transaction costs involved in producing it. Most PFM experts strongly discourage
low-income or weak capacity countries from implementing accrual accounting. Financial reporting
Financial reports aim to improve budget compliance. They provide a means for internal or external actors
to assess government performance. Financial reporting entails extracting and presenting data from the
accounting system in ways that facilitate analysis. Governments produce a range of reports for internal
and external consumption. Typical reports include daily flash reports on cash flows, monthly reports on
budget execution, revenue reports, mid-year reports and annual financial statements or fiscal reports.
There are internationally recognised minimum requirements for annual fiscal reporting. These reports
form the basis for the audit generals review of government performance. Budget monitoring To gain an
understanding of how public funds have been utilised, and how they contribute to government policies, it
is important to monitor the results of expenditure. This has led to the establishment of government
monitoring and evaluation (M&E) systems. A common feature of such systems involves the Ministry of
Finance keeping spending agencies in check by requesting reports on financial and non-financial
performance. The latter is also referred to as the results of government spending, and can be measured at
the levels of outputs, outcomes and impacts, which involves defining performance indicators. It is
important for governments to define and keep track of indicators to consider what they are trying achieve
with their policies and how far they are progressing and to use the information to plan accordingly. For
this reason, there is a strong link between budget monitoring (understanding how public resources are
being utilised) and performance-based budgeting. There are different tools, methods and approaches for
monitoring non-financial performance. Different organisations that have a key stake in the budget process
can be involved. Within government, this includes the Ministry of Finance (inputs, activities, outputs and
sometimes outcomes), the Ministry of Planning and national planning agencies (outcomes and impacts)
and spending agencies (inputs, activities, outputs, outcomes and impacts). A guide to public financial

management literature - For practitioners in developing countries 17 Outside of government, other actors
can also be involved in budget monitoring, including donors and civil society organisations (CSOs). There
are merits to both approaches. This is related to the incentives to report accurately and to use the
information to improve performance, decision-making and accountability. Readiness for adopting tools
for monitoring government performance is discussed in the literature. Some of the key lessons are (i) there
is no model M&E system that works in every country; (ii) M&E is a demand-driven process; (iii)
introducing M&E is a joint effort; and (iv) bringing M&E into the budget is politically sensitive.
External oversight After the party External audit External auditing is one among several compliance
mechanisms in the PFM system designed to ensure that the budget is executed in accordance with the law
and effectively delivers public services. A Supreme Auditing Institution (SAI) is a public body
independent of the government with the powers to scrutinise government transactions, systems and
practices. Originally, external audits were a means to ascertain that the governments financial statement
was a fair and accurate reflection of revenue collected and expenditures made (financial audit), and that
agencies acted in accordance with law and regulations (compliance audit). Today, it is common for SAIs
also to undertake value for money or performance audits that assess an agencys performance against its
stated goals rather than its compliance with rules and laws. There are three main kinds of SAIs. The
Anglo-Saxon (Westminster) tradition of independent national auditing offices, headed by auditors-general,
report findings to the parliament, but has no direct means of enforcing its recommendations. In the Latin
judicial model, in contrast, the SAI is a fully independent judicial body and has the power to judge and
sentence those found guilty of PFM breaches. Many Asian countries use the board system, where the audit
function is independent of the executive and reports to the parliament much like in the Westminster
model. Legislative oversight In most countries, the legislature provides a crucial PFM oversight role
through ex-ante and ex-post budget scrutiny. The role of the legislature varies significantly between
countries and there is a pronounced difference between its role under parliamentary versus presidential
political systems. Across systems, however, the legislature tends to plays an oversight role by reviewing
the budget prior to its approval and scrutinising the final audit report after the budget has been executed.
Many former British colonies have Public Accounts Committees (PACs), which specialise in scrutinising
the financial accounts and serve as the main interlocutors for SAIs. In some PAC countries, the legislature
has a legal obligation to follow up on the SAIs recommendations. As elected representatives, the
legislature can play an important role in facilitating public engagement in the budget process. Through
consultations with their constituents, representatives can raise community concerns in budget debates and
during the budget execution scrutiny. Reforming the PFM legal framework Most countries have rules
governing budget formulation, execution and reporting processes that are set out in one or several budget
system laws. Such laws protect the legislatures authority over the budget process. The number, structure
and content of a countrys budget system laws will thus depend on the countrys legal and political
structures, particularly the relationship between the executive and the legislature. Many countries have
revised their budget system laws in recent years in order to address deficiencies in the existing framework
or to introduce new budget principles. While such laws need to be developed to suit the country context,
there are some general principles that can help to guide the design of new budget system law(s).
PART II: From theory to practice PFM reform strategy, diagnosis and evaluation The preceding section
reviewed the phases of the budget cycle and described PFM institutions and the various functions of the
PFM system. In many developing countries, however, practice diverges significantly from textbook PFM
systems. While many developing countries have relatively robust PFM laws and regulations that conform
to international standards, weak implementation is a common problem. PFM has received significant
donor attention, particularly in recent years, with large reform programmes supported by the World Bank,
the IMF and other bilateral agencies. Yet, despite decades of domestic and external efforts to strengthen
and upgrade PFM systems in poor countries, the results have frequently been disappointing. Recognising
this divergence between theory and practice, many practitioners and researchers have reviewed and
criticised traditional PFM reform approaches. One school of thought criticises the assumption that PFM
principles and systems can be imported directly from developed to developing countries, stressing the
importance of responding to country-specific needs. Authors argue that, because PFM systems are linked
intimately to political institutions, they should be shaped to serve the domestic political context. Other

practitioners have criticised PFM reform projects for trying to advance reforms too quickly and without
regard for country capacity. They have recommended or designed reform strategies that attempt to
prioritise and sequence the reforms. Another set of critics has pointed to the political economy factors
influencing PFM and stressed the need to support reforms that pay attention to political dynamics and
engage with the political system rather than attempting to control it with technical measures. This section
of the paper discusses literature that engages with the challenges of reforming a PFM system. It discusses
PFM reform strategies, tools for measuring the strength of a PFM system and how such tools can help to
inform reform efforts, and some recent evaluations of PFM reform progress. It also includes a section on
literature that addresses the specific PFM reform needs of post-conflict countries.
PFM reform strategy Challenges to PFM reform PFM reform efforts often run up against political
economy constraints. Reforms that interfere with the existing patronage system (by limiting the
distribution of resources, employment opportunities and rents) will often meet fierce resistance from those
groups that benefit from the status quo. Such challenges are particularly acute in countries where the fiscal
power is vested in the Presidency and the Ministry of Finance has limited fiscal control. Another
challenge to PFM reform programmes is weak capacity among the technical staff charged with managing
the PFM system, and poor remuneration and incentive structures that discourage the civil service from
performing well. The sequencing of PFM reform The PFM literature pays significant attention to the
optimal way to plan and sequence PFM reforms. Two related approaches have dominated the literature:
the basics first approach (Schick, 1998) and the platform approach (Brooke, 2003). The basics first
approach argues that a government should seek to ensure that three basics of budgetary control are fully
operational before working to strengthen areas beyond the basics: (i) there should be effective control of
inputs before seeking to control outputs; (ii) accurate cash-based accounts should be developed before the
introduction of accrual-based accounts; and (iii) effective financial audits should be conducted before
moving to performance audits. Building on a similar logic, the platform approach proposes that reforms
be packaged together into groups of activities or measures (platforms) that form a logical sequence over
a specified timeframe (Brooke, 2003). Both of these approaches have stimulated debate. Critics have
questioned Schick and Brookes prioritisation of reforms, and some have argued that advanced beyond
the basics reforms can sometimes be undertaken successfully alongside basic reforms. Furthermore,
experience with implementation of the platform approach has raised concerns about its overly optimistic
timeframe and overloaded matrix of activities. Notwithstanding these debates, there is a general consensus
among PFM experts that a logical and sequential approach to reform is preferable to a big bang
approach. Prerequisites for PFM reform In order to develop a PFM reform programme that responds to
the political and institutional dynamics of a PFM system, it is important to understand a countrys
institutions and incentives and to build domestic ownership for the reform process. Diagnostic tools can
be used to assess the weaknesses in a PFM system, as we have seen, but it is also important to consider
institutional factors such as human resource availability, skills and IT requirements and political drivers
that will shape the reform process. Such factors will determine the incentives needed to ensure
sustainability. Furthermore, the reform programme has to be understood and owned by the domestic
technical and political leadership rather than by donors and international consultants. Strong domestic
ownership is crucial for building reform consensus at the political level and acceptance by the lower-level
technocrats needed to run the system
Government budgets are key areas of public action by which policy objectives are chosen and acted upon
and the necessary resources collected, allocated and spent. Government budgeting systems are also
important to donor agencies because of their role in providing fiduciary safeguards, helping to ensure, for
example, that foreign aid funds remitted as direct budget support are properly used for their intended
purpose. Strong budgeting systems also contribute to better overall standards of public sector governance.
In recent years, donor-supported Public Financial Management (PFM) reform programmes have covered a
range of initiatives to strengthen the rules and procedures that underpin budget processes in aid recipient
countries. Standard interventions have focused on: a) improving the comprehensiveness of budget
operations; b) building better links between annual allocations and mediumterm policy objectives; c)
introducing performance indicators and management systems; d) computerising budget management and
expenditure control.

Improving Financial Management In The Public Sector THE EIGHT KEY ELEMENTS OF PFM
SUCCESS
T he Confederation of Asian and Pacific Accountants (CAPA) is recognised by the global accountancy
profession, represented by the International Federation of Accountants (IFAC), as a regional organization
representing national accountancy organizations in Asia Pacific.
WHY PUBLIC FINANCIAL MANAGEMENT?
The Financial Management Framework is about improving the outcomes from Government program and
service delivery.
Governments are responsible to their citizens and taxpayers for implementing effective systems of public
financial management and for utilising those systems to safeguard, and ultimately enhance, a countrys
economic sovereignty.
T he effective management of public finances known as public financial management (PFM) is
fundamental to the development and growth of individual economies. As populations increase, as resources
become scarcer or as economies grow more complex, the importance of PFM rises. One reason PFM is so
essential is that the tax-paying citizens of any country expect their public finances to be well-managed. They
expect them to be allocated effectively, used to deliver quality services, and to provide a secure and stable
environment in which society may exist and prosper. They also expect finances to be collected and expended
fairly and according to the law, with surpluses, deficits and debt levels understood and in control.
Additionally, the private and public sectors are highly inter-dependent and must have confidence in each
other if they are to work together to grow cities and nations. This kind of confidence requires government
accountability and transparency in both decision-making and reporting. When such expectations are not met
when confidence is lost it can have significant consequences. Foreign investment may become difficult to
attain, the cost of public debt may rise and donor funds may be harder to attract. This type of fallout can, in
turn, reduce employment and economic growth, affecting the standard of living for many citizens. In the
worst case, it can eventually lead to significant unemployment or poverty, accompanied by social unrest.
Governments are responsible to their citizens and taxpayers for implementing effective systems of public
financial management and for utilising those systems to safeguard, and ultimately enhance, a countrys
economic sovereignty
1-Governance - The Values System Capacity and Capability Fiscal and Policy Framework Performance
Management Reporting Scrutiny and Assurance The first element of PFM success is necessarily the
widespread recognition and acknowledgement that change is required, along with a commitment from key
stakeholders to effect the necessary reforms. The second essential element of PFM success is that of a welldefined legal and regulatory framework: one that facilitates the implementation of efficient and effective
public-service arrangements. Appropriate institutions must be in place, as well as a set of recognised codes,
standards and practices. The public entrusts taxpayer funds to the government and expects them to be used
appropriately. Yet the appropriate attitudes and behaviours are not always culturally embedded. The third key
to PFM success is therefore an open, honest and responsible approach to the way services are planned,
executed and reported, which signifies a strong intent to work in the public interest.
2-Capacity and Capability Fiscal and Policy Framework Performance Management Reporting Scrutiny and
Assurance The first element of PFM success is necessarily the widespread recognition and acknowledgement
that change is required, along with a commitment from key stakeholders to effect the necessary reforms. The

second essential element of PFM success is that of a well-defined legal and regulatory framework: one that
facilitates the implementation of efficient and effective public-service arrangements. Appropriate institutions
must be in place, as well as a set of recognised codes, standards and practices. The public entrusts taxpayer
funds to the government and expects them to be used appropriately. Yet the appropriate attitudes and
behaviours are not always culturally embedded. The third key to PFM success is therefore an open, honest
and responsible approach to the way services are planned, executed and reported, which signifies a strong
intent to work in the public interest. The fourth key to PFM success is ensuring that the appropriate resources
are available to support the application of each aspect of PFM, particularly in terms of people and systems.
Without the necessary systems and skilled personnel to implement them, no PFM reform process can be
successful.
3-Fiscal and Policy Framework Performance Management Reporting Scrutiny and Assurance The first
element of PFM success is necessarily the widespread recognition and acknowledgement that change is
required, along with a commitment from key stakeholders to effect the necessary reforms. The second
essential element of PFM success is that of a well-defined legal and regulatory framework: one that
facilitates the implementation of efficient and effective public-service arrangements. Appropriate institutions
must be in place, as well as a set of recognised codes, standards and practices. The public entrusts taxpayer
funds to the government and expects them to be used appropriately. Yet the appropriate attitudes and
behaviours are not always culturally embedded. The third key to PFM success is therefore an open, honest
and responsible approach to the way services are planned, executed and reported, which signifies a strong
intent to work in the public interest. The fourth key to PFM success is ensuring that the appropriate resources
are available to support the application of each aspect of PFM, particularly in terms of people and systems.
Without the necessary systems and skilled personnel to implement them, no PFM reform process can be
successful.1 The main output of PFM systems is the budget, through which public policies are financed.2
A credible budget is essential, reflecting the expected financial impact of the governments policies and its
use of resources. As a result, the fifth element of PFM success is that of a clearly defined and comprehensive
fiscal and policy framework.
4-Performance Management Reporting Scrutiny and Assurance The first element of PFM success is
necessarily the widespread recognition and acknowledgement that change is required, along with a
commitment from key stakeholders to effect the necessary reforms. The second essential element of PFM
success is that of a well-defined legal and regulatory framework: one that facilitates the implementation of
efficient and effective public-service arrangements. Appropriate institutions must be in place, as well as a set
of recognised codes, standards and practices. The public entrusts taxpayer funds to the government and
expects them to be used appropriately. Yet the appropriate attitudes and behaviours are not always culturally
embedded. The third key to PFM success is therefore an open, honest and responsible approach to the way
services are planned, executed and reported, which signifies a strong intent to work in the public interest. The
fourth key to PFM success is ensuring that the appropriate resources are available to support the application
of each aspect of PFM, particularly in terms of people and systems. Without the necessary systems and
skilled personnel to implement them, no PFM reform process can be successful.1 The main output of PFM
systems is the budget, through which public policies are financed.2 A credible budget is essential, reflecting
the expected financial impact of the governments policies and its use of resources. As a result, the fifth
element of PFM success is that of a clearly defined and comprehensive fiscal and policy framework. The
sixth key element is the successful implementation of the budget, both in macro terms and at the
organisational level. The budget must be well managed, monitored and reported to achieve the anticipated
outcomes, with three things value for money, the efficient and effective delivery of services, and financial
compliance acting as overriding performance principles.
5-Reporting Scrutiny and Assurance The first element of PFM success is necessarily the widespread
recognition and acknowledgement that change is required, along with a commitment from key stakeholders
to effect the necessary reforms. The second essential element of PFM success is that of a well-defined legal
and regulatory framework: one that facilitates the implementation of efficient and effective public-service
arrangements. Appropriate institutions must be in place, as well as a set of recognised codes, standards and
practices. The public entrusts taxpayer funds to the government and expects them to be used appropriately.

Yet the appropriate attitudes and behaviours are not always culturally embedded. The third key to PFM
success is therefore an open, honest and responsible approach to the way services are planned, executed and
reported, which signifies a strong intent to work in the public interest. The fourth key to PFM success is
ensuring that the appropriate resources are available to support the application of each aspect of PFM,
particularly in terms of people and systems. Without the necessary systems and skilled personnel to
implement them, no PFM reform process can be successful.1 The main output of PFM systems is the
budget, through which public policies are financed.2 A credible budget is essential, reflecting the expected
financial impact of the governments policies and its use of resources. As a result, the fifth element of PFM
success is that of a clearly defined and comprehensive fiscal and policy framework. The sixth key element is
the successful implementation of the budget, both in macro terms and at the organisational level. The budget
must be well managed, monitored and reported to achieve the anticipated outcomes, with three things value
for money, the efficient and effective delivery of services, and financial compliance acting as overriding
performance principles. Empirical evidence is emerging that highlights the positive relationship between the
degree of fiscal transparency and measures of fiscal sustainability. Not surprisingly, then, appropriate,
transparent reporting against planned outcomes is the seventh key element of PFM success, helping
governments be accountable for their fiscal actions.
6- Scrutiny and Assurance: Reported information must be reliable, whether for purposes of transparency,
accountability or decision making. It must also be capable of withstanding scrutiny from different levels and
forms of review. As a result, the eighth key element of PFM success is that of subjecting information to
effective scrutiny and assurance, thus generating confidence in its veracity. Confidence is further enhanced
by subjecting this information to external, independent audit.
QUESTIONS TO ASSIST IN DIALOGUE WITH GOVERNMENTS
1. The Climate for Reform
The fi rst element of PFM success is necessarily the widespread recognition and acknowledgement that
change is required, along with a commitment from key stakeholders to effect the necessary reforms. To
determine if such conditions exist, we highly recommend researching and responding to each of the
following fundamental questions.
1.1 Public Interest and Expectations To what extent are taxpayers demanding that more be achieved with
the available resources? What fundamental concerns, if any, exist around transparency and accountability?
Are any of the following seen by the public as an issue, and to what extent? Neglect Waste and
inefficiency Corruption
1.2 Economic and Social Drivers To what extent are national or international economic circumstances
prompting action to address PFM issues or opportunities? Is fi nancial-management reform a recognised
means of reducing poverty and improving living standards? If so, how is this done?
1.3 Donor Interest and Expectations Are donors interested, and if so, in what ways are they engaged in
reform? How well do existing PFM systems meet the expectations of donors a typical prerequisite to
maintaining or increasing partnering efforts?
1.4 Political Will What evidence suggests that politicians will embrace high-quality PFM reform or
required reforms and provide clear-cut support? To what extent is the political leadership and its
commitment clear, constant and sustained? What mechanisms are in place to ensure that rulings and
mandates come without political interference?
1.5 Change Management Capabilities How can any reform process best be directed and managed? What
capacity is available to enable this process, including dedicated and available systems and people? To what
extent are the necessary links established with the private sector, academics and others?
2. Governance The Legal and Institutional Framework
The second essential element of PFM success is that of a well-defi ned legal and regulatory framework: one
that facilitates the implementation of effi cient and effective public-service arrangements. Appropriate
institutions must be in place, as well as a set of recognised codes, standards and practices. To ensure that
such a framework exists, we recommend exploring each of the following questions.

