They allocate funds among their subordinate units, make commitments, purchase and procure goods and services, verify the goods and services acquired, prepare requests for payment (and make payments, if the payment system is not centralized), prepare progress reports, and may keep accounts and financial records. Doe, L., S. Pattanayak, 2008, Financial Control in African Countries, Public Financial Management Technical Guidance Note, (Washington: International Monetary Fund). In Francophone systems, a guiding principle is that the official who orders payments has to be different from the official who makes the payments. This requires that personnel database (where personnel information files are kept) and payroll records be linked, regularly updated, and reconciled. Nonetheless, recent theoretical and empirical evidence supports a mixed relationship between these variables. This control can also apply to the wages/personnel expenditure in the sense that a designated official (e.g., the head of the division/department) certifies that the respective staff have performed their duty during the time period for which wages are to be paid. FSU countries. Sweden has a separate debt management agency which also administers the TSA system. In this context, the function of financial and expenditure control has been merged with the treasury and verification of the regularity of certain current expenditures (such as salaries, leases and certain procurement contracts) has been delegated to line agencies at the commitment level. For example, Angola, Cape Verde, Guinea Bissau, Mozambique, and Sao Tome and Principe. This information is then used for preparing the baseline estimates of the detailed medium-term budget forecast. Jacobs, D., and others, 2009, Budget Classification, Technical Notes and Manuals, (Washington: International Monetary Fund). A change management strategy should also be developed and implemented, taking into consideration the implications of the reform strategy for diverse stakeholders, from senior officials to agency heads, and the personnel who will support the new systems. A unit of government, typically a line ministry, department or agency, is assigned the responsibility to ensure that the appropriated resources are spent as intended within the authorized limits. Procurement procedures should provide a fair opportunity for all bidders to compete for government contracts, and be designed to get good value for money and to minimize risks of corruption and patronage. These procedures also lead to significant differences between fiscal accounts and financing data (i.e., between above- and below-the-line data).38, Austrian. Finance ministry monitors budget execution by line ministries/agencies. Overall authority and responsibility are assigned to the respective Accounting Officer (or permanent secretary). In most cases, researchers assume that control of corruption, rule of law, accountability, and government expenditure tend to have a positive impact on government effectiveness. Pattanayak, S., and I. Fainboim, 2011, Treasury Single Account: An Essential Tool for Government Cash Management, Technical Notes and Manuals (Washington: International Monetary Fund). The system of payments to government suppliers was highly decentralized. In both centralized and decentralized systems, there should be regular bank reconciliation of transactions27 and reporting of expenditure against authorized allocations by spending agencies. Public Expenditure and Financial Accountability Assessment: Federal Democratic Republic of Ethiopia (Somali Regional State Government), Public Expenditure and Financial Accountability Assessment: Federal Democratic Republic of Ethiopia (Southern Nations, Nationalities and Peoples Region), Timor-Leste Public Expenditure and Financial Accountability Assessment 2018: Public Financial Management Performance Report, https://doi.org/10.5089/9781513574639.005. In any case, understanding the seven key stages of the expenditure cycle and associated control systems is also important to effectively design and implement an FMIS. Under a dual accrual and cash budgeting/appropriations framework, there is a need for each agency to make projections of both its anticipated cash requirements as well as incurrence of expenses and liabilities and accumulation/realization of long-term obligations and contingent liabilities. The ministry of finance in these countries does not carry out any form of detailed commitment or payment control. Allen, R., and D. Radev, 2009, Extrabudgetary Funds, Technical Notes and Manuals (Washington: International Monetary Fund). In line with internationally accepted good practice, the payment should be made through a treasury single account (TSA) system.13 Payments by checks are, in most countries, recorded at the point of their issuance. Allen, R., and others, 2015, The Evolving Functions and Organization of Finance Ministries, Working Paper WP/15/232 (Washington: International Monetary Fund). The line agencies have responsibility for executing their budget and managing the funds/ resources assigned to them. International Monetary Fund Copyright 2010-2021. Key strengths: line agencies directly accountable for the use/control of their appropriations; and no complementary period. _paq.push(["setDoNotTrack", true]); Inordinate delay in issuance of spending authority to line agencies. Elementary and secondary