2.1 Parliament and Legislation How skillful, experienced and fi nancially aware are the elected members of
parliament? How clearly defi ned are the roles of different levels of government, both national and local?
Is there an extensive legal framework(s) in which the core PFM functions may operate?
2.2 Institutional Framework Is there an appropriate organisational structure, including ministries, central
government organisations, Treasury, Central Bank, Auditor- General, etc.? To what extent are these
institutions strong, independent and operating with clear mandates? How are links established with
stakeholders in the non-government sector?
2.3 Regulations To what extent are the appropriate accountability and transparency requirements prescribed
in a law or regulation, such as a Public Accounts Act that deals with: Reporting and Audit Probity and
Procurement Anti-Fraud and Corruption Measures
2.4 Donor Requirements How are donors governance requirements identifi ed? Are these requirements
appropriately addressed, to the satisfaction of donors? To what extent is multiple donor involvement
coordinated and harmonised to avoid duplication and disruption?
2.5 Identifi cation / Adoption / Implementation of Recognised Codes and Standards How are internationally
recognised codes and standards perceived? We include: IMF Code of Good Practices on Fiscal
Transparency International Public Sector Accounting Standards (IPSAS), cash or accrual International
Standards on Auditing or equivalent national or public-sector specifi c Codes of Conduct Anti-corruption
requirements
3. Governance The Values System
The public entrusts taxpayer funds to the government and expects them to be used appropriately. Yet the
appropriate attitudes and behaviours are not always culturally embedded. The third key to PFM success is
therefore an open, honest and responsible approach to the way services are planned, executed and reported,
which signifi es a strong intent to work in the public interest. To determine the extent to which such attitudes
and behaviours exist, we recommend looking at each of the following questions
3.1 Transparency To what extent: Are citizens consulted and kept informed? Are planning and decision
making conducted in an open environment? Are decisions and outcomes made readily available?
3.2 Accountability What codes of conduct and performance expectations are established? Are these clear?
Are performance and decision making open to assessment and scrutiny? To what degree?
3.3 Ethics Are ethics and integrity demonstrated beyond legal requirements? Do adequate mechanisms
exist to ensure that activities and decisions are conducted with probity and in an objective manner? Do
these mechanisms encourage and support the exposing of unethical behaviour, and if so, to what degree? To
what extent is unethical behaviour confronted?
3.4 Corruption How strongly are the rules of law upheld? Is there evidence to suggest that honest
behaviour is the general norm? What mechanisms exist to encourage and support the exposing of corrupt
behaviour? How would corrupt behaviour be confronted, should it exist?
4. Capacity and Capability
The fourth key to PFM success is ensuring that the appropriate resources are available to support the
application of each aspect of PFM, particularly in terms of people and systems. Without the necessary
systems and skilled personnel to implement them, no PFM reform process can be successful.
4.1 Human Resources Does the sector attract or have access to suffi cient skilled personnel? Are they
appropriately educated and motivated? Are these personnel adequately trained, developed and maintained?
Do remuneration arrangements adequately support all of the above? To what extent is the government
prepared to invest in educating its offi cials?
4.2 Information and Communication Technology Systems How accessible are the appropriate fi nancial and
performance systems? Is there an adequate investment in, or the commitment to invest in, the required
systems?
4.3 Professional Accountancy Organisation (PAO) How would you describe the accountancy professions
member bodies focus on, and support for, the public sector? To what extent are PFM skills incorporated
into examination and training programs? How can PAOs play a pivotal role in providing, or assisting in, the
training of professional accountants for the public sector? How can PAOs educate - and communicate to politicians about PFM?

4.4 Leadership: Governing Body and Senior Management Does the public sector attract and retain talented
leaders? To what extent does leadership display vision, thought leadership and clarity of direction? Are
authorities and responsibilities made clear, and is performance regularly assessed? Is there evidence to
suggest that leadership displays and encourages a high-performance culture? Do those who receive and
have the ability to act on information understand the implications of that information?
5. Fiscal and Policy Framework
The main output of PFM systems is the budget, through which public policies are financed.4 A credible
budget is essential, reflecting the expected financial impact of the governments policies and its use of
resources. As a result, the fifth element of PFM success is that of a clearly defined and comprehensive fiscal
and policy framework.
5.1 Overall Framework How adequate is the legal framework for budgeting, as established in the
constitution or law? Is the budgetary framework supported by lower level legislation or administrative
policies? To what degree? Are parliamentary and executive relationships clearly defined?
5.2 Policy Making Are adequate macro policies in place and are they comprehensively designed? Do
these policies include appropriate and sustainable economic, social and environmental benefits? Are the
policies fully budgeted, with multi-year forecasts, and is this sufficient?
5.3 Planning : The logical organisation of activities in order to achieve national objectives Do expectations
align with available resources? Are they realistic? To what extent are reliable and accurate social and
economic data available?
5.4 The Budget and Forecasts: The financial representation of the planning outcome What links exist
between policy making and budget formulation? Is the scope of the budget well defined and are the
relevant revenues and expenditures included, such as capital expenditures and borrowing costs? How
transparent are the budget and the budgetary process? Does budgeting extend adequately into the medium
and longer term, with recognition of projected costs and liabilities arising from social welfare and health
responsibilities?
5.5 Outcome Focus How well defined are fiscal objectives and priorities? Is a comprehensive plan made
available to Parliament? How clearly does the plan focus on outcomes versus inputs? How is expenditureperformance monitored?
5.6 Taxation and Revenue Does evidence suggest that the tax policy is appropriate for the country? Is the
revenue base properly identified and are all public revenues captured? Are revenue services appropriately
resourced and motivated to collect tax effectively?
6. Performance Management
The sixth key element is the successful implementation of the budget, both in macro terms and at the
organisational level. The budget must be well managed, monitored and reported to achieve the anticipated
outcomes, with three things value for money, the efficient and effective delivery of services, and financial
compliance acting as overriding performance principles.
6.1 Non-Financial To what extent are expected budget outcomes defined and documented? Are
appropriate performance indicators identified? Have adequate mechanisms been established for measuring
and monitoring the effectiveness of service delivery? Are physical assets actively managed, and if so, to
what degree?
6.2 Financial What financial regulations are in place and are they complied with? What measures are
taken to ensure that transactions and commitments are fully identified and accounted for in a timely manner?
What means are used to ensure that services are delivered efficiently and cost effectively, for example,
procurement (see box)?
6.3 Managing Revenues and Costs What mechanisms provide central control over cash and borrowing?
What processes are established for deficit and debt management? How are risk management and internal
control administered over revenues and expenditures?
Procurement Procurement is a key aspect of the fiscal framework and deserves separate consideration. The
relevant section from the Guidelines for PFM Reform, Commonwealth Secretariat, 2005 states: There
should be clear rules about open and accountable procurement policies based on the following principles: A
centralised procurement committee should be responsible for bringing an efficient and effective procurement
system into the government. Procurement decisions based on this system should be delegated to the bodies

responsible for funding the procurement. Procurement laws should be reviewed to meet best-practice
criteria. Procurement guidelines must be put in place that are consistent with principles of transparency,
fairness, openness and value for money. Sanctions must be implemented for non- compliance with
regulations. There should be strictly scrutinised and accountable procurement procedures, such as those
with regard to tender processes
7. Reporting
Empirical evidence is emerging that highlights the positive relationship between the degree of fi scal
transparency and measures of fi scal sustainability. Not surprisingly, then, appropriate, transparent reporting
against planned outcomes is the seventh key element of PFM success, helping governments be accountable
for their fi scal actions.
7.1 Financial and Performance Reporting Framework To what extent are the format, frequency, timing and
nature of reporting understood and appropriate? Does this reporting framework include internationally
recognised fi nancial (IPSAS), social and environmental reporting (integrated reporting)? Does the
framework cover past, current and forecast budgets, as well as actual outcomes? Are the bases for actual
and budget reporting consistent, and to what extent? What reporting challenges have been identifi ed and
addressed, such as asset and liability identifi cation and measurement?
7.2 Transparent Reporting To what extent are the required levels for reporting defi ned, such as
organisation, portfolio and sector? How are the needs of different audiences addressed? Is the information
made publically available on a timely basis? What steps are taken to ensure the information is presented in
a way that facilitates analysis and assessment?
7.3 Consolidation What entities have been identifi ed for inclusion in whole-of-government reporting? Is
this approach adequate? How well are government, public-sector and public services clearly defi ned and
understood?
7.4 Compliance To what extent are reporting mechanisms in place to cover compliance with: Laws and
regulations? Budget authorisations? Probity requirements? Tax administration?
8. Scrutiny and Assurance
Reported information must be reliable, whether for purposes of transparency, accountability or decision
making. It must also be capable of withstanding scrutiny from different levels and forms of review. As a
result, the eighth key element of PFM success is that of subjecting information to effective scrutiny and
assurance, thus generating confi dence in its veracity. Confi dence is further enhanced by subjecting
information to external, independent audit.
8.1 Parliament Is there adequate legislative scrutiny of the budget, accounts and audit reports? What form
does this scrutiny take? Is a public accounts committee in place? How appropriate is its charter?
8.2 Central Agencies Is central oversight administered through a fi nance ministry, the treasury or other
agencies? How adequate and effective is this oversight? Does the oversight incorporate feedback leading, where required, to corrective action?
8.3 Entity Governance To what extent do the public sector organisations have all or a number of the
following mechanisms in place: Executive committees? Review committees comprising management
and external parties? An appropriately resourced and positioned internal audit function? Audit and risk
committees - partially or fully independent from management?
8.4 Other External Oversight Are any donors effective in administering oversight? If so, how does this
occur? Do any other organisations (the IMF, Transparency International, rating agencies) apply scrutiny? If
so, how does this occur? Are media and civil-society organisations active? If so, in what way?
8.5 Supreme Audit Institution Roles (for example, fi nancial, performance audit) How adequately resourced
is the national government auditor? To what extent are appropriate independence arrangements, authorities
and reporting lines established? What scope of practice has been established and to what extent does it
include various types of audit, such as fi nancial, performance and investigation, using internationally
recognised auditing?
PFM REFORM: SUGGESTED APPROACH

When beginning a PFM reform effort, an initial consideration will be that of defining the public sector. Many
definitions exist and the scope of the public sector will vary across jurisdictions. Establishing a common
understanding of the scope of the public sector in a given jurisdiction will therefore be an important starting
point in any dialogue.5 The next consideration should be the sequencing of reform activities. In larger-scale
PFM reform efforts, deep consideration has been given to the most appropriate approach. Recent work in this
area proposes that choice within broad reform categories should be country-specific, especially since all
countries face different non-technical determinants external to PFM that are recognised as critical to the
success of reform.6 Accordingly, this document does not propose any particular sequence for reform, nor
establish any sequence of priority. Dependent on circumstances and local conditions, the focus may be on
any or all of the eight key elements. Additionally, PFM reform should be home-grown and country-led. It
will usually take place as part of an overall economic development strategy; however, in developing or
emerging economies it may be supported by one or a number of donor agencies. Such donors provide ideas,
skills and funds in a partnering arrangement that encourages local ownership. In more developed economies,
lenders and credit agencies may play this role. Reform must also be well managed.7 It will first require
access to appropriate skills, experience and best-practice materials, both in change management and PFM.
Next, reform and the associated macro-economic policies will require access to solid statistical data. Finally,
reform progress must be measured and monitored. Next, successful reform will feature broad consultation
with stakeholders and effective communication with citizens about its purpose and intent. Addressing
wastage and inefficiency will be a key aspect. We note that all policies and priorities should be realistic.
Short, medium and long-term planning will be essential, extending beyond any electoral cycles. Political and
institutional commitment will be needed to drive the behaviours that ensure that appropriate systems,
processes and people are embedded within the public sector. Lastly, having the right people will be crucial.
The advancement of financial management in the public sector requires professional people with
professional skills who are establishing professional careers in the sector. Professional accountancy
organisations have a key role to play in making this happen. 5 Definitions and related matters are considered
in Setting high professional.
POSITION STATEMENT: Improving Public Sector Financial Management
T he Confederation of Asian and Pacific Accountants (CAPA)8 fully supports and encourages the
convergence towards International Public Sector Accounting Standards (IPSAS) by all member countries in
the Asia Pacific region to assist in the improvement of public sector financial management. Users of financial
reports produced by the private sector have, for many years, demanded and supported the development of
globally accepted high-quality financial reporting standards. These users have included both regulators and
central government agencies. This has resulted in an increasing number of countries adopting and
implementing IFRS as the financial reporting norm for the private sector. Concurrently, there is a growing
international movement to improve financial reporting in the public sector. This has resulted in many
countries initially adopting cash-based accounting, moving to a more sophisticated accrual basis for financial
reporting and adopting and implementing accrual-based IPSAS. Improving the quality of financial reporting
in the public sector is viewed by CAPA as critical in addressing the huge risks, such as unexpected sovereign
debt crisis situations, that may remain obscured when robust accounting and reporting techniques are not
used in the public sector. From a public interest perspective, the more effective monitoring of financial
performance within public sector entities is critical. CAPA supports accrualbased financial reporting as the
only means to provide the necessary highquality, transparent reporting of public sector activities and
positions. Achievement of accrual-based accounting ensures that the same high standards of financial
reporting are applied by both the private and public sectors of an economy thus leading to better-informed
decision making at both the micro and macro levels. CAPA therefore calls for governments in the Asia
Pacific region to fully recognise the need for robust financial systems and to lead changes in public sector
accounting and reporting to support enhanced public sector financial management.

REFERENCE MATERIAL
Managing Public Expenditure, A Reference Book for Transition Countries, Organisation for Economic Cooperation and Development (OECD), 2001
Guidelines for PFM Reform, Commonwealth Secretariat, August 2005
Code of Good Practices on Fiscal Transparency, International Monetary Fund (IMF), 2007
Public Financial Management Reform Literature Review, Department for International Development
(DFID), January 2009
Public Financial Management, A Whole System Approach, Chartered Institute of Public Finance &
Accountancy (CIPFA), August 2010
Improving Public Sector Financial Management in Developing Countries and Emerging Economies,
ACCA, 2011
Good Practice Note on Sequencing PFM Reforms, Jack Diamond, January 2013
Background Paper 1: Sequencing PFM Reforms, Jack Diamond, January 2013
Background Paper 2: The Core PFM Functions and PEFA Performance Indicators, Daniel Tommasi,
January 2013
Setting High Professional Standards for Public Services around the World, ACCA, February 2013
Good Governance in the Public Sector Consultation Draft for an International Framework, International
Federation of Accountants (IFAC) and Chartered Institute of Public Finance & Accountancy (CIPFA), June
2013
Government program and service delivery should offer value for money. Government is accountable to
taxpayers for achieving this goal. Value for money requires that the limited resources available to
Government be applied in such a way that community needs and expectations are satisfied to the greatest
extent possible both now and in the future. However, achieving value for money in Government program
and service delivery is made challenging by many factors, including:
the complexities of the political process, the variability of, and difficulty in quantifying, social values,
uncertainty about the most appropriate program and service delivery strategies, differences in knowledge
and agendas amongst individual stakeholders and the absence of price signals to guide decisions on the
provision and consumption of goods and services. Given these challenges, improving value for money in
Government program and service delivery requires the application of five principles: clarity of
objectives; proper allocation of responsibility and accountability; appropriate, comprehensive incentive
structures; performance management; integrity of information.
6. PRINCIPLES OF IMPROVING VALUE FOR MONEY Improving Government program and service
delivery necessitates addressing the challenges associated with achieving value for money. The following
principles are central to this process: Clarity of objectives Clear statements of program and service
delivery objectives assist in focussing debate on the desirability of the objectives and their relative
priority. A common understanding of objectives within Government contributes to successful agency
design of program and service delivery strategy. Proper allocation of responsibility and accountability
The responsibility for program and service delivery should be allocated to those parties within
Government best placed to design and deliver programs and services efficiently and effectively. Such
allocation is contingent upon clarification of, and agreement on, the roles and responsibilities of parties to
program and service delivery. Allocation should be balanced by clear accountability structures.
Appropriate, comprehensive incentive structures Well-designed incentive structures are required to align
the actions of all parties contributing to program and service delivery with the pursuit of value for money.
The design of incentive structures should minimise perverse incentives as well as offer positive
incentives. Performance management Regular, rigorous review and evaluation of program and service
delivery are required to assess whether value for money is being achieved. This is particularly so given the
uncertainty about appropriate responses and the absence of price signals and competition. Program and
service delivery strategies which are inefficient, ineffective or inappropriate should be redesigned or
jettisoned. Integrity of information Comprehensive, meaningful and accurate information about the

efficiency, effectiveness and appropriateness of program and service delivery underpins accountability
and performance management and is critical to ensuring transparency. Improving value for money in
Government program and service delivery is based on the application of five principles: clarity of
objectives; proper allocation of responsibility and accountability; appropriate, comprehensive incentive
structures; performance management; integrity of information.

Public Financial Management:

Public Policy and Management: Planning and Performance Centre for Financial and Management
Studies, SOAS University of London.
Introduction
Welcome to Public Financial Management: Planning and Performance. We hope that you will find the
course stimulating and useful. Even if you do not have a background in public finance we think you will
be able to learn a lot and do well in the assessment for this course. There is technical material and
language that may seem to outsiders to be jargon, but we aim to explain the reasoning behind all new
terms as we introduce them and to avoid unnecessarily technical language. It is an interesting time to be
studying public finance for several reasons. First, there are changes in the way that the public sector does
its business. Bureaucracies with strict hierarchies of public employees carrying out their duties according
to a fixed set of rules are giving way, or have already given way, to different ways of working. In some
cases there have been programmes of decentralisation and delegation of authority so that managers and
professionals at relatively junior levels now have to take decisions based on the best information,
including financial information, available to them. In professions across the public sector whether
medical, educational, legal, engineering or custodial people are making choices about investments,
about how to achieve efficiency, how to stay within budget and how to improve performance. Whether
reluctantly or willingly, people are having to understand costs, budgets, financial statements about cash
flows and expenditures, even when they are not in accountancy. In other cases, services are increasingly
contracted out to commercial companies, to NGOs or to communities rather than being provided directly
by public employees. These arrangements require a different set of disciplines of monitoring other
peoples performance, of assessing value for money of contracts rather than employees performance. To
cope with these and other changes, the ways in which public finances are managed have also changed.
The days have gone of accounts consisting only of the recording of cash spent, except perhaps at the very
frontline of services. Management accounts now commonly include a record of money that has been
committed, rather than only of cash spent, allowing managers near the frontline to manage their spending
with more confidence. In many countries budgets and accounts are no longer concerned just with the cash
allocated and spent but also with the resources used in providing services capital resources and assets as
well as people and materials. The further away from cash accounting the systems get the less they look
like our personal accounts and the more we need to learn about the relevant concepts to enable us to
understand and run them. A second reason why public finance is interesting now is that in many countries
what people are being held to account for is also changing. It is often not sufficient to have accounts that
show that money has been spent as governments intended politicians and the public want to know how
well it has been spent, whether it has been used efficiently and whether it has achieved the purposes for
which it was allocated. This widening of accountability, combined with the delegation of accountability
lower down in the organisations, has placed a burden on accounting systems and on the Course
Introduction and Overview Centre for Financial and Management Studies 3 managers and professionals
who have to understand and operate them. Computer systems make financial management easier but
managers need to understand the concepts underlying the numbers and the consequences of the financial

information that is provided. Some of these tendencies have led to a narrowing of the differences between
private sector and public sector budgeting and accounting: the public sector is now also interested in
performance, in the use of assets in service provision and in performance defined as efficiency and
effectiveness. Some parts of the public sector now operate on very commercial lines with revenue and
profit targets, competition for customers or contracts requiring approaches to costing, budgeting and
financial reporting that are very similar to those of the private sector. A third reason why planning and
budgeting are currently interesting is that the responses to the financial crisis by governments have put a
strain on budgeting systems the developments in performance-related budgeting in the UK and in
France, for example, were made during times of spending growth. When the emphasis of budgets is on
deficit reduction and spending cuts, the link between spending and performance may be more difficult to
establish. These trends and tendencies are by no means universal. While some governments have
embraced commercial-style accounting and financial management, others have resisted. Some have
adopted changes reluctantly but have been forced to change by lenders or donors who have made financial
management reform a condition for further lending. In this course we do not take the view that there is a
single best practice in public financial management. The best approach is the approach that produces the
desired results. If a simple cash-accounting system is adequate to run the financial affairs of, say, a school
responsible for the salaries of its employees and the consumables used, then the added complications of
asset valuation and accounting for asset use may not help those responsible to manage better. This is
especially the case where the decisions made at school level do not include decisions about asset sales and
acquisitions. What we try to show is that there are approaches to financial management that can be
tailored to the approach to management and governance that governments have adopted. This implies that
a single approach may not be right within one country at all levels of government. For example, if there is
a centralised system of tax collection and a distribution of tax receipts to provincial or municipal
governments, then the planning, budgeting and accounting requirements at national and provincial or
municipal levels will be different. Similarly, if a public entity operates on commercial lines it needs a
commercial-style set of financial procedures. An airport, for example, that is financed by landing charges
and franchise sales needs a management accounting system to track revenues and forecast profits or
losses. On the other hand, a school whose sole income comes from a government grant needs to track
expenditures against budget but would not need a sophisticated system for recording revenues. Both may
be operating in the same juris- Public Financial Management: Planning and Performance 4 University of
London diction. We will try to point out which techniques and methods seem appropriate in which
contexts. Some commentators and advocates of public financial management reform talk as if there is a
progression from simpler to more sophisticated systems and that the latter are always better. This can, in
our view, lead to the development of rules and systems that are not supported by the right technologies or
skills and, in the worst cases, can actually make financial management worse. While most of the issues
discussed in the course are technical, they are not without dispute and dissent. Just as in the private sector
there are many examples of creative accounting to make profits look better (or worse) than they really
are, so public sector accountants are not above creativity. A favourite is reclassifying expenditure as
capital (financed over the period of the assets life) when it used to be current (to be financed out of
this years receipts) to make this years current accounts look better. Some people in the accounting
profession argue that some of the accounting for deals done under Public Private Partnerships represents
at best misleading reporting and at worst false accounting. At a time when European governments were
trying to keep their borrowing low to comply with treaty obligations to support the launch of the Euro
currency, such accounting adjustments were valuable weapons. We take the view that one of the functions
of public financial management is to keep the politicians honest and the public informed. This applies as
much to simple systems as to sophisticated definitions of assets used and capital consumed. This course is
almost entirely about the expenditure side of public financial management: issues of taxation, borrowing,
debt and aid are dealt with in the course, Public Financial Management: Revenue; accounting for public
expenditure and the audit of public accounts are dealt with in Public Financial Management: Reporting
and Audit; while issues concerning the financial relationships between tiers of government are covered in
Decentralisation and Local Governance. This course starts with a discussion of three elements of the
context: the macroeconomic framework of the budget the accountability framework of the public

sector the impact of new public management on financial management. Unit 2 is about the coverage of
public budgets and their structure and classification: this unit will help you to read budgets and understand
how budgets reflect policy choices. Unit 3 is concerned with costs and costing systems, and discusses the
different ways in which costs can be calculated or estimated according to how the costing information is
being used. Units 4 and 5 are about accounting and budgeting. They explore recent developments in
public sector financial management at national levels of government (Unit 4), and at sub-national levels of
government (Unit 5). Unit 6 is about budget implementation and control: it covers the processes between
setting a budget and implementing it, what can be done to make Course Introduction and Overview Centre
for Financial and Management Studies 5 sure that the budget is implemented properly or if not, to know
exactly what has gone wrong and how to correct it. Unit 7 asks how far financial management can be used
to improve public sector performance and explores a variety of experiences in trying to integrate budget
management with public sector performance. The unit uses case studies of budget management in various
countries to illustrate its discussion. Unit 8 deals with the relationship between politics and budgeting:
while all policy decisions implied in budgets are subject to political approval, the processes by which
budgets are made involve both legislatures and executives. It considers whether there is any single, best
system of public financial management. This unit shows how politicians and the public can be better
involved in the process, with case studies from a variety of countries. During the course you will be asked
to do some calculations and to analyse financial statements. While this is not a technical training course,
we believe that this sort of practical engagement with costing and accounting issues will help to develop
your understanding of the conceptual issues involved. 2 The Course Authors Fred Mear is a Principal
Lecturer in Accounting and Finance, specialising in public finance, at de Montfort University, Leicester,
United Kingdom, and a tutor for CeFiMS MSc programmes. He has an MBA, is a Member of the
Chartered Institute of Public Finance and Accountancy and a Fellow of the Association of Chartered
Certified Accountants. Before becoming an academic he had a career as an accountant in the public sector
and in private practice. He has consulting and training experience in a range of countries, including the
United Kingdom, Peoples Republic of China, Cuba, Belarus, Ukraine, Kazakhstan and Singapore. He is a
trustee and director of Skillshare International. Norman Flynn is Programme Director of the Public Policy
and Management programme. His publications include Moving to Outcome Budgeting, Scottish
Parliament 2002, Miracle to Meltdown in Asia and Public Sector Management. He has held academic
posts at London Business School and London School of Economics and was Chair Professor of Public
Management at City University Hong Kong. He has been a visiting professor at University of the West
Indies, Innsbruck University and Strathmore Business School, Nairobi. 3 An Overview of the Course Unit
1 The Context of Financial Management 1.1 Introduction 1.2 What is a Budget? 1.3 The Macroeconomic
Framework 1.4 Accountability 1.5 'New Public Management' and Financial Management 1.6 Conclusion
Public Financial Management: Planning and Performance 6 University of London Unit 2 Budget
Coverage, Classification and Structure 2.1 Introduction 2.2 Coverage of the Budget 2.3 Classification of
the Budget 2.4 Budget Composition 2.5 The Line Item System vs Programme Systems Unit 3 Costs 3.1
Some Definitions of Cost 3.2 Costing Systems 3.3 Cost-Volume-Profit Model 3.4 Absorption or Full Cost
Recovery 3.5 Activity-Based Costing (ABC) 3.6 Managing Costs 3.7 Price-Based Costing 3.8 Relevant
Costs Unit 4 Accounting and Budgeting: National Level 4.1 Approaches to Public Accounting and
Budgeting 4.2 Cash Accounting vs Accruals Accounting 4.3 The Macroeconomic, Fiscal framework and
the Medium-Term Expenditure Framework 4.4 The Role of the Ministry of Finance 4.5 Budget Timetable
Unit 5 Accounting and Budgeting: Sub-National Level 5.1 Translating the national budget into operational
budgets 5.2 Structure, Performance, Discretion, Block Grants and Contracts 5.3 Fund Accounting 5.4
Resource Accounting and Budgeting 5.5 Which Techniques at Which Stage? 5.6 Budget Timetable at
Sub-National Level 5.7 Accounting for Services Provided by Third Parties Unit 6 Budget Execution 6.1
Introduction: Budgetary Control 6.2 Controlling Operations 6.3 Monitoring Budget Execution 6.4 Taking
Action 6.5 Summary Unit 7 Budgeting and Performance 7.1 Introduction: Accruals Accounting and
Output and Outcome Budgeting 7.2 Defining and Measuring Non-Financial Items, Especially Outputs and
Outcomes 7.3 Case Study 1: Output and Outcome Definitions 7.4 Output and Input Budgets 7.5 Case
Study 2: Outcomes and Outputs in Budgets in England 7.6 Case Study 3: Performance Budgeting in
Canada Course Introduction and Overview Centre for Financial and Management Studies 7 7.7

Conclusion: Will Performance Management and Budgeting Ever Be Fully Implemented? Unit 8
Budgeting and Democracy: Conclusions 8.1 Introduction 8.2 National Legislatures and the Budget
Process 8.3 Case Studies the USA, the Netherlands and Brazil 8.4 Conclusions on Budgeting and
Democracy 8.5 Is There a Single Best Method of Financial Management? 8.6 Review: The Journey from
Bureaucracy to NPM as it Affects Public Financial Management 8.7 Is PEFA the Answer? 4 Learning
Outcomes When you have completed this course you will be able to: explain how public budgeting fits
into the macroeconomic framework apply ideas about accountability to the production of various forms
of account for public services and public money discuss how changes in public management require
different forms of public accounting read a budget and a set of national accounts and explain the
differences between budgets and accounts in different jurisdictions explain costs and different ways of
measuring them and how costs are used in budgets discuss the budget process at national and subnational levels and the techniques appropriate at different levels apply budgetary control methods use
financial management to enhance the performance of public organisations. discuss how public financial
management interfaces with politics and political choices. 5 Study Materials There are two textbooks.
Andreas Bergmann (2009) Public Sector Financial Management, London: FT Prentice Hall. Bergmann is
a professor at Zurich University and brings an international perspective to public financial management.
This book provides a high-level view of public financial management, with occasional coverage of the
more detailed day-to-day issues. The second text starts from a more practical viewpoint. Anwar Shah
(editor) (2007) Budgeting and Budgetary Institutions Washington DC: World Bank. Public Financial
Management: Planning and Performance 8 University of London This book arose out of a series of
education and training events run by the World Bank, and is written by leading experts in public finance.
While Part II of the book is about Africa, the principles, analyses and discussions of practice in Part I are
applicable universally. We will not be using all of Part II on the course, but if you are working in a
developing country context, you might find the examples useful. In addition, there are readings that are
mainly case studies of practice in a variety of countries. These are contained in the Course Reader. The
course contains case studies of budgeting in a variety of settings, in both developed and developing
countries. While context matters in the choice of budgeting and accounting methods, it is the view of the
authors that there is probably not one single set of best practice. To successfully complete the course and
the examinations, we recommend that you read all of the articles and chapters in the Reader before the
examination. This part of the course is written to introduce you to the scope and the learning objectives.
Reading At this point, especially if this is your first course in public financial management, we
recommend that you turn to Bergmann and read Chapter 1. In this introductory chapter, Bergmann sets out
the scope of his book, but more importantly, the scope of public financial management. He starts with a
definition of the public sector, including the general government sector and the public corporations. While
there is international agreement about what constitutes the public sector, national definitions require
interpretation. He then goes on to define public financial management in two useful ways: the task-based
approach, which defines the tasks of public financial management the institution-based approach, which
describes the various bodies involved in planning, spending and accounting for public money. In this part
of the chapter he uses the term public sector controlling, by which he means performance management,
and public sector assurance which is otherwise known as audit. At this stage we do not need to worry
too much about language in this field, except to note that learning about public financial management in
English can lead to problems of translation from and into other languages1 . He then goes on to discuss
Integrated approaches, specifically the Public Expenditure and Financial Accountability (PEFA)
framework, which has been developed by a consortium of organisations concerned with economic
development. PEFA is used to assess financial management in developing countries but it also provides a
useful framework to help us grasp the scope of the financial management system elsewhere. We will
return to PEFA at the end of course, in Unit 8. 1 For example, in German controlling has a more strategic
meaning than controlling in English. In Australia the basic unit in budgeting is called a product, in
France an action. Andreas Bergmann (2009) Public Sector Financial Management, Chapter 1 Public
sector financial management. Course Introduction and Overview Centre for Financial and Management
Studies 9 Please do not read the section on accounting models at this stage we will give an overview of
accounting frameworks later. 6 Studying the Course When you work through the materials, there are

various exercises, from the textbooks or based on the readings, that are designed to consolidate your
knowledge and skills. We recommend that you do the exercises, most of which take half an hour or less,
before you look at the model answers, where they are provided, at the end of the unit. You will be asked
to submit your assignments and receive feedback through the Online Study Centre, and to ask questions of
your tutor. The OSC will also be the main way that we will communicate with you about administrative
matters. We would encourage you to also use the discussion area of the OSC to discuss issues with your
fellow students. You will be prompted to do so occasionally as you progress through the course. Because
public financial management varies greatly across the world, you should find it valuable to check your
understanding and experience with your global classmates. 7 Assessment Your performance on each
course is assessed through two written assignments and one examination. The assignments are written
after week four and eight of the course session and the examination is written at a local examination
centre in October. The assignment questions contain fairly detailed guidance about what is required. All
assignment answers are limited to 2,500 words and are marked using marking guidelines. When you
receive your grade it is accompanied by comments on your paper, including advice about how you might
improve, and any clarifications about matters you may not have understood. These comments are
designed to help you master the subject and to improve your skills as you progress through your
programme. The written examinations are unseen (you will only see the paper in the exam centre) and
written by hand, over a three hour period. We advise that you practise writing exams in these conditions as
part of your examination preparation, as it is not something you would normally do. You are not allowed
to take in books or notes to the exam room. This means that you need to revise thoroughly in preparation
for each exam. This is especially important if you have completed the course in the early part of the year,
or in a previous year. Preparing for assignments and exams There is good advice on preparing for
assignments and exams and writing them in Sections 8.2 and 8.3 of Studying at a Distance by Talbot. We
recommend that you follow this advice. Public Financial Management: Planning and Performance 10
University of London The written examinations are unseen (you will only see the paper in the exam
centre) and written by hand, over a three-hour period. We advise that you practice writing exams in these
conditions as part of your examination preparation, as it is not something you would normally do. You are
not allowed to take books or notes into the exam room. This means that you need to revise thoroughly in
preparation for each exam. This is especially important if you completed the course in the early part of the
year, or in a previous year. Understanding assessment questions Examination and assignment questions
are set to test your knowledge and skills. Sometimes a question will contain more than one part, each
section testing a different aspect of your skills and knowledge. You need to spot the key words to know
what is being asked of you. Here we categorise the types of things that are asked for in assignments and
exams, and the words used. All the examples are from CeFiMS examination papers and assignment
questions. Definitions Some questions mainly require you to show that you have learned some concepts,
by setting out their precise meaning. Such questions are likely to be preliminary and be supplemented by
more analytical questions. Generally Pass marks are awarded if the answer only contains definitions.
They will contain words such as: Describe Define Examine Distinguish between Compare Contrast
Write notes on Outline What is meant by List Reasoning Other questions are designed to test your
reasoning, by explaining cause and effect. Convincing explanations generally carry additional marks to
basic definitions. They will include words such as: Interpret Explain What conditions influence What
are the consequences of What are the implications of Judgment Others ask you to make a judgment,
perhaps of a policy or of a course of action. They will include words like: Evaluate Course Introduction
and Overview Centre for Financial and Management Studies 11 Critically examine Assess Do you agree
that To what extent does Calculation Sometimes, you are asked to make a calculation, using a specified
technique, where the question begins: Use indifference curve analysis to Using any economic model you
know Calculate the standard deviation Test whether It is most likely that questions that ask you to make
a calculation will also ask for an application of the result, or an interpretation. Advice Other questions ask
you to provide advice in a particular situation. This applies to law questions and to policy papers where
advice is asked in relation to a policy problem. Your advice should be based on relevant law, principles,
evidence of what actions are likely to be effective. Advise Provide advice on Explain how you would
advise Critique In many cases the question will include the word critically. This means that you are