education, utilities, public safety, health, roads, street lamps, signs, and traffic lights are the main areas of expenditure of the local governments. Commitment. The paper also examines the influence of different administrative traditions on types of expenditure controls, including the authority and responsibility of various institutional actors. To help PFM practitioners evaluate a countrys budget execution system and identify priorities for strengthening expenditure controls, this TNM: explains the key stages of the government expenditure chain (Section II); describes the (i) types of controls applied at each stage of the chain, their objectives, and key features; (ii) nature of expenditure limits in cash-based, commitment-based and accrual-based budgeting environments; (iii) centralized vs. decentralized approach to the exercise of those controls; and (iv) authority and responsibility of various institutional actors throughout the expenditure cycle (Section III); examines the influence of different administrative traditions on types of expenditure controls exercised and the allocation of responsibility for their application (Section IV); identifies the typical weaknesses and problems associated with different expenditure control traditions (Section V); and. Countries of the former Soviet Union (FSU) have tended to retain centralized treasury departments to control and process government payments, while controls at the commitment, verification and payment order stages remain with the line ministries/agencies. It is a statement of the estimated receipts and expenditure of the Government in a financial year (which begins on 01 April of the current year and ends on 31 March of the following year). Budget modifications during the year are done according to legally prescribed processes (e.g., virements, contingency reserves, and supplementary/revised budgets), transparently, and in a way that promotes governments chosen objectives. In countries of the British Commonwealth tradition, officials in spending agencies are charged with initiating and authorizing expenditure transactions, from commitment to payment, based on apportionments/allotments/warrants issued by the ministry of finance. 2, No. Options for strengthening the expenditure control framework. In cases where a centralized payment system has been established, the individual spending units may prepare the payment orders electronically and submit them to the central unit/treasury for payment through a Financial Management Information System (FMIS). These valuations measure the full costs of paying pension benefits. Government expenditures as a share of national output went sharply up and down in these countries, mainly because of changes in defense spending and national incomes. Verifies the legal and administrative compliance to ensure that the expenditure operation and related documents/contracts follow the procedure, prescribed in the law and/or financial regulations. This may lead to potential arrears. Whereas, in Francophone systems, the financial control officer is employed by the Budget Office, in Lusophone systems the payment-authorizing officer is employed by the Accounting Office. In general, relatively advanced countries have moved further in the direction of devolving their expenditure control systems than developing countries, but this is not true in all countries. Bank reconciliations, among other things, are critical to identifying potential misappropriation of public money. Governments expenditure must be within the amounts that the budget appropriations have established, with some flexibility allowed through virements and contingency reserve mechanisms. This convergence is in the direction of: an increased focus on ex ante controls over expenditure commitments rather than ex post controls only at the payment stage of the expenditure cycle; a shift from controlling only cash expenditures towards controlling the accumulation of accrued liabilities as well; greater devolution of responsibility for routine expenditure controls towards ministries and agencies and a more risk-based approach to the exercise of centralized controls; a stronger reliance on internal and external audit to ensure the integrity of financial control systems in ministries and agencies; and. As such, the focus of expenditure control at the commitment phase of budget execution has moved from an annual to a multiannual basis, i.e., the total cost of a legal commitment into which the government is entering into is fully recorded against the available multiannual commitment authorizations/AEs. The budget should be implemented as formulated and authorized with as little deviation as possible, but there should be room to adjust to changing circumstances (e.g., genuinely unexpected events) by modifying the budget as necessary during the year. The defining characteristic of an expenditure at the verification stage is that a liability has been incurred. 