expected to look at the question from at least two points of view, offering a critique of each view and your
judgment. You are expected to be critical of what you have read. The questions may begin Critically
analyse Critically consider Critically assess Critically discuss the argument that Examine by argument
Questions that begin with discuss are similar they ask you to examine by argument, to debate and give
reasons for and against a variety of options, for example Discuss the advantages and disadvantages of
Discuss this statement Discuss the view that Discuss the arguments and debates concerning The grading
scheme Details of the general definitions of what is expected in order to obtain a particular grade are
shown below. Remember: examiners will take account of the fact that examination conditions are less
conducive to polished work than the conditions in which you write your assignments. These criteria
Public Financial Management: Planning and Performance 12 University of London are used in grading all
assignments and examinations. Note that as the criterion of each grade rises, it accumulates the elements
of the grade below. Assignments awarded better marks will therefore have become comprehensive in both
their depth of core skills and advanced skills. 70% and above: Distinction, as for the (6069%) below
plus: shows clear evidence of wide and relevant reading and an engagement with the conceptual issues
develops a sophisticated and intelligent argument shows a rigorous use and a sophisticated
understanding of relevant source materials, balancing appropriately between factual detail and key
theoretical issues. Materials are evaluated directly and their assumptions and arguments challenged and/or
appraised shows original thinking and a willingness to take risks 60-69%: Merit, as for the (5059%)
below plus: shows strong evidence of critical insight and critical thinking shows a detailed
understanding of the major factual and/or theoretical issues and directly engages with the relevant
literature on the topic develops a focussed and clear argument and articulates clearly and convincingly a
sustained train of logical thought shows clear evidence of planning and appropriate choice of sources
and methodology 5059%: Pass, below Merit (50% = pass mark) shows a reasonable understanding of
the major factual and/or theoretical issues involved shows evidence of planning and selection from
appropriate sources, demonstrates some knowledge of the literature the text shows, in places, examples
of a clear train of thought or argument the text is introduced and concludes appropriately 4549%:
Marginal failure shows some awareness and understanding of the factual or theoretical issues, but with
little development misunderstandings are evident shows some evidence of planning, although
irrelevant/unrelated material or arguments are included 044%: Clear failure fails to answer the question
or to develop an argument that relates to the question set does not engage with the relevant literature or
demonstrate a knowledge of the key issues contains clear conceptual or factual errors or
misunderstandings [approved by Faculty Learning and Teaching Committee November 2006] Course
Introduction and Overview Centre for Financial and Management Studies 13 Specimen exam papers Your
final examination will be very similar to the Specimen Exam Paper that you received in your course
materials. It will have the same structure and style and the range of question will be comparable. CeFiMS
does not provide past papers or model answers to papers. Our courses are continuously updated and past
papers will not be a reliable guide to current and future examinations. The specimen exam paper is
designed to be relevant to reflect the exam that will be set on the current edition of the course Further
information The OSC will have documentation and information on each years examination registration
and administration process. If you still have questions, both academics and administrators are available to
answer queries. The Regulations are also available at
, setting out the rules by which exams are governed. Public Financial Management: Planning and
Performance 14 University of London Course Introduction and Overview Centre for Financial and
Management Studies 15 UNIVERSITY OF LONDON Centre for Financial and Management Studies
MSc Examination Postgraduate Diploma Examination for External Students 91DFMC301 PUBLIC
POLICY AND MANAGEMENT PUBLIC FINANCIAL MANAGEMENT Public Financial
Management: Planning & Performance Specimen Exam This is a specimen examination paper designed to
show you the type of examination you will have at the end of the year for Public Financial Management:
Planning & Performance. The number of questions and the structure of the examination will be the same
but the wording and the requirements of each question will be different. Best wishes for success on your
final examination. The examination must be completed in THREE hours. You must answer THREE
questions. At least one question from each Section. The examiners give equal weight to each question;

therefore, you are advised to distribute your time approximately equally between three questions. DO
NOT REMOVE THIS PAPER FROM THE EXAMINATION ROOM. IT MUST BE ATTACHED TO
YOUR ANSWER BOOK AT THE END OF THE EXAMINATION University of London, 2011
PLEASE TURN OVER Public Financial Management: Planning and Performance 16 University of
London Answer THREE questions, at least one question from each section Section A (Answer at least
ONE question from this section) 1 Answer both parts of the question. a Why do some governments have
bigger deficits than others? b When does a deficit become unsustainable? 2 When would a public entity
best use a line-item budget and when would a programme budget be best? 3 Answer all parts of the
question. a Write short notes on: i marginal cost and average cost ii fixed and variable cost iii absorption
costing iv price-based cost. b When would it be appropriate to use each of these when calculating a cost?
4 Answer both parts of the question. a Under what circumstances should public bodies use cash
accounting? b When should they use accruals? Section B (Answer at least ONE question from this
section) 5 How does the choice of management system affect the choice of costing system? What are the
main causes of budget overspends and underspends? 6 What are the advantages and limitation of using the
budget process to manage performance of public bodies? 7 How can budget systems be designed to help
politicians make choices about priorities and exercise control over public entities? 8 Do changes in
management methods in the public sector necessarily require changes in the accounting methods used?
[END OF EXAMINATION]

Department of Economic and Social Affairs Division for Public Economics and Public Administration
TRANSPARENCY AND ACCOUNTABILITY IN GOVERNMENT FINANCIAL MANAGEMENT
II. REPORT OF THE SEMINAR: ISSUES AND PROPOSALS A. Malfeasance in government It is not
useful to have well designed and written laws and regulations that are not followed. In many countries, the
feeling is that too little is done once malfeasance is found. This sends the wrong message that it really
does not matter even if one is caught for wrongdoing. Sufficient punishment should be meted out so as to
discourage others from doing the same thing. It was noted that steps are needed to strengthen government
resolve to prosecute and punish offenders, which ultimately requires that the public be made aware of its
entitlement to sound financial accountability and demand it. The Meeting recommended that national
entities, either government or nongovernment organizations, be encouraged to formulate orientation
programmes for legislators to enhance transparency and accountability. The United Nations can support
this effort by collating information on successful programmes and making it widely available through its
clearing-house information service or its publications programme. Wherever possible, it should also work
with national entities to assist in obtaining technical assistance and/or funding for such programmes. The
Meeting recommended that the United Nations assist Member States with : (a) Promulgation of
comprehensive anticorruption legislation; and (b) Compilation of national policy statements on ethical
conduct in order to develop a generic civil service code of conduct setting standards of leadership and
professional conduct for public officials. B. Compliance by Governments and donors with laws, rules and
regulations Concern was expressed regarding the level of compliance with financial management rules
and regulations. Donor agencies need to respect the financial rules and regulations of national
Governments. This means ensuring that funds, or meaningful accounting data, pass through government
books of accounts on a timely basis and therefore can, and should, be audited by government auditors.
There is a clear need for transparency and accountability issues to be recognized at the outset of all host
country/donor negotiations, and properly incorporated into any agreements subsequently ratified.
Statements of government policy defining this requirement need to be unambiguous, widely promulgated
and officially supported in any dialogue with donor agencies. Neither government officials nor project
managers should receive money that is not documented in the public statements of revenue and
expenditure of the country. Ongoing discussions are needed between donors and recipient Governments to
find a workable solution to the donors need to manage funds and to account to their own constituents,
particularly where donors are concerned about the level and quality of financial management and
accountability in a recipient country, while ensuring that Report of the Seminar: Issues and Proposals 7
their contributions are reflected in the countrys national accounts. Donor officials need to obtain formal
receipts and to account to both the donor agency and the national Government concerned for all money
advanced to every project. United Nations agencies and other donors must ensure that national auditors
are not denied access to project documents, including procurement documents, by any agency or official
claiming diplomatic immunity. The Meeting called upon the United Nations to play an active role in
summarizing the essence of constitutional provisions and financial management laws, as well as national
Governments' policies and procedures, to assist both host countries and donors in negotiations involving
disbursement and accounting for external assistance. This review should also identify for amendment any
provisions that may foster corruptive behaviour. C. Shortage of skilled manpower and need for longerterm training initiatives Participants commented on the shortage of skilled manpower in government
agencies of developing countries and stressed the need for trained accountants and internal auditors as a
major step towards the professionalization of the financial management systems of their countries. This
will lead to Governments becoming not only more effective in managing scarce resources, but also more
transparent. Effectiveness will be reinforced by the presence of adequate numbers of professionally

qualified accountants within Governments' financial management and control systems. The size of the
task is captured by the needs assessment for Kenya. It is estimated that over 7,000 qualified accountants
are needed by its Government; the Institute of Certified Accountants of Kenya currently registers 1,720
members in both private and public practice. Government training initiatives are unlikely to meet the need
without special training programmes. The Meeting suggested the following activities as a complement to
direct professional training: (a) Attachments to those national Treasuries that have effectively carried out
the accounting process, of six-month duration and on two occasions; (b) Two-week regional workshops
on how to account for public financial resources, with one workshop at the beginning of every financial
year; and (c) Workshops on public accountability issues and not only on aid accountability, as most donors
seem to prefer. Transparency will be enhanced, in part, as a result of the professional ethics that are
infused into training programmes for qualified accountants. Early guidance on codes of professional
conduct will deter government officials so trained from engaging in purposeful malpractice. Since
government accountants and internal auditors rely on government salary scales, many trained staff leave
for the private sector for better pay. Attracting already qualified professionals to the office is another issue.
Partial solutions lie in training on the job, attachments, and workshops to enhance effectiveness so that the
outputs of this cadre can be useful to stakeholders (ministers, financial managers, Members of Parliament,
donors and lenders). People will tend to always leave for the market-place Report of the Seminar: Issues
and Proposals 8 whenever their output is not in demand. Training programmes, systems reform initiatives
and programmes in support of Governments' efforts to enhance the professional nature of these services,
all need to recognize the need for a longerterm outlook on activities launched in these fields. The Meeting
called on the United Nations and other international bodies to collect and document effective training and
public financial management enhancement programmes and for these to be given to ministers and
financial managers to examine. Good and adaptable programmes can be replicated in other settings. The
need is for public officials to make their own comparative analysis using an available source of reference
material. Further, the Meeting called for a regional programme to be formulated in which a best practices
model in public financial management is documented in detail, to be used as a reference source for both
reform and national training initiatives. The Meeting also called on Member States to recognize the need,
in contracting public service regimes, for all accounting personnel to be professionally trained to the
highest levels possible and to ensure that civil service salaries properly reflect the responsibilities
discharged by public officials in the public financial management field. These steps will significantly help
ensure retention of qualified officers, and so promote transparency and accountability. D. Role of the
United Nations in assisting the Governments of developing countries The Meeting identified a number of
areas in which the United Nations could play a positive role in supporting the accountability process in
developing countries. These include the collation and provision of useful best practices as well as specific
issues which should be the subject of regional meetings and collaboration. For instance, it was noted that
information on Governments that have successfully consolidated national accounts covering all receipts
(tax, nontax, donations, grants, and loans) and expenditures (recurrent, development including counterpart
and foreign contributions) would be very helpful to developing countries. Secondly, a special meeting on
procedures and accounting processes to detail what constitutes public financial resources was urgently
needed as Governments cannot properly manage, control and direct resources they have not thoroughly
documented. It was stated that the United Nations should also assist individual countries in developing a
methodology to detail the full range of national assets and resources comprehensively including tax and
non-tax revenues, donations, grants, loans, trust funds, cash/bank balances, advances, all stores,
equipment, vehicles, plant, buildings, etc., as well as government investments in public and private
enterprise (equity and debt). The Meeting recommended to Member States and the United Nations to
maintain links between experts in this field, particularly through electronic media such as electronic mail
and the Internet, the purpose being to share ideas and secure assistance on an ongoing basis as the need
arises. The Meeting requested the United Nations to support its information needs through an information
clearing house. Report of the Seminar: Issues and Proposals 9 This would ensure that information and
advice can be readily and economically accessed and that studies on detailed revenue budgeting as well as
methodology for detailing all government financial resources can be undertaken. This can be distributed
in hard copy as well as through the electronic medium. The Meeting requested the United Nations to

convene a regional meeting to discuss the importance of transparency and accountability in national
financial management. It noted that since 1989 donors have collaborated to good effect in a working
group on the importance of integrated financial management and accountability in Latin American, and
requested the United Nations to explore the feasibility of convening a similarly focused meeting on Africa
involving both donors and recipient countries. Cash management The main operational issues with cash
management in government start with the making and maintenance of accurate records of cash receipts
and cash payments. Reducing the extent to which government itself handles cash is seen as a solution in
some countries; subcontracting to commercial banks as payment centres, and the use of credit and debit
cards is another. Bank cheques and credit cards are methods of reducing risks in cash management. These
methods are in use in Kenya, but only by few in comparison to the overall population. All Kenyan
taxpayers on formal payrolls remit part of the taxes through a direct check-off and payment system called
PAYE (Pay As You Earn). The responsibilities of the central bank and Treasury have to be clearly agreed
upon and both parties need to be committed to this agreement within the context of all applicable laws.
This is to ensure that monetary issues which usually befit the central bank can be combined with fiscal
issues which are the responsibility of Treasury. The determination of public-sector borrowing
requirements, and its associated interest cost, is crucial for government in any cash management system.
The problem of cash management begins with the preparation of the national budget. Normally, the
degree of compliance with the national budget by line agency budget managers affects overall cash
management. A cash management system for spending agencies that considers cash forecasts, revenue
mobilization, matching of receipts and payments and investment of idle funds is important. Without it the
traditional treasury payment function, can lead to government agencies spending on the basis of budget
alone, leaving the Treasury to finance revenue shortfalls. Other issues relevant to this discussion are the
commitment of agencies collecting money on behalf of the central Government and the competence, or
otherwise, of the commercial banks which have been selected to receive these funds and transfer them to
the consolidated government fund. In cases where these banks are not paid any fees because the law
prohibits commercial banks from charging for their services if they manage accounts for the central
Government, delays in the transfer of these funds to the central bank can arise with correspondingly less
control being established over cash management. It was noted that in Uganda all tax collection by the
Uganda Revenue Authority, a semi-autonomous body, is Report of the Seminar: Issues and Proposals 10
very successfully performed through commercial banks and cash losses to the Government have been
greatly reduced. The contract with these banks includes payment of a commission and reimbursement of a
premium for loss insurance. However, the Meeting noted that these sub-agency agreements in no way
mitigate the Governments responsibility to account for and manage all State assets, including cash. The
meeting noted that basic record-keeping and effective management of cash receipting was at the centre of
any effort to improve cash management. The Meeting recommended that, where permitted by law, any
choice of commercial banks should be by tender. This would introduce the many aspects of contract
letting and management. Some of the issues to be considered during the selection procedures should
include the bankruptcy risk of commercial banks, fund-transfer speed and frequency, and the timeliness of
presentation of bank statements. On the question of fees for these services, it was noted that a no-cost
service may result in fund-transfer delays, leaving the Government with no way to measure the
opportunity cost of using the commercial banks. Recommendations for improved transparency and
accountability in cash management included the following: (a) Proper regulations on cash management
should be issued and enforced; (b) Control over printing and use of official cash receipts should be
maintained; (c) Only senior and specified staff should be allowed to collect and handle cash, including the
regular banking of funds; (d) Proper internal control over cash with regular audits is necessary, including
unannounced audits. Staff need to be trained on how to audit cash by ensuring that all government audit
manuals contain a standard questionnaire on cash reconciliations. Also audit personnel should be regularly
rotated; and (e) Those who misuse cash should be dealt with seriously, including prosecution in a court of
law. Parastatals The recording of loans and facilities to capitalize parastatals and the capacity of
Governments to monitor their operating performance were the two main issues to arise in this area of
public financial management. Loans and other facilities were not seen to be reliably recorded in some
cases, leading to an undervaluation of the parastatal at time of divestiture or overstatement of operating

performance. Clearly, in those countries where parastatals need to continue to operate in shallow domestic
manufacturing markets, there is a need to value all capital contributions by the State to ensure that
operational results are realistic. Secondly, when preparing to divest these assets, as many countries are
currently planning, it is essential that a reliable balance-sheet valuation be performed to ensure that sale
values mirror their true cost. It was considered that the donor community would readily endorse major
programmes within Treasuries to re-evaluate the capitalized value of parastatals in order to support
reliable valuations and performance analysis. With regard to measuring operational performance, the
quality of parastatal Report of the Seminar: Issues and Proposals 11 accounting as well as Governments
capacity to analyse their financial statements were issues raised. It was suggested that improving the basic
quality of parastatals accounts would significantly assist Governments in monitoring operational
progress. Similarly, better analysis of these accounts would yield better decisions regarding the future of
these assets. In both cases, the need for properly trained staff was again highlighted as immediate and
obvious. The Meeting recommended that training programmes in financial management and accounting
be launched to assist countries with parastatal management and divestiture programmes. Donors could be
approached to assist with this, given the expected impact on overall transparency and accountability, as
well as the materiality of the funds involved in many cases.
Review of financial management in government in UK
Constraints on public expenditure will be necessary for years to come as work continues to tackle the
deficit and bring the public finances under control. Within this context it is more important than ever that
tax-payers money is spent efficiently and effectively and that we maximise the value secured for every
pound we spend. Strong financial management across central government has been, and will continue to
be, critical to achieving this. Moreover, the improved information that comes with stronger financial
management will be key to delivering better public services and driving public sector reform.
First, even greater attention across government is required to understand and demonstrate value for money
in government spending. Government finance has a clear role to play in providing the analysis that can
cost government activity linked to defined outputs.
1.1 Excellent financial management is critical to the Governments continued ability to reduce the deficit,
achieve value for money from public expenditure and deliver high quality public services. Around 60 per
cent of the planned fiscal consolidation for this Parliament has already been achieved. The Autumn
Statement 2013 set out that achieving the governments fiscal aims will mean further consolidation over
the course of the next Parliament.1 1.2 With many efficiencies having already been made and as the fiscal
consolidation continues, departments will need even stronger systems and processes to manage spending
reductions still to be implemented. It is therefore critical to examine how financial management can be
strengthened and knowledge about the effectiveness of public expenditure improved. In June, as part of
the Spending Round 2013, the Treasury published a paper on Strengthening financial management
capability in government, and launched this review. 1.3 As set out in the terms of reference (Annex A), the
review takes as its starting assumption the current parliamentary and Accounting Officer framework will
remain. The Treasury is responsible for setting the rules for the administration of public money, including
arrangements for providing accountability to Parliament for expenditure and ensuring that financial
planning is consistent with the Governments fiscal objective. 1.4 In many respects the Government starts
from a position of strength: departmental directors and directors general finance are now professionally
qualified and have a seat on departmental Boards (Annex C). Whole of Government Accounts were
published in full for the first time in 2011.The spending reductions set out in Spending Review 2010 are
one year ahead of schedule, while levels of satisfaction with public services have been maintained or
improved. 2 The UK is one of only two countries, that sets departments binding multi-year budgets.3
UKs financial management arrangements rank third out of 100 countries for transparency. 4 1.5 This
review builds on a range of recent and ongoing reforms to individual departments internal systems and
processes. For example, the Ministry of Defence has invested heavily in its Cost Assurance and Analysis
Service, which provides independent costing analysis to inform budgeting, investment appraisals and

procurement decisions. Another example is the Department for Business, Innovation and Skills' new
Enterprise Performance Management Programme, which is providing a single system to consolidate,
report, forecast and plan, as well as, enabling a step change to the quality and the efficiency of the finance
function of the department and across its 32 Arms Length Bodies. Across government, departments are
moving to a small number of shared services, for example for transactional services. 1.6 In
commissioning the review, Ministers were clear that it should draw on best practice in both the private
sector and comparable public administrations, consulting with a broad range of organisations and
individuals.
Key issues and recommendations Management information context 3.1 The improvements made in
financial reporting over recent years have greatly increased the range and quality of the information
available to decision makers. The effect of this has been amplified by the increased influence of nonexecutives on departmental Boards; the discipline forced by reduced budgets; and increased financial
capability and focus at senior levels, all of which have increased the demand for reliable financial
management information. 3.2 This has led to significant improvements to the information reported to
departmental Boards. A recent report by Dr Martin Read1 3.3 As public spending continues to be
constrained, it will be important that we develop a more sophisticated understanding of what we spend
and what we get for it. Some departments have good systems in place for costing many of the services
they provide. For example, the Department of Health are able to cost around 700 clinical procedures. To
ensure that we can continue to drive efficiency, and that scarce resources are targeted at the highest
priority areas we need to reinforce these efforts and ensure that they are consistently applied across
government. This is not easy. Many of the countries surveyed aspired to being able to do this, but none
have achieved this across the full range of their activities. Private sector companies surveyed said that
defining and measuring non-financial performance is intrinsically difficult, and many thought it would be
more so in government where the range of outputs is broader and in some cases harder to measure. This
will therefore be a substantial task that will take some time to complete. There will be limitations, but
recent work in departments highlights the benefits of this approach. , despite highlighting deficiencies in
government management information generally, found that all of the departmental board reports surveyed
included figures for aggregate spend to date against forecasts and budgets. But there remains more to be
done to ensure that financial risks and more detailed spending are consistently well understood,
particularly to allow meaningful comparisons between departments. Management information
recommendations 1 make the investment to i) better understand the costs of activities and ii) ensure this
understanding will be used to better inform decision-making. It took Government 15 years to transform
financial accounting. We now need to devote a similar effort to management accounting across
government. The Treasury will lead this work, working in close collaboration with departments and the
Cabinet Office; 2 define standards for management information, working closely with departments to
ensure that both their and governments collective needs are met. These will be underpinned by a set of
clear principles, including a mandatory requirement that outputs are defined at an appropriate level of
detail and costed in a consistent way. The information needed by Ministers and officials in the centre of
government must 1 The Read Report, Practical Steps to Improve Management Information in
Government (June 2013) 16 be made available to them. They will also cover techniques for forecasting,
risk, and assurance. The Treasury will work with each department on an agreed implementation plan,
which will include ensuring that the structures, processes and behaviours required to use management
accounting information effectively are in place both in the department and in the Treasury. Once
implemented, departments will be subject to audit against these standards; 3 continue to develop skills
across government to ensure that the centre and departments increase analytic capacity to use the
information effectively in decision making and resource allocation at cross-government and Board level;
and 4 accelerate current initiatives required to support a common framework: building on the work of the
Efficiency and Reform Group, the standards will cover information that should be produced on a common
basis to allow cross-government comparisons. In the shorter term, we will accelerate the work required to
support a common framework, including completing the substantial task of extending and implementing
the Common Chart of Accounts; devising common definitions for accounting for back and middle office
services; continuing to focus on excelling at the fundamentals of financial accounting and working with

shared service providers to simplify processes and facilitate provision of information to the centre through
systems such as OSCAR. Controls context 3.4 The Treasury operates several in-year spending controls
as a means of better monitoring and controlling expenditure. These include overall annual expenditure
limits and the requirement that departments seek Treasury approval for project and programme
expenditure above agreed thresholds. 3.5 Much of the budgetary system that the Treasury sets and
administers is shaped by Parliaments requirement that it should approve expenditure on an annual basis,
and will continue to do so. 3.6 Although necessary, departments report that the focus on annual
expenditure constraints flexibility and can constrain options, particularly where expenditure profiles
change between years. The Budget Exchange2 3.7 From 2010 the Government introduced a new set of
spending controls covering specific categories of expenditure. The Treasury delegated operation of some
of the controls to the Cabinet Office. Further information about the controls and how they are operated
can be found in the Cabinet Office Controls guidance process affords some flexibility between years and
the Treasury announced further flexibility on major capital programmes in Spending Review 2013. While
departments and the Treasury will continue to face difficult decisions linked to annual budgeting, a
sustained focus on improving the consistency and depth of management information across government
will strengthen departments ability to forecast costs and expenditure, and the centres ability to make
decisions on when greater flexibility is required. 3 3.8 In 2010, these controls were required as a shock to
the system; to challenge and stop wasteful spending and bring a renewed focus on efficiency and value for
money. Around 60 per . 2 HM Treasury, Consolidated budgeting guidance from 2013-14 (March 2013) 3
Version 3.1 (September 2013) 17 cent of the 10 billion efficiency savings reported by Cabinet Office for
2012-13 are from areas where a category spending control operates.4 3.9 The controls have also played a
role in driving policy change (e.g. on procurement and digital services) and improving capability across
government by encouraging departments to draw on a central source of expertise in areas such as digital
delivery and procurement. Moreover, they have provided a platform for ensuring that the public sector as
a whole can exploit economies of scale, while managing cross-departmental financial risks. 3.10
However, there is a cost to operating controls (since April 2013 departments have submitted several
hundred business cases to Cabinet Office and the Treasury for approval). There is a need to assess that the
controls still remain proportionate. 3.11 While in 2010 there was a clear case for introducing additional
controls, the Treasury remains committed to the principle that responsibility for decision making should
fall to those with the greatest access to relevant information, and who are therefore best placed to judge
feasibility and understand opportunities and risks. That will generally cascade through department to
front-line delivery organisations. Controls recommendations 1 over the medium-term the Treasury will
develop and apply a framework within which departments can take greater responsibility for areas of
expenditure that are currently controlled by the centre; 2 in order to pass responsibility back to
departments the Treasury will require assurance that departments will avoid a return to the conditions that
prompted the additional layer of controls in the first place, and that the necessary oversight and levers are
in place to continue to identify and exploit cross-departmental efficiencies; 3 this framework will be based
on a system of earned autonomy, wherein thresholds for seeking approval on expenditure are raised for
individual departments, dependent on demonstrating capability, sustained improvements in financial
standards, transparency of information, commitment to key reforms and provision of ongoing assurance
(including in the form of robust and visible management information); and 4 this framework should
present departments with a clear set of incentives to take greater ownership of the Governments
efficiency and reform agenda. Strengthening the centre of government, the relationship between Cabinet
Office and the Treasury context 3.12 The Government announced the formation of the Efficiency and
Reform Group (ERG) in May 2010 to work across organisational boundaries and drive the Governments
efficiency and reform agenda. The group is responsible for operating many of the Cabinet Offices key
controls as well as the Quarterly Data Summaries (QDS). As ERG has developed and evolved, so has the
relationship between the Treasury and Cabinet Office, particularly in relation to the operation of spending
controls and project approvals. 3.13 Within ERG there has been a concerted effort to minimise the
additional bureaucratic burden related to the new controls and to align with existing processes. However,
the review 4
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/204603/FINAL_12_13_ER

G_annual_report.pdf 18 consultation concluded that there is further to go in terms of aligning the Cabinet
Office and the Treasurys processes and systems. Some of this work is already underway in relation to
gateway approvals for major projects and programmes. Strengthening the centre of government, the
relationship between Cabinet Office and the Treasury recommendation 1 the Treasury should lead,
working with the Cabinet Office, a short-term project to improve the alignment of processes and systems
at the centre of government, building on the work that has already been done. This should include clearer
arrangements for sharing information and making decisions where expenditure cuts across multiple
controls. The project will aim to improve the speed and quality of decision making within the corporate
centre; and 2 set a long-term objective to consolidate the operation of central controls and decision
making within a single gateway in the Treasury. Leadership context 3.14 The leadership model for
finance in government differs significantly from any in major private sector or international organisations:
first, there are split responsibilities. The Head of Finance Profession is a part-time role, held by a
director general in a major spending department. This role has a clear focus on building capability within
the finance profession and promoting the role of finance in Government more generally. Responsibility
for setting and maintaining the spending and financial reporting frameworks rests with the director
general public spending, located in the Treasury. This role focuses on the: management of overall public
spending; supporting spending directors and teams in their relationships with Whitehall departments, and
leading the Treasurys spending relationship with Number 10 and the Cabinet Office. In major private
sector organisations both of these roles would be combined in the CFO function; and second, neither of
these roles have any direct management relationships with the directors and directors general finance in
government departments. The head of function operates through influence and by consent, the director
general public spending through instruction and guidance that carries the authority of the Treasurys
Permanent Secretary. 3.15 There are also significant differences between the Government and the private
sector and other governments in the way they manage finance as a function: few other countries have a
separate role of Head of Finance Profession, or consistently place the same emphasis on employing
professionally qualified accountants; however, in countries which take a more centralised approach to
financial management, the finance ministry does sometimes play a greater role on the selection and
appointment of finance officers in departments and agencies, including direct line management of some
senior finance posts; private sector organisations placed greater emphasis on developing talent. Those
with whom we spoke recognised the importance of growing rather than simply recruiting senior talent.
Some governments, such as Canada also emphasised the importance of adopting a government-wide
approach to developing talent. 19 3.16 It will become increasingly important that finance is consistently at
the centre of strategy and policy formation. Moreover, the review sets an ambitious agenda in terms of
improvements to the quality and consistency of financial management information and the role of
departments in owning and driving the Governments efficiency and reform agenda. 3.17 Focused and
empowered leadership, with real authority, will be needed to deliver continued change. Combining the
two existing roles into one, locating the new role in the Treasury, and granting the individual a degree of
authority over individual directors and directors general finance will aid this transformation. This role will
be analogous to the CFO role in the private sector, but differences will remain due to the structural set up
of private companies compared to the public sector, in particular the Accounting Officer framework
(Annex C). Leadership recommendations 1 strengthen financial leadership within Government, by
creating a new role director general for spending and finance, which will be responsible for leadership
of the finance function and overall public spending. This role will have the overall accountability for
driving improvement in financial management across government (see Box 3.A for more detail on key
responsibilities) a the new role will be located within the Treasury to ensure that director general for
spending and finance has direct strategic oversight of expenditure policy and is in a strong position to
assist in formulating the Governments financial strategy, devise spending policy and strengthen crossdepartmental working; b the new role will be a director general with a seat on the Treasurys Executive
Management Board and will report to the Treasury Second Permanent Secretary (Finance); c in order to
meet the requirements set out in Box 3.A the director general for spending and finance must demonstrate
the following qualities: excellent interpersonal skills and ability to communicate effectively; strong
understanding of the political context in which government operates, to be able to work within Whitehall

effectively; experience of managing a large complex financial function; and practical financial
experience and be financially qualified. The first incumbent should have an accountancy qualification. 20
Box 3.A: Director general for spending and finance job description Purpose To manage overall public
spending, and to support delivery of the governments fiscal objectives and improvements in value for
money by raising standards of financial management across government. Responsibilities direct
management of overall public spending and Spending Round process; dotted-line management of the
directors and directors general finance of 17 main departments; progressively resolving qualifications of
the accounts through discussions with departments, the National Audit Office and the Financial Reporting
Advisory Board; 5 oversee cross-government financial reporting; oversee development and
introduction of a mandatory set of standards for management accounting; oversee development of a
framework within which departments can take greater responsibility for areas of expenditure that are
currently controlled by the centre; oversee development of the government financial reporting systems,
ensuring the information is available to those who need it; provide leadership to the finance community,
by building partnerships and professional skills, championing learning and development and acting as a
senior advisor; ensure that the finance community has the skills it needs to carry out its responsibilities;
ensure effective talent management (including career and succession planning) of the finance community,
by developing and retaining skilled staff in order to enhance organisational and professional capability, as
well as expanding the pool of senior finance professionals across Whitehall able to operate effectively at
Board level; and chair the Finance Leadership Group. 2 strengthen the management relationship
between the director general for spending and finance and the Whitehall finance community, via a
dotted-line arrangement to the 176 a Departmental directors and directors general finance will continue
to report on day-to-day issues and delivery of the departmental strategy, via a solid-line, to their
permanent secretaries, who will remain accountable to Parliament on departmental spend. It is important
that directors and directors general finance retain confidence of their permanent secretaries and secretaries
of state. At the main departments directors and directors general finance (Box 3.B). 5 The Board
Responsible for advising the Government on the adoption of accounting standards 6 Cabinet Office;
Business, Innovation & Skills; Communities and Local Government (DCLG); Culture, Media and Sports
(DCMS); Education (DfE); Energy & Climate Change (DECC); Environment, Food and Rural Affairs
(DEFRA); Foreign Office; Health (DH); HM Revenue and Customs; HM Treasury; Home Office;
International Development (DfID); Ministry of Defence; Ministry of Justice; Transport (DfT); Department
of Work and Pensions (DWP) 21 same time, the director general for spending and finance will input into
appraisal discussions of directors and directors general finance based on, amongst other things, their
compliance with finance policies and procedures set by the centre and their co-operation on cross-cutting
finance matters; b final recruitment decisions for departmental directors and directors general finance will
continue to sit with the individual permanent secretaries via the solid-line arrangement. However, the
director general for spending and finance will also be involved in these recruitments: she or he will review
candidates and be part of selection panels; c the director general for spending and finance will be actively
involved in expanding the pool of senior finance professionals across Whitehall, and in career and
succession planning; and d the director general for spending and finance will be responsible for
articulating the long-term vision for the finance profession and driving efforts to broaden finance
capability across government more generally. Box 3.B: The management relationship between the director
general for spending and finance and directors and directors general finance, will be based on:
effectiveness of financial management in their departments, including a discussion on performance of
departmental finance function against a number of agreed indicators; and discussions (with departments,
the NAO and Financial Reporting Advisory Board) to resolve any qualifications of accounts; compliance
with finance policies and procedures set by the director general for spending and finance; co-operation
on cross-cutting finance matters, including considering crossdepartmental efficiency savings;
championing the importance of financial management in their organisations; building the capability of
the finance function both departmentally and corporately; and talent management of the finance function
in their department. 3 give greater prominence to the Finance Leadership Group7 a promote and
champion a culture of effective financial and performance management throughout central government;
(FLG), which will be chaired by the director general for spending and finance. Individual members of the

FLG will be responsible for strengthening finance communities in their respective organisations and
ensuring that finance is placed squarely in the centre of decision making. In doing so FLG members will
need to: b discuss government-wide spending priorities; c cascade finance policies and procedures set by
the centre to their organisations and ensure appropriate compliance; and 7 FLG was set up in 2005.
Membership currently consists of: DWP, DfT, BIS, CLG, DfE, HO, DH, DFID, HMRC, MoD, MoJ,
Wales, Scotland, Director Public Spending (HMT) and the Head of the Finance Profession 22 d take
specific leadership of priority areas and commission delivery of activities, reports and projects to the
finance director group and other groups as appropriate. Internal audit context 3.18 The role of internal
auditors is key to assuring that financial management practices meet required standards. As such, the
governments internal audit service has an important role to play in supporting transformation in the
application of financial management practices, as well as in all other aspects of government activity. 3.19
The central government internal audit service was transformed into a core set of shared services from
April 2013. This built on an internal audit transformation programme, the aim of which has been to drive
a step change in the quality of internal audit. 3.20 The principle behind creating shared services is to have
sufficient numbers of internal auditors grouped together for the development of capability and future
leaders and the sharing of resources, particularly for specialist areas. 3.21 Ten core internal audit shared
services were established from April 2013. They cover 17 main departments.8 Internal audit
recommendations Nine of these cover one department each, together with many of their related Arms
Length Bodies (ALB). The other one is the Cross Departmental Internal Audit Service (XDIAS) that
covers the remaining eight departments and many related ALBs. There is potential for further
consolidation. 1 over the medium-term, to consolidate the shared services further providing a single,
integrated internal audit service. This will maximise the benefits from sharing resources, specialist skills
and talent, whilst continuing to provide a high quality, responsive and flexible service to each department
and ALB client. It will also strengthen moves to identify and manage a cross-government view of risk and
assurance; 2 this service will be internal to central government, as well as to departments and ALB clients,
and be an independent agency of the Treasury. Going beyond the current service, this would also provide
assurance on common risks and a clear framework for escalation of key departmental risks to the centre.
The move to an integrated service should be done incrementally, based on service improvements and
client needs, and structural changes should not interrupt the quality of service to existing clients, whilst
improving it to the centre. The integrated service will be established, in four stages: a setting up the
XDIAS agency; b establishing reporting lines, including to the functional lead; c consolidating the smaller
departments services; and d moving all staff across to an integrated service. 8 Including Cabinet Office;
Business, Innovation & Skills; Communities and Local Government ; Culture, Media and Sports
Education ; Energy & Climate Change; Environment, Food and Rural Affairs ; Foreign Office; Health ;
HM Revenue and Customs; HM Treasury; Home Office; International Development; Ministry of
Defence; Ministry of Justice; Transport ; Department of Work and Pensions 23 3 the service, will provide
robust and consistent advice and assurance to Accounting Officers, audit and risk committees and the
central departments as follows: a a comprehensive and flexible service dedicated to and agreed with
Accounting Officers and their Audit and Risk Assurance Committees to support them in managing their
departmental and ALB delivery and other risks; b a framework for escalating significant local risks,
including those that may have a cross government impact; c a service to the centre of government to
provide assurance explicitly on cross government risks and common performance measures. 4 the role of
the head of profession for internal audit will also be strengthened and become the Head of Government
Internal Audit. As well as overseeing crossgovernment operational elements, she or he will also take a
holistic view of resource requirements and capabilities across the piece and other chief internal auditors
and heads of internal audit (HIA) would be accountable to the head of government internal audit. 5 the
head of government internal audit, will report to the director general spending and finance in the Treasury,
and be responsible for maintaining a single set of detailed professional standards, driving continuous
improvement in these, and be involved in all senior HIA appointments (in consultation with Accounting
Officers who will have the final say, based on a shortlist of suitably professionally-qualified candidates
approved by the functional lead). To assist with the management of cross-government risk, the accounting
officer would be expected to release any internal audit report, particularly where material issues are