2. A centralized accounting organization (usually called Accountant General) is responsible for making payments and keeping accounting records. It can be spent on a range of different . Fiscal rules, medium-term budget plans, and annual budgets are meaningless if expenditure cannot be controlled during execution. None of the Scandinavian countries have formalized apportionment (or in-year release of spending authority) mechanisms. Large delay between actual delivery and verification (leading to late payments, interests, arrears, etc). To reduce the deficit or the gap between the expenditures and income, the government may cut back on certain expenditures and also . While the controls may be well specified and the roles and responsibilities of the key actors clarified in a countrys legal/regulatory framework, problems may still arise due to lack of enforcement. Verification of goods and services (contrle du service fait): This control involves: (i) verification of the goods and/or services delivered by a supplier to ensure that these conform to the specified quality and quantity; and (ii) a calculation of the liability incurred by the government to the supplier. Other specific controls relate to specific types of transactions and are designed to either reinforce macro-fiscal discipline and sustainability (e.g., controls on payroll, pensions, and incurrence or liquidation of liabilities or guarantees) or safeguard the integrity and efficiency of public procurement and payroll systems. The three main types of government expenditure include public services, transfer payments, and debt interest. The reforms should focus on modernizing the mode of payment (e.g., through electronic fund transfer), streamlining check floats, introducing active cash management to ensure cash availability for payments, and ensuring regular bank reconciliation. Commitment limits may be multi-year in nature (usually for capital projects) and carried over from one financial year to the next, while cash expenditure limits are usually set for the budget year. The descriptions of the various traditions provided below are broad and general, and in practice, there are variations among the countries belonging to each tradition. Sequestering (or gel/rgulation budgtaire in Francophone tradition) is the blocking of appropriations by the ministry of finance. To ensure these objectives are met, government expenditures typically go through seven stylized stages4 between authorization by the legislature and payment to the final beneficiary (Figure 4). The main reforms required to address the weaknesses at different stages of the expenditure cycle are as follows: Authorization. Key strengths: centralized payment and treasury accounting system. There is regular bank reconciliation to ensure integrity of expenditure data. Budgets are not the only mechanisms that provide the legal authorization to incur expenditure. Commitment approval delinked from apportionment and cash management frameworks. For example in Austria, as highlighted by external audit a few years ago, there were instances of either delayed or no recording of commitments until their respective payments materialized. Despite their different administrative origins, there has been some convergence between various expenditure control systems in recent years. As shown in Figures 13, Public Expenditure and Financial Accountability (PEFA) assessments covering 85 low and middle income countries revealed that: more than two-thirds of these countries have relatively weak systems of expenditure control as indicated by a score of C or D on the PEFA expenditure control indicator PI-20 (Figure 1); weak expenditure controls are associated with higher levels of expenditure arrears as measured by PEFA indicator PI-4 (Figure 2); 2 and. Without accounting for the state rollback error, the total general fund revenue and expenditure budget which funds police and fire, parks and recreation and public works is $157.9 million . Lusophone African countries are also characterized by a higher degree of centralization in the sense that the overall budget execution responsibility, including the responsibility for financial control, is usually concentrated in one office: either the budget office itself (e.g., in Guine Bissau, and Sao Tome and Principe) or the accounting office (e.g., in Angola and Mozambique). The research seeks to learn from good practice outside UK Central Government and focuses on: The budget processes in place. Once checks are made to ensure that all previously stipulated controls have been performed and documented, a payment order is issued. While this was a common practice in most of the Latin American countries several years ago, many countriese.g., Bolivia, Columbia, Paraguay, and Uruguayhave in recent years separated the accounting and audit functions. Key Stages of Expenditure Control Framework, Seven key stages of the expenditure cycle, III. For example, the British budgeting system sets appropriations for both the expenses incurred (the net resource requirement) and the cash payments to be made (the net cash requirement) by each ministry. Expenditure not appropriated/authorized by the start of fiscal year. Allowing ministries and agencies to commit and use their resources whenever they want complicates cash management.40. A complementary period (generally two months)33 is allowed after the close of the fiscal year to process and record payments in respect of commitments that were authorized before the close of the fiscal year, but for which the actual delivery of goods or services has yet to take place. Strengthening expenditure control in a particular country can, therefore, sometimes require difficult judgments about whether to reinforce traditional administrative arrangements or seek to modernize them. 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