concerned, to the Treasurys Principal Accounting Officer and the head of government internal audit.
Audit and risk committees will continue to see all reports as they require. The Permanent Secretary to the
Treasury will be able to commission cross-government internal audit work , though this will be by
exception rather than routine. Accounting Officers will also be able to propose cross-government audits
where they identify common risks.
Next steps 4.1 Implementation of the reviews recommendations will begin in the New Year. 4.2 The
immediate next step is recruitment for the position of director general for spending and finance, which
will begin in the first part of 2014 and will be externally advertised and open to candidates inside and
outside of Whitehall. The successful candidate will lead on the implementation of the recommendations
set out in the review. 4.3 In addition, a new team will be created in the Treasury to support the director
general for spending and finance in specifically implementing the work on establishing a set of standards
on management accounting in order to help departments to consistently record inputs and outputs. This
team will work closely with departments and the Cabinet Office. 4.4 Beginning in early 2014, the
Treasury, working with the Cabinet Office, will lead a project to better align Treasury and Cabinet Office
processes. 4.5 Over the medium-term the Treasury will lead a project to develop a framework within
which departments can take greater responsibility for areas of expenditure currently controlled by the
centre. 4.6 For internal audit, the process for establishing the XDIAS agency will commence in the New
Year, as well as an implementation plan for the longer-term vision for the service.
Terms of reference A.1 The review will particularly examine how the Treasury can, within existing
budgets, and while preserving the single point of accountability to Parliament for financial stewardship
that the Accounting Officer regime provides: improve the quality and consistency of management
information flows between the Treasury and departments to ensure these are of the right quality to enable
effective risk-management and decision making across government; strengthen the role of the Head of
the Government Finance Profession in promoting and assuring improved financial capability skills,
systems and processes across government (considering also the interaction of this role with the
Treasury); ensure that the right levels of delegated authorities and approvals are in place to ensure both
tight spending control and appropriate flexibility for those departments with proven financial management
capability; and create a more streamlined, coherent set of central appraisal and approval processes for
projects and programmes outside those delegations.
Summary of recommendations Leadership of Government Finance 1 strengthen financial leadership
within Government by creating a new role director general for spending and finance, which will be
responsible for leadership of the finance function and overall public spending; 2 strengthen management
relationship between the director general for spending and finance and the Whitehall finance community
via a dotted-line arrangement to the 17 main departments directors and directors general finance; and 3
give greater prominence to the Finance Leadership Group. Management information 1 make the
investment to i) better understand the costs of activities and ii) ensure this understanding will be used to
better inform decision-making; 2 define standards for costing and management information; 3 continue to
develop skills across government; and 4 accelerate current initiatives required to support a common
framework, including adopting the common chart of accounts. Spending controls 1 develop and apply,
over the medium-term, a framework within which departments can take greater responsibility for some
areas of expenditure that are currently controlled by the centre; 2 set a long-term objective of
consolidating controls and central government oversight within a single gateway in the Treasury; 3 lead a
shorter term project to improve the alignment of Treasury and Cabinet Office processes. Internal audit 1
consolidate internal audit shared services over the medium-term providing a single, integrated internal
audit service, which will be an independent agency of the Treasury; 2 strengthen the role of the head of
profession for internal audit, to become the head of government internal audit, which will report to the
director general for spending and finance in the Treasury; and 3 provide an internal audit service to
government departments and to government as a whole. 9 Director general for spending and finance job
description Purpose To manage overall public spending, and to support delivery of the governments fiscal

objectives and improvements in value for money by raising standards of financial management across
government. Responsibilities direct management of overall public spending and Spending Round
process; dotted-line management of the directors and directors general finance of 17 main
departments; progressively resolving qualifications of the accounts through discussions with
departments, the National Audit Office and the Financial Reporting Advisory Board; oversee crossgovernment financial reporting; develop and introduce a mandatory set of standards for management
accounting; develop the framework of delegated authorities within which departments can take greater
responsibility for some areas of expenditure that are currently controlled by the centre; oversee
development of the government financial reporting systems, ensuring the information is available to those
who need it; provide leadership to the finance community, by building partnerships and professional
skills, championing learning and development, and acting as a senior advisor; ensure that the finance
community has the skills it needs to carry out its responsibilities; ensure effective talent management
(including career and succession planning) of the finance community, by developing and retaining skilled
staff in order to enhance organisational and professional capability, as well as expanding the pool of senior
finance professionals across Whitehall able to operate effectively at Board level; and chair the Finance
Leadership Group.

Improving public sector financial management in developing countries and emerging economies
Accountants for business Improving public sector financial management in developing countries and
emerging economies 20 This paper explores how public financial management can be improved and
capacity strengthened in developing countries and emerging economies. It explores common issues,
lessons learnt and effective practice through a number of case studies where ACCA has worked with a
range of governments, regulators and stakeholders to improve public financial management. It draws upon
specific case studies from Botswana, Pakistan, Vietnam, Zambia and Zimbabwe. About ACCA ACCA (the
Association of Chartered Certified Accountants) is the global body for professional accountants. We aim
to offer business-relevant, first-choice qualifications to people of application, ability and ambition around
the world who seek a rewarding career in accountancy, finance and management. Founded in 1904,
ACCA has consistently held unique core values: opportunity, diversity, innovation, integrity and
accountability. We believe that accountants bring value to economies at all stages of their development.
We seek to develop capacity in the profession and encourage the adoption of global standards. Our values
are aligned to the needs of employers in all sectors and we ensure that, through our qualifications, we
prepare accountants for business. We seek to open up the profession to people of all backgrounds and
remove artificial barriers, innovating our qualifications and their delivery to meet the diverse needs of
trainee professionals and their employers. We support our 140,000 members and 404,000 students in 170
countries, helping them to develop successful careers in accounting and business, based on the skills
required by employers. We work through a network of 83 offices and centres and more than 8,000
Approved Employers worldwide, who provide high standards of employee learning and development.
Through our public interest remit, we promote appropriate regulation of accounting and conduct relevant
research to ensure accountancy continues to grow in reputation and influence. About Accountants for
business ACCAs global programme, Accountants for Business, champions the role of finance
professionals in all sectors as true value creators in organisations. Through people, process and
professionalism, accountants are central to great performance. They shape business strategy through a
deep understanding of financial drivers and seek opportunities for longterm success. By focusing on the

critical role professional accountants play in economies at all stages of development around the world,
and in diverse organisations, ACCA seeks to highlight and enhance the role the accountancy profession
plays in supporting a healthy global economy. www.accaglobal.com/accountants_business The
Association of Chartered Certified Accountants, 2010 Improving Public Sector Financial Management 1
in Developing Countries and Emerging Economies Introduction There is an increasing focus on
improving the quality of public financial management around the globe, with many countries in both the
developed and developing world making important and impressive achievements in strengthening public
financial management and governance. Nonetheless, much still remains to be done. The public sector
landscape is rapidly changing with an increasing emphasis on fiscal management and discipline,
prioritisation of expenditure and value for money. As a result it is even more important that international
donors, governments, national and local institutions, including regulators and professional accountancy
bodies, work together in partnership to achieve long-lasting improvements, transparency and
accountability in public financial management. This paper explores how public financial management can
be improved and capacity strengthened in developing countries and emerging economies. It explores
common issues, lessons learnt and effective practice through a number of case studies where ACCA has
worked with a range of governments, regulators and stakeholders to improve public financial
management. It also draws upon specific case studies from Botswana, Pakistan, Vietnam, Zambia and
Zimbabwe. 2 1. Why strong financial management is important Public financial management is absolutely
critical to improving the quality of public service outcomes. It affects how funding is used to address
national and local priorities, the availability of resources for investment and the cost-effectiveness of
public services. Also, it is more than likely that the general public will have greater trust in public sector
organisations if there is strong financial stewardship, accountability and transparency in the use of public
funds. It is important for governments to get it right because it impacts on a broad range of areas
including: aggregate financial management fiscal sustainability, resource mobilisation and allocation
operational management performance, value-formoney and budget management governance
transparency and accountability fiduciary risk management controls, compliance and oversight.1 In
addition, effective public financial management is important for decision making. Accurate financial
information is often used as the mechanism to support decisions and ensure effective resource allocations.
Good financial management is responsible for not only protecting, developing, using resources, pushing
and maintaining economic growth and increasing income, but also managing effectively and efficiently all
national resources. Dr Dang Thang, president Vietnam Association of Accountants and Auditors 1.
Michael Parry, The Four Dimensions of Public Financial Management, March 2010. In July 2009, the
International Federation of Accountants (IFAC) G20 Summit in London and the World Bank emphasised
the need to develop and strengthen the finance profession in developing and emerging economies to
achieve stable and stronger financial management. At an Eastern and South African Association of
Accountants General (ESAAG) conference in February 2009, the need to develop a professionalisation
project for the public sector in Africa was identified as urgent and vital. Donors and lending institutions
such as the World Bank, International Monetary Fund (IMF), Department of International Development
UK (DFID), European Commission (EC) and Cultural Industries Development Agency UK (CIDA)
continue to make funds available to build financial management capacity and curriculum development in
financial training in a number of developing countries and emerging economies. Additionally,
accountancy bodies and organisations such as the International Organisation of Supreme Audit Institutions
(INTOSAI) work collectively to develop both professional skills in finance and audit capacity, as well as
disseminating best practice. Most recently, an accord was signed in October 2009 between INTOSAI and
the donor community to ensure that there is a strategic approach for strengthening and developing
supreme audit institutions (SAIs). The key goals for these combined institutions are to build sustainable
financial capacity in public services and improve accountability and transparency in the use of public
funds. Improving Public Sector Financial Management 3 in Developing Countries and Emerging
Economies Both the developed and developing countries continue to struggle with the increasing
complexities of public financial management and the pace of change. Not least, finance professionals
working within the public sector are concerned with improving financial management and budgeting,
responding to changes in financial reporting, securing better regulation, strengthening institutions,

improving risk management and governance, and eradicating fraud and corruption. In addition, the
spotlight is currently on public financial management as governments across the world increasingly
struggle with achieving fiscal sustainability and managing fiscal risk. New and more sophisticated models
and tools will be required to help governments deal with fiscal management. Also, there will be more than
ever a focus on achieving effective resource allocation, particularly, in resource constrained environments.
Governments will have to become smarter to ensure budgets are effectively linked to policy objectives
and value for money is secured. As well as the increasingly complex financial management landscape, the
problems of the lack of strong leadership and political support, staff shortages, training and retention, poor
reward systems and the lack of a public financial management infrastructure mean that the issues are more
acutely felt in developing countries and emerging economies. For example, China is reported to have
about 130,000 qualified accountants in the public and private sectors, fewer than half the estimated
300,000 it needs to support improvements in financial reporting and corporate governance and increase
the rate of growth in China.2 2. http://www.accountancyage.com/accountancyage/news/2138619/
shortage-accountants-hinders 2. Why improving public financial management can be so difficult In
Botswana historically the wheel of change wields its way very slowly. It has taken 25 years to look within
itself and to evolve by reengineering its delivery of public services and processes. Governments are
conservative in nature and dont want to or rather do not have the capacity to implement change robustly.
Ideally systems and processes once implemented should be reviewed every 35 years to test their
effectiveness, efficiency, relevance to the market and whether quality service standards are still being met.
Mr Letsholo, Senior Auditor General, Office of the Auditor General, Botswana 4 A key driver for the
public financial management programme was the need to free the country from the status of least
developed country (LDC) by 2020. The governments strategy identified the direction of development and
poverty reduction as well as stressing the importance of building public financial management at all levels
to deliver better services for the poor. The objective of the programme was to promote a public financial
management system to assure transparency and accountability through strengthening public financial
management and capacity-building workforces. Dr Bouasy Lovanxay (president, SAI Laos)3 3. Dr
Bouasy Lovanxay (president, SAI Laos), Public Finance Reform for Enhancing the Effectiveness of
Public Expenditures and the Role of Supreme Audit Institution Laos, 2009. 3. Key drivers for change It is
not surprising that the key drivers for improving public financial management vary from country to
country, because of political, legal, social and economic differences. The five case studies discussed in
this paper reveal some common drivers for change and illuminate ways of improving public financial
management. Key drivers for change Public sector financial management reforms lagged behind those in
the private sector Skills deficit and retention issues Losses and waste in the public sector The need to
improve accountability and transparency over public spending for the general public and tax payer Weak
resource allocation Serious deficiencies in financial data and budget reporting Accounting and auditing
systems were antiquated There was a need to comply with internationally accepted accounting practice
The need to strengthen governance in a developing country The need to improve efficiencies and
effectiveness in service delivery The legislative framework was weak. Improving public financial
management is not without its difficulties. The complexity of the issues, presence of multiple stakeholders
and degree of political appetite for change mean that multifaceted approaches are needed. A government
project for improving financial reporting and auditing in Pakistan, outlined in case study 1, shows why
change was required and the difficulties that had to be addressed to improve public financial reporting and
auditing. Improving Public Sector Financial Management 5 in Developing Countries and Emerging
Economies Case study 1: Key drivers for improving financial reporting and auditing in the Department of
the Auditor General of Pakistan In the early 1990s, as the government of Pakistan pursued its agenda of
privatisation of state-owned entities and deregulation of the economy, the government realised that
although private sector banking and business reforms were needed to attract foreign investors, there was
also an urgent need to initiate financial management and governance reforms in the public sector.
Government recognised that the efficient use of public funds depended on the availability of timely and
relevant financial management information and the adoption of internationally accepted financial
reporting, accounting and auditing principles, best practices and standards. The accounting and auditing
system and procedures of federal, provincial and district governments, controller general accounts and

those of the auditor general of Pakistan were antiquated and required a complete overhaul. Serious
deficiencies in financial data, systems and staff skills resulted in unreliable planning, budgeting and
reporting and ineffective internal controls. Cash, asset and debt positions were unreliable, there were
unknown commitments/obligations, and pensions and depreciation records were not kept up to date,
causing uneven resource allocation in spending. This led to weak governance and accountability. Whereas
the issue for the Pakistan government was the need to improve financial reporting and auditing systems,
the challenge for Zimbabwe was that of dealing with an acute shortage of qualified professionals working
within the public sector. Botswana also had very similar issues to those in Zimbabwe. Although a
relatively wealthy country, Botswanas public sector was challenged by its failure to match the rewards
offered to professional staff by the private sector. Its civil service was dominated by expatriates, whereas
the locals moved to greener pastures in the private sector. In the case of Zambia, there was no specific
programme for the public sector but it is now making steady progress on public finance reforms. Zambias
Vision 2030 and 5th National Development Plan set out a clear vision for wealth creation and poverty
reduction; improving public financial management is pivotal to this reform. 6 Strong leadership and the
support and political will of national governments are vital to the success of any change programme for
strengthening public financial management. There is no quick fix, as many of the improvements may
require legislative, structural and cultural changes, which take a significant amount of time to implement
and embed. They also require organisations to work together effectively at a strategic level so that
optimum use is made of resources, skills and capacity. This section illustrates some of the practicalities of
improving financial management, and outlines helpful models for understanding how public sector
organisations Table 1: Key challenges and findings from the case studies Challenges Findings from the
case studies: Botswana, Pakistan, Vietnam, Zambia and Zimbabwe Strengthening the systems, processes
and infrastructure for public financial management The basic elements to support public financial
management are sometimes non-existent or weak. Concerted effort is required by national and
international institutions to put the basic building blocks in place. Improving financial qualifications
Improving financial qualifications is a priority for public sector organisations. It is generally resource
intensive and a balance has to be struck between funding targeted curriculum development and building
capacity within the profession. Equal attention has to be given to developing the accounting technician
qualification together with professional qualifications. Developing skills that fulfil the basic job
requirement There is an acute shortage of qualified finance professionals working within the public sector
in developing and emerging economies. The public sector is perceived by potential students as less
attractive and less well rewarded than the private sector. Basic technical skills are often absent and
continuing professional development and support are often not well developed. Students have reported
that they were unsupported, as employers had no formal training structure and very few resources.
Developing public sector accountants/auditors for the future Public sector bodies do not always appreciate
the difference between professional and academic qualifications, and as a result a professionally qualified
accountant is not given appropriate recognition in the salary and benefits system and is therefore less
likely to stay within the public sector. Developing accountants for the future requires a concerted and
sustained effort by employers, donors and professional bodies to work in partnership to build structures
and professional accountancy capacity. Once a change programme is successful, it is likely that other
partners and donors will become involved to take it further. Improving cooperation between national
governments and local and international institutions, eg state audit institutions, accountancy bodies,
INTOSAI The challenge is for key stakeholders such as national governments, SAIs, the donor
community and accountancy bodies to work together effectively. The case studies illustrate that where
there has been effective collaboration it is more likely that that there will be proven results. Improving
competences through support and development Continuing professional development and support were
often absent or not well developed. Employers had little in the way of structured continuing professional
development (CDP) programmes that fulfilled both employer and individual development needs. 4.
Criteria for success have instituted better public financial management over time. It also draws lessons
from the case studies. Both the models and case studies highlight that effective public financial
management reforms can only be achieved through proper planning, being realistic and keeping the
approach simple. Key challenges A review of the case studies highlights a number of key challenges that

developing countries and emerging economies face for improving public financial management. These are
outlined in Table 1. Improving Public Sector Financial Management 7 in Developing Countries and
Emerging Economies Case study 2 A change programme and actions for improving financial reporting
and auditing for the Pakistan government The Department of the Auditor General Pakistan set itself an
ambitious agenda to improve the transparency of public sector accounting and auditing outputs. The
change programme outlined below and actions taken have helped it to improve, but it is widely recognised
that much still needs to be achieved. Taking stock Following a survey in government accounting carried
out by the International Monetary Fund (IMF) and a diagnostic study sponsored by the World Bank, a
sponsored project to improve financial reporting and auditing (PIFRA) was introduced in 1994. Project
partners included DFID, Asian Development Bank and IMF. The overall vision of PIFRA was to ensure
transparency in spending both government and donor developmental funds and to make improvements in
the accountability of government revenue and expenditure, strengthen decisionmaking and budgeting
processes, and provide reliable information to the public. Overall, PIFRA was intended to improve public
sector accountability and institutional capacity for economic policymaking and management. Setting
direction and getting started PIFRAs aim was to enhance public sector efficiency and effectiveness by
modernising accounting and reporting systems in line with best practices and standards of reporting, and
replacing manual accounting and auditing systems with a computerised system. The desired results were:
the production of reliable, relevant and useful accounts improvement of government audit procedures
by adoption of internationally accepted auditing standards strengthening of financial management
practices, and implementation of a governance and legal framework for an independent and effective
audit function and internal controls. PIFRA was divided into two stages PIFRA I and PIFRA II. The
desired outputs of PIFRA I were new financial rules and regulations, a new accounting model (NAM) and
chart of accounts, improved accounting and auditing skills, decision-making support systems and
accountability frameworks. PIFRA I had the following five components. Developing accounting
standards, reporting systems and financial procedures. Improving government auditing systems and
standards. Developing human resource management, organisation and systems development. Provision
of professional-level training and strengthening professional and specialist skills. Development of
management information systems to support information technology requirements. PIFRA II was a
follow-on project focused on increasing the accuracy, completeness, reliability, and timeliness of intrayear and year-end government financial reports in Pakistan at the national, provincial, and district levels.
PIFRA II objectives included the following. Strengthening the governments financial management
policy and capacity, including the role and the reach of the controller general accounts office, internal
controls, and accounting skills requirements across the board. Modernising the auditor generals office
and communication and change management to promote transparency and increase stakeholder awareness
and ownership. Developing new-accounting-model based systems. Capacity building by restructuring
the controller general accounts and district accounts offices, establishing internal controls, improving
internal audit and strengthening research and development. 8 Making it happen A number of lessons were
learnt from PIFRA I. At the end of implementation, the department of the auditor general concluded that,
as improved public sector accounting and financial systems enhanced public sector accountability and
supported improved institutional capacity for economic policymaking and management, PIFRA II would
be rolled out. Whereas PIFRA Is scope included the development of manuals and system implementation
at a few selected sites, PIFRA II focused on comprehensive implementation of the automated system.
Obtaining human resources for change management and especially to enable the move from a manual to
an automated system required extensive capacity building, communication and stakeholder engagement
throughout. Linkages between budget development, planning, treasury, tax and debt management needed
to be developed. PIFRA II faced a number of challenges, the most important being a heavy human
resources commitment to build capacity in accounting and auditing knowledge and skills. The success of
PIFRA II depended on the understanding of the new system, adopting new office routines and processes,
and acquiring new professional skills and competences. A need emerged for more accounting and auditing
specialists and for a major realignment in the structure of their career paths. Key achievements have
included the following. A government finance system for accounting has been developed and
implemented. Financial statements of the government are now compliant with the international public

sector accounting standard (IPSAS) for the cash basis. SAP has been implemented for budgeting and
accounting at all tiers of government. Preparation of annual financial statements which previously took
about nine months after close of the financial year are now prepared within three months. A risk-based
audit methodology complying with international standards has been developed and implemented.
Computer assisted audit techniques (CAATs) software has been acquired and is being successfully used
for audit at federal, provincial and district levels. A nationwide integrated audit management system is
being implemented to facilitate top down control, macro level planning and standardisation of work and
information management. Timelines for submission of audit reports to the legislature has reduced from
33 to 13 months of the close of the financial year and for the current audit year audit reports will be
submitted within 8 months of the close of the financial year. ACCA worked in partnership with, and
provided support to, the auditor generals office. Since adding the controller of general accounts and the
auditor generals office to the list of ACCA approved employers in 2007, around 46 ACCA members and
trainees have supported the implementation of the accounting and auditing components of PIFRA II.
ACCA members have also helped with the streamlining of audit functions in government ministries and
institutions and have taken a leading role in project management. Despite the onerous challenges of
change management, new technology, human resources skills and a knowledge gap, PIFRA has raised
awareness of the importance of financial reporting and auditing in the public sector. The scale of PIFRA
has been enormous. Its complete success depends upon sustained long-term efforts and developing a
culture of awareness of the importance of reliable accounting records and of having auditing tools aligned
to best practices. By making it possible to provide accurate, complete and timely financial reports, I
believe PIFRA has morphed into a symbol of excellence in public financial management. Masud
Muzzafar, controller general of accounts Improving Public Sector Financial Management 9 in Developing
Countries and Emerging Economies CASE STUDY 3 PUBLIC FINANCIAL MANAGEMENT
REFORM IN ZAMBIA Taking stock In the case of Zambia there has been no specific financial
improvement programme for the public sector. Historically, the public sector has faced capacity
constraints compounded by inadequate information processes and systems. In addition, non-compliance
with internal controls had led to poor predictability of government expenditure and a lack of analytical
capacity. Similar to other African countries, the public sector has also struggled to attract qualified
professional accountants to the sector. Setting direction and getting started The former president of
Zambia laid key foundations for public sector reform through its Vision 2030 strategy and 5th National
Development Plan. The governments National Development Plan priorities included a commitment to
good governance and three levels of accountability: political accountability, administrative accountability
and financial and budgetary accountability. In relation to financial and budgetary accountability, Zambia
is making steady progress on public financial management reforms. It has amended the Public Finance
Act over a number of years, strengthened accountability and significantly contributed to re-defining
structures and the functions of key government offices, such as the minister of finance and auditor
general. The public financial management reforms have been supported by the donor community through
various reform initiatives such as public expenditure management and financial accountability
(PEMFA), a World Bank financial management reform programme for the public sector. Making it
happen Further reforms are underway including the revamping of internal control functions. Audit
committees in line with ministries are being set up as a new requirement enshrined in the Public Finance
Act 2004. Most recently, the minister of finance announced the introduction of the single national treasury
account and the supporting legal framework is being actioned. This is one of a number of reforms set out
by the National Constitution Commission (NCC) which is currently reviewing the countrys constitution.
Other changes have included increased training and support to existing finance staff, as well as a review
of structures, roles and responsibilities. 10 CASE STUDY 4 CHANGING PERFORMANCE AUDIT IN
VIETNAM One of a number of challenges for the state audit of Vietnam was the need to introduce stepby-step change to performance audit. Taking stock Over the last few years it would appear that
performance audit was not of much concern for state audit, as claimed in a paper Innovation in
Administering Public Expenditure and the Role of State Audit Vietnam. Financial and compliance audit
have been given the most prominence at the expense of knowing the socio-economic impacts of public
expenditure allocations. In other words, despite legal compliance, the audit does not show whether there

has been an improvement in public goods or basic services. Performance audit has been identified as one
of the greatest challenges to the state audit office of Vietnam. Setting strategic direction It is recognised
that to improve the quality and performance of auditing the following requirements need to be met. A
switch in focus to output-orientated budgeting as opposed to input-based budgeting. The creation of a
database and of norms for monitoring and evaluating expenditure. Building capacity to enable analysis
and study of the impact of policy and resource allocations on beneficiaries. Meeting these requirements
will require step-by-step change. Improving Public Sector Financial Management 11 in Developing
Countries and Emerging Economies CASE STUDY 5 DEALING WITH THE ISSUE OF A SHORTAGE
OF QUALIFIED PROFESSIONALS IN ZIMBABWE In Zimbabwe the issue was an acute shortage of
qualified professionals working within the public sector. This case shows how a strong partnership
approach can help in addressing issues that some people would consider insurmountable. Taking stock
The issue for the Zimbabwean government was an acute shortage of qualified professionals within the
public sector. This needed to be urgently addressed. Setting direction and getting started To improve the
numbers of accounting and auditing specialists, ACCA has worked in partnership with the Public Services
Commission (PSC) and the auditor generals office to increase capacity and address the skills shortage.
The partnership helped to support the auditor generals office in recruiting, training and retaining
professional staff. Making it happen ACCA worked with its partners on ways of using quality training as a
recruitment and retention tool, improving the conditions of service for finance professionals and training
support, and on introducing a system of mentoring for trainees. As a result, professional qualifications
such as ACCAs certified accounting technicians qualification (CAT) and the diploma in financial
management (DipFM) were given appropriate recognition within the civil service salary and benefits
reward system. For the first time, finance professionals were included in the technical categories together
with other professionals such as engineers and doctors. This provided individuals with an increased sense
of value and status. As part of the change programme, the auditor general (AG) became an approved
employer with the capacity to train auditors. Mentoring for trainees was provided by his qualified staff as
well as by the external audit firms that undertook subcontracted work. To ensure that there was adequate
breadth and depth in the coverage of the audit competences, the trainees were seconded to external audit
firms and given an opportunity to be seconded to other regional AG offices. Both the employer and the
students were also supported with regular guidance. Public sector-specific continuing professional
development (CPD) events were arranged to deal with the unique requirements of public sector
accounting and auditing, such as the need to demonstrate value for money (VFM). Funding was provided
from the AG as well as by donors, who paid for expenses and exam fees. In 2009, the African
Development Bank (ADB) paid for a range for initiatives to support 48 members and students from the
AGs office to increase accountancy and auditing capacity. Keeping on track These changes have led to an
increasingly professionalised civil service in which accountancy students and members are supported, and
to an increase in the numbers of professional accountants working in government, particularly in the
auditor generals office. There is a general sense that the civil service is turning a corner in the recruitment
and retention of professional accountants. As a result, it is likely that more partners and donors will be
prepared to support similar capacity-building initiatives within the public sector. 12 CASE STUDY 6
PUBLIC FINANCIAL MANAGEMENT AND CAPACITY BUILDING WITHIN BOTSWANA
Botswana had very similar issues to Zimbabwe in relation to staff retention and capacity building. A
number of specific public financial management challenges were also identified by the office of the
auditor general (OAG). Taking stock Although Botswana is a relatively wealthy country, its public sector
had the challenge of matching the rewards offered by the private sector. Its civil service was dominated by
expatriates while the locals moved to more rewarding careers in the private sector. Also, it faced a number
of public financial management challenges. These were identified by the OAG as: a need to update
legislation supporting public financial management a need to strengthen the capacity of the offices of the
auditor general and accountant general a lack of controls in the new computerised accounting and
budgeting systems accounting processes and ledgers which were not kept up to date an inadequate cash
accounting system used by government ministries and local authorities. Setting direction and getting
started There was a strong political drive by the government to improve service delivery to the public in
all levels of government ministries and local authorities. Public sector financial management reforms

lagged behind those in the private sector and public expectations of the quality of public services were not
met. The government agreed that a re-engineering of government service delivery and performance
management was necessary to create operational efficiencies and to achieve service delivery
improvements. This was driven by its Vision 2016, which includes objectives for: an educated and
informed nation a prosperous, productive and innovative nation an open, democratic and accountable
nation a moral and tolerant nation. Strategic outcomes were established in line with the National
Development Plan and an operational plan was drawn up. Workshops were held across ministries to
develop a framework for an integrated results based management approach. This was accompanied by an
overhaul of the organisational structure and competencies to link with strategic outcomes and service
delivery. Making it happen A significant investment was made by the government in ensuring the
necessary skills and competencies were put in place to achieve the outcomes set in its operational plan. A
consolidated fund was utilised for training public servants under the direction of the Ministry of
Education. The OAG had entered into an institutional capacity building co-operation with the Swedish
National Audit Office (SNAO) and the African Organisation of Supreme Audit Institutions (AFROSAIE). This allowed the OAG to learn from good practice and strengthen its core auditing services. SNAO
interventions were aimed at: improving financial management audits improving performance audits
assessing organisational effectiveness. In addition, ACCA, in partnership with the auditor general (AG),
worked on a plan similar to that followed in Zimbabwe. The AG became a registered employer with the
capacity to train auditors. Mentoring for trainees was provided by his qualified expatriate staff as well as
by the external audit firms that undertook subcontracted work. Improving Public Sector Financial
Management 13 in Developing Countries and Emerging Economies A practical experience requirement
(PER) that was specifically tailored to their type of work and the level of progression within the exams
was developed in partnership with the AG. This was based on the competence matrix used by the Big
Four audit firms. It was followed through with in-house training and coaching of both trainees and their
supervisors on how to implement PER. This included sample reviews of PER records and discussions on
the lessons learnt. As a result of these initiatives trainees tended to stay with the employer for longer
periods as they appreciated the structured approach to their professional development. Overall progress
has been made on the specific public financial management challenges. A new computerised budgeting
system has been successfully implemented across all ministries, internal controls were strengthened which
has facilitated improved budget planning and control of expenditure and performance tools have been
introduced. As well as revisions to the Finance and Audit Act there was a directive by the Ministry of
Finance to build financial capacity and capability. Some successes have also included, the establishment
of a corruption prevention committee (CPC) in each ministry to monitor and review reports and fraud
cases and a public procurement and assets disposals board to review the awarding of government tenders
for public expenditure on medical equipment and roads. Although significant progress has been made the
government and the OAG are realistic about what still needs to be achieved in terms of continuing to
retain the quality of trained finance professionals within the public sector and build on the reforms to date.
A framework for better financial management A number of models have been developed for helping
organisations to improve and assess how well their public financial management functions are
performing. We have outlined three models and diagnostics which can assist in improving public financial
management. There are many more, but in our view these are perhaps the most helpful and have had
proven results. The Audit Commission model This model, developed by the Audit Commission in
England, uses the metaphor of a journey, in which one starts at one place and wants to arrive at another.
The model identifies five key improvement phases: taking stock, getting started, setting strategic
direction, making it happen and keeping on track. This allows one to gain a better understanding of how
organisations have improved public financial management over time. As reflected in the case studies and
this model, public sector organisations seeking to improve financial management share some similar
characteristics. Quite simply put, there are four elements that have been applied to organisations that have
successfully improved public financial management. These are: clarity of purpose and strategic direction
effective political and managerial leadership the basic building blocks for achieving change driving
and sustaining change. Public sector organisations can measure their progress against these four elements
when embarking on a change programme, as outlined in a slightly adapted version of the Audit

Commissions model. This model is helpful for public sector organisations in assessing whether they are
at an early stage on their improvement journey or have made significant progress. It is not the only model
for improving public financial management, but arguably it is one of the most effective. The model can be
used to complement those instruments for measuring success that donor institutions, governments,
national institutes and regulators already use. It is particularly useful for taking a strategic overview,
prioritising and ensuring that the focus is clearly on the issues that need to be addressed. 14 Table 2:
Assessing progress towards strong public financial management Taking stock Setting direction Getting
started Making it happen Keeping on track Clarity of purpose and strategic direction Identify the reason
for current problems, for example, a weak legislative framework and policies for public financial
management; lack of compliance with international accounting standards; poor financial management;
serious budget deficiencies, losses and waste; lack of financial skills and capacity, etc. Key players clarify
the direction, allocate resources to priorities and set milestones. Place an emphasis on creating the
frameworks, structure and culture of strong financial management. Avoid getting distracted by too many
priorities. Political and managerial leadership Key players such as the government, donors, national
institutes and regulators consider what the response should be. A change programme is developed
covering a specified period with risks and resources aligned to it. Strong leadership is required together
with good communication. Early successes should be publicised to send positive messages to
organisations and donors. Leaders are more self-aware and reflect on lessons learnt to deliver and improve
on public financial management. Basic building blocks Key players assess the current state of public
financial management. The emphasis should be on addressing the major areas of concern and attending to
the risks. Invest in building up capacity and skills to deliver the project. Stop peripheral activities and
projects that detract from the change programme. Implement strong performance management and
partnership working at a strategic level. Driving and sustaining change Key players assess the capacity,
build critical mass and judge the likely pace of improvement. Make an early investment in improving
capacity and skills, but with emphasis on building momentum. A stronger organisation builds
infrastructure, systems and processes for public financial management. Institute regular reviews to learn
and consolidate improvement. Adapted from: Audit Commission, Improvement Through Better Financial
Management, 2004. Improving Public Sector Financial Management 15 in Developing Countries and
Emerging Economies Public financial management measurement framework model A second model is the
public financial management (PFM) measurement framework developed by the Public Expenditure and
Financial Accountability secretariat (PEFA), the World Bank and IMF. This performance measurement
framework is mainly focused on governments, but can be applied to other parts of the public sector. The
model sets out high level performance indicators which can be used to assess performance. There are six
critical dimensions to the model as set out below. The advantages of using this model to assess
performance on improving public financial management are that it: enables an integrated assessment of
performance of PFM systems demonstrates progress in PFM performance over time enables regular,
rigorous, evidence-based monitoring by domestic and international stakeholders provides a common
information pool on PFM performance. Six critical dimensions of PFM system performance Budget
credibility Is the budget realistic, and implemented as intended? Comprehensiveness and transparency Are
the budget and the fiscal risk oversight comprehensive, and is fiscal and budget information accessible to
the public? Policy-based budgeting Is the budget prepared with due regard to government policy?
Predictability and control in budget execution Is the budget implemented in a predictable manner and are
control and stewardship exercised in the collection and use of public funds? Accounting, recording and
reporting Are adequate records and information produced, maintained and disseminated to meet decisionmaking, control, management and reporting purposes? External scrutiny and audit Are there effective
arrangements for scrutiny of public finances and follow up by the executive? Source: PEFA, Public
financial management (PFM) measurement framework 16 Ten steps to success A third useful framework
for improving financial management was developed by HM Treasury Financial Skills Advisory Panel
(UK), Doing the business: embedding financial management skills in government (2008). It reviewed
the workings of the government department board, business and finance functions across government
departments. It outlined ten steps to success which provided government departments with a benchmark
against which to measure their own performance. 8. Start taking active steps to develop stronger

leadership skills within your businesss finance function. The CFO must have a wide range of skills
including the ability to lead and develop a finance function which meets business needs and to support the
building of financial management skills and capacity elsewhere in the organisation. 9. Keep it simple. The
key to success is being able to get things done. The role of finance and sound financial principles must be
easily understood and the benefits clearly defined. Finance needs to be seen as part of the solution not part
of the problem. 10. Temper ambition with realism. Recognise that becoming world-class takes time.
Aspiring to world-class performance is commendable. But for most organisations it represents a very
challenging target. What is more this type of transformational change is as much about creating a different
climate, changing behaviours and culture as it is about changing systems and processes. It requires
concerted action and sustained commitment over an extended period. Source: HM Treasury Skills
Advisory Panel, Doing the Business: Embedding Financial Skills in Government, 2008. 1. Act now to
kick-start good financial management skills in your organisation. It is never too soon to start. Whatever
the current level of financial management skills and awareness in the organisation there will be potential
almost certainly huge potential to improve. The drive needs to start at the top: it is critical the Permanent
Secretary and departmental board and all of its executive and non-executive members, want good
financial management to be at the heart of the business, and are committed to it and are consistent in
promoting and supporting its application. 2. Ensure finance is at the heart of developing your vision and
business strategy. Without this commitment the board not only runs the risk of flawed planning and poor
decision making but failure to embed sound financial principles into the management of the business as a
whole. 3. Start rolling out and embedding good financial management across your business today. The
principles of sound financial management must be integrated into the professional development and
performance management of all managers. This can be tackled through a variety of means including
awareness-raising and training and development. 4. Invest in people development and training needs
analysis. Different financial skills and levels of acumen and awareness are required in different parts of
the organisation. Identify the distinctive financial competencies needed in different areas of the business
from Non-Executive Directors to non-financial managers, from the Policy Unit to operational front-line
delivery, and tailor training, development and support to address them. 5. Remember the importance of
communication and engagement skills. This is about a step change in the quality of engagement between
finance and non-finance professionals. It includes skills in relationship building, communication, listening
and influencing. 6. Keep it fresh and current. This means regularly reviewing the skills and competencies
needed by and available to the business. It means looking over the horizon to anticipate tomorrows needs
and planning (and succession planning) to meet them. It means scanning for new ideas and for better
practice and performance and using these resources to improve the department. 7. Reward and celebrate
good financial management; tackle poor financial management. To attract and retain the best talent,
government will need to rethink its strategy in relation to pay and conditions. It will need to ensure that
senior managers rewards reflect in an appropriate way their financial management skills and
performance. Equally importantly, managers who perform poorly in this area by, for example, failing to
consider the financial implications of different policy options, should be made aware of their failings and
of the imperative to remedy their shortcomings in the future. By following the ten steps to success it is
hoped that government departments in the UK will operate and do business in a more effective way. A
government department board will have a stronger grip on the business and will be more equipped to
drive the change agenda. Management will have a clear of view of what it needs to deliver and the chief
finance officer and his finance team will be better placed to focus on delivering value for money. Above
all, the finance department will be fully engaged with the business at all levels and deliver the best
possible outputs and outcomes. Improving Public Sector Financial Management 17 in Developing
Countries and Emerging Economies It is hoped that this paper has given an insight into the scale and
complexities of public financial management issues that often need to be addressed in developing
countries and emerging economies. More importantly, it has shown how some issues have been
successfully overcome and the lessons learnt and it provides useful guidance for helping organisations to
improve public financial management. Key lessons learnt include the need to be realistic about what can
be achieved, and to set priorities and time scales. Sustainable public financial management requires strong
leadership, a long-term commitment and momentum, effective partnership working and strong project

management. There will be some early successes and it is important that these are communicated to
facilitate long-lasting process and cultural change for sustainable public financial management. As
highlighted in this paper, ACCA is committed to working in partnership with governments, accountancy
bodies, regulators and the donor community to help improve public financial management in developing
and emerging economies. To find out more about our work please contact Gillian Fawcett, head of public
sector. gillian.fawcett@accaglobal.com 5. Conclusion and lessons learnt Useful signposts Audit
Commission, Improvement through better financial management, 2004, . Audit Commission, Use of
resources key lines of enquiry, 2009, . DFID, A Platform to Improving Public Financial Management,
2005, . HM Treasury Financial Skills Advisory Panel, Doing the Business: Embedding Financial
Management Skills in Government, 2008, . Public Expenditure and Accountability (PEFA), Public
Financial Management; Performance Measurement Framework, 2006, . Acknowledgements We would
like to thank Afra Sajjad (ACCA), Daisy Kopolo (ACCA), Hannah Jones (ACCA), Mukaba Mukaba
(ACCA), the Auditor Generals Office Pakistan, the Auditor Generals Office Botswana and Members of
ACCAs International Public Sector Committee for their contributions. TECH-AFB-IPSFM ACCA 29
Lincolns Inn Fields London WC2A 3EE United Kingdom / tel: +44 (0)20 7059 5000 /
www.accaglobal.com

1 PUBLIC SECTOR FINANCIAL MANAGEMENT TRANSPARENCY AND ACCOUNTABILITY:

THE USE OF INTERNATIONAL PUBLIC SECTOR ACCOUNTING STANDARDS Governments must
implement the necessary institutional arrangements required to enhance public sector financial
management transparency and accountability. An integral and essential part of these arrangements is the
use of accrual-based accountingthrough the adoption and implementation of International Public Sector
Accounting Standards (IPSASs)which promotes greater transparency and accountability in public
sector finances and allows for enhanced monitoring of government debt and liabilities for their true
economic implications. Introduction Over the years there have been many sovereign debt defaults and
write-downs taken by investors in public debt. In the 21 years to 2011, there were 25 sovereign debt
restructurings. The sovereign debt crisis engulfing the European Union in 2010-2012 and related
government debt issues affecting the United States, and potentially other countries around the world, are
cause for major concern. The problems highlighted by sovereign debt crises include the lack of
transparency and accountability of governments, poor public finance management and public sector
financial reporting, and the deficiency of institutions for fiscal management in many countries. These
institutions create neither the constraints nor the incentives for governments to manage their finances in a
manner that protects the public interest and also protects investors. IFAC is of the view that governments
around the world must implement the necessary institutional arrangements to protect the public as well as
investors in government bonds. It is critical that governments work to establish greater trust between
themselves and their constituents; this should be one of the highest priorities for national leaders and
public officials. To establish such trust, it is important that governments provide accurate and complete
information on expenditures and transactions, in order to demonstrate accountability and stewardship, and
to reinforce their own credibility. This means providing clear and comprehensive information regarding
the financial consequences of economic, political, and social decisions. This information must also focus
on the longer term impact of decision making; something that cannot be achieved through the reporting
and disclosure of only cash flows. Furthermore, given the prominence of banks and private sector
investors that hold government debt, there is strong demand for the same level of financial transparency
and accountability from the public sector as is expected from the private sector. The type of information
required can only be provided through a high-quality, robust, and effective accrual-based financial
reporting system, which allows for government assets and liabilities (including debt) to be appropriately
recorded, reported, and disclosedand hence effectively monitored. The most globally accepted highquality accrual-based financial reporting system is IPSASs. IPSASs provide for the full disclosure of all
assets, liabilities, and contingent liabilities, which is vital for assessing the true economic implications of
public sector financial management. The disclosure of all liabilities, including long-term obligations (e.g.,
pension obligations), also may encourage government leaders to make decisions that are driven by matters
other than short-term political incentives. IFAC POLICY POSITION 4 March 2012 2 Public Interest
Governments have a responsibility to enact legislation, formulate and implement policy, and deliver
products and services to their citizens. The decisions made and actions taken in fulfilling these ambitions
should be undertaken in the public interest. Indeed, there is political accountability on the part of
governments to ensure that they do act in the public interest. Governments have coercive powers to tax.
Monies raised through taxation are allocated to spending, both recurrent (e.g., paying wages to public
sector employees) and capital (e.g., spending on major infrastructure projects, such as roads and railways),
for the benefit of the country and its citizens. This responsibility obliges governments to discharge their
accountability by demonstrating the manner in which they have effectively and efficiently used the
resources at their disposal. Additionally, where governments have shortfalls between amounts raised
through taxation and amounts outlaid as government spending, they raise funds through debt markets.
Where this is done, governments have a public interest obligation to market participantsinvestors and

potential investorsto provide timely, reliable, and detailed information of their financial performance
and positionsin the same way that listed companies have obligations to equity market participants.
However, without robust, transparent, and accountable arrangements for financial reporting and financial
management, it is not possible to reliably assess whether decision making by governments has been in the
public interest. Furthermore, it is unlikely that governments will be able to adequately discharge their
accountability, and provide the standard of information required by investors, without being able to
publicly report and disclose high-quality financial information. It is, itself, a major public interest concern
that strong financial reporting and financial management arrangements are not in place in many countries
around the world. The implications of not having appropriate systems in place include: a potential failure
by government to deliver services and products in the most effective and efficient manner, and in a way
that maximizes sustainable social benefit; making decisions to invest, or not invest, today in projects and
programs that result in foregone potential benefits, and which represent an opportunity cost where citizens
in the future will pay for the mismanagement of today; and poor decision making that may be, at best,
made with a short-term focus or, at worst, made in the self-interest of politicians and public servants who
have incentives to operate in a particular fashion. Context: Public Sector Financial Management Public
financial management is defined by The Chartered Institute of Public Finance and Accountancy (CIPFA)
as the system by which financial management resources are planned, directed and controlled to enable
and influence the efficient and effective delivery of public service goals. 1 CIPFA describes public
financial management in terms of a whole system approach. IFAC supports a whole system approach to
public sector financial management, and recognizes the critical importance of the foundations of the
systemstakeholder consultation, the demand for services and projects, and 1 CIPFA, Public Financial
Management: A Whole System Approach, Volume 1, 2010, page 5 3 governance2which, along with the
key process elements, aims to deliver public, community, and individual value as part of the overall
objective to deliver sustainable social benefit. For the purposes of this position paper, IFAC is focused on
aspects of two of the key process elements: namely, standards and assurance. IFAC supports the use of
high-quality financial reporting standards for the public sector that allows for independent assurance.
Also, the use of high-quality financial reporting standards requires the implementation of primary
institutional arrangements to support their effectiveness, as a tool for enhanced public sector financial
management. Use of International Public Sector Accounting Standards (IPSASs) IFAC supports the global
adoption and implementation of IPSASs for public sector financial reporting. A key issue for public sector
financial reporting is that most governments still adhere to the cash basis of accounting, and therefore
provide minimal disclosures relative to what the public, banks, investors, and credit providers generally
expect of the private sector. Current cash-based accounting systems, which operate in many countries,
may provide inappropriate incentives for decision makers. For example, cash-based reporting systems
would promote an obvious decision about whether to offer wage increases to government workers today,
or whether to offer them increased pension benefits that they can access at a future date. A cash-based
system, which does not require pension liabilities to be recorded and reported, will provide incentives for
politicians to opt for the latter. No cash is exchanged todaythat is, there is no increase in reported
spending, and hence no pressure to raise debtwhen the decision is made to offer increased pension
benefits. However, an accrual-based accounting system that requires pension liabilities to be reported will
promote more careful analysis, and could result in an alternative decision to be made when factors such as
the governments financial position, net worth, and long-term sustainability are able to be considered. The
need for accrual-based public sector accounting is recognized by many governments around the world that
already prepare financial statements on an accrual basis.3 The need is also explicitly recognized by the
European Parliament, which in its Report on the proposal for a Council directive on requirements for
budgetary frameworks of the Member States, in May 2011, included in its draft legislative resolution that
Member States shall have in place public accounting systems, applying the accrual basis of accounting
and comprehensively and consistently covering all sub-sectors of general government as defined by
Regulation (EC) No 2223/96 (ESA 95). Those systems shall be subject to independent control and audit.
4 Financial Reporting Standards - IPSASs IPSASs are issued by the International Public Sector
Accounting Standards Board (IPSASB), an independent standard-setting board supported by IFAC. The
adoption of IPSASs by governments 2 The Professional Accountants in Business (PAIB) Committee of

IFAC and CIPFA are cooperating to develop an international governance framework for the public sector.
3 As at December 31, 2011, there are 39 countries which prepare government financial statements on an
accrual basis, including the US, the UK, Japan, France, Canada, Brazil, Switzerland, Australia, and New
Zealand. Of these countries, 11 use, or are committed to use, IPSASs. The European Commission, North
Atlantic Treaty Organization, the United Nations system, and the Organisation for Economic Cooperation
and Development are several examples of organizations that also have adopted IPSASs for their reporting.
4 Refer www.europarl.europa.eu/sides/getDoc.do?type=REPORT&reference=A7-20110184&language=EN 4 worldwide will improve the quality of financial information reported by public
entities, which is critical for investors, taxpayers, and the general public to understand the full impact of
decisions made by governments with respect to their financial performance, financial position, and cash
flows. Global adoption of these standards will facilitate the comparability of such information on a global
basis and assist in internal management decisions in resource allocation (planning and budgeting),
monitoring, and accountability. Furthermore, as a universal set of public sector accounting standards,
IPSASs would also provide better information regarding systemic risks associated with government
liabilities. The adoption of IPSASs would represent a significant step forward in achieving the financial
transparency of national governments worldwide. IPSASs are designed to apply to the general purpose
financial statements of all public sector entities, and are developed primarily for an accruals-based
accounting context. While application of IPSASs would not solve the problems associated with
government debt, the appropriate use of the financial information rendered from such standards would
assist public officials and other groups in assessing the implications of fiscal decisions proposed or made
by government. Assurance Financial reporting using IPSASsa globally recognized and accepted, highquality financial reporting framework and set of standardssupports the ability to conduct high-quality
audits of governments financial statements. This is particularly important for public sector auditors,
supreme audit institutions and the International Organization of Supreme Audit Institutions (INTOSAI),
which have responsibility for, and interest in, the auditing of government information and reporting. The
use of IPSASs provides a solid foundation and suitable criteria upon which auditors can undertake their
work. In relation to auditing standards, INTOSAI cooperates with the International Auditing and
Assurance Standards Board (IAASB) to enable it to draw upon International Standards of Auditing (ISAs)
and the International Standard on Quality Control (ISQC) 1 in the development of the International
Standards for Supreme Audit Institutions (ISSAIs). Institutional Arrangements The adoption of IPSASs
and the preparation of full accrual-based financial statements alone will not enhance the transparency and
accountability of governments. IFAC recognizes that to enhance public sector financial management,
governments must implement the necessary institutional arrangements to support transparency and
accountability, including measures such as: The preparation and delivery of high-quality and timely
accrual-based financial reporting for the public sector. As systems develop, governments should aim to
have information publicly available on at least a monthly basis; The publication, in a timely mannerno
longer than within six months from the end of the reporting periodof independently audited financial
statements for the public sector; The preparation and publication of public sector budgets and
appropriations on the same basis; that is, on an accrual basis and in a timely manner; Full transparency
preparation and publicationof all financial reporting (position and performance), budgets, and
appropriations in a sufficiently appropriate amount of time ahead of elections; 5 Established, well-defined,
and publicly available principles for fiscal management and control, with full transparency (publication in
a timely manner) to demonstrate that principles are being followed. Implications for IFAC Members and
Associates IFAC members and associates are required, among other things, to support IFAC's mission and
programs and to demonstrate compliance with the seven Statements of Membership Obligations
(SMOs).5 SMO 5, titled International Public Sector Accounting Standards and Other IPSASB Guidance,
6 sets out the obligations of IFAC members and associates in relation to IPSASs and other guidance
issued by the IPSASB. These obligations are that member bodies should: notify their members of all
IPSASs, guidelines, studies, and occasional papers developed by the IPSASB; and use their best
endeavors: to incorporate the requirements of IPSASs into their national public sector accounting
requirements, or where responsibility for the development of national public sector accounting standards
for financial reporting by governments and others in public sector organizations lies with third parties, to

persuade those responsible for developing those requirements that general purpose financial statements of
public sector entities other than government business enterprises (GBEs) should comply with IPSASs, and
disclose the fact of such compliance; and to assist with the implementation of IPSASs, or national
public sector accounting standards that incorporate IPSASs. As well as meeting these obligations, member
bodies and associates are encouraged to participate in supporting the adoption and implementation of
IPSASs in other ways, including, where appropriate: the inclusion of IPSASs and public sector financial
reporting and auditing in professional programs and continuing development courses; promoting the role
of professional accountants in the public sector, potentially working with governments to identify
opportunities for such promotion; providing input into public sector financial reporting standard setting,
both locally and internationally; and commenting on relevant exposure drafts and other consultations
related to public sector financial reporting and financial management, both locally and internationally.
_____________________________________________________________________________________
__ This Policy Position has been prepared by IFAC. The approved text of this Policy Position is published
in the English language. For further information, please email: publicpolicy@ifac.org. 5 The objective of
the SMOs is to provide clear benchmarks to current and potential IFAC members to assist them in
ensuring high-quality performance by professional accountants. The SMOs cover an IFAC member
bodys obligations to support the work of the independent standard-setting boards supported by IFAC and
the International Accounting Standards Board, and obligations regarding quality assurance and
investigation and discipline. 6 All seven SMOs are currently under revision. Proposed changes to SMO 5
include: clarifying the best endeavors concept and the applicability framework; clearly defining
requirements relating to adoption and implementation of international standards issued by the IPSASB;
and adding the translation requirement. Exposure Drafts, Consultation Papers, and other IFAC
publications are published by, and copyright of, IFAC. IFAC does not accept responsibility for loss caused
to any person who acts or refrains from acting in reliance on the material in this publication, whether such
loss is caused by negligence or otherwise. The IFAC logo, International Federation of Accountants, and
IFAC are trademarks and service marks of IFAC. Copyright March 2012 by the International
Federation of Accountants (IFAC). All rights reserved. Permission is granted to make copies of this work
provided that such copies are for use in academic classrooms or for personal use and are not sold or
disseminated and provided that each copy bears the following credit line: Copyright March 2012 by
the International Federation of Accountants (IFAC). All rights reserved. Used with permission of IFAC.
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Table 1: Summary of PFM Performance Scores No. PERFORMANCE INDICATOR Score A PFM OUTTURNS: Credibility of the budget 1 Aggregate expenditure out-turn compared to original approved
budget D 2 Composition of expenditure out-turn compared to original approved budget D 3 Aggregate
revenue out-turn compared to original approved budget D 4 Stock and monitoring of expenditure payment
arrears Not Rated B KEY CROSS-CUTTING ISSUES: Comprehensiveness and Transparency 5
Classification of the budget D 6 Comprehensiveness of information included in budget documentation B 7
Extent of unreported government operations D+ 8 Transparency of inter-governmental fiscal relations C 9
Oversight of aggregate fiscal risk from other public sector entities D 10 Public access to key fiscal
information C C BUDGET CYCLE C(i) Policy-based Budgeting 11 Orderliness and participation in the
annual budget process D+ 12 Multi-year perspective in fiscal planning, expenditure policy and budgeting
D C(ii) Predictability and Control in Budget Execution 13 Transparency of taxpayer obligations and
liabilities C 14 Effectiveness of measures for taxpayer registration and tax assessment D+ 15
Effectiveness in collection of tax payments D+ 16 Predictability in the availability of funds for
commitment of expenditures D+ 17 Recording and management of cash balances, debt and guarantees C+
18 Effectiveness of payroll controls C+ 19 Competition, value for money and controls in procurement D+
20 Effectiveness of internal controls for non-salary expenditure D+ 21 Effectiveness of internal audit D
C(iii) Accounting, Recording and Reporting 22 Timeliness and regularity of accounts reconciliation C 23
Availability of information on resources received by service delivery units D 24 Quality and timeliness of
in-year budget reports C+ 25 Quality and timeliness of annual financial statements D+ 12 No.
PERFORMANCE INDICATOR Score C(iv) External Scrutiny and Audit 26 Scope, nature and follow-up
of external audit D+ 27 Legislative scrutiny of the annual budget law C+ 28 Legislative scrutiny of
external audit reports D