In the 20th Century records came to be unmanageable and unmanaged
in many countries. Manual records and increasing volumes of documentation of vastly growing government activities outpaced
human capabilities and government resources.
Today’s 21st Century technology and the growing demand for
better accountability and more transparency coincide to open a new century of strategic resources available for public sector
managers. Timely indeed is this century-opening contribution by the International Records Management Trust providing a reference
model for modern management of financial records.
During the 20th Century the concept of the integral nature of financial
management systems and records nearly completely disappeared as governments and their transactions became so fragmented that
effective integration of data became impossible under the systems then in effect. This happened so fast during the period
of public sector and public service expansion that no one actually realized that governments were losing control over the
information vital to their own management. The philosophy of dispersed record keeping among the different offices of governments
without any framework for consistency resulted in the absence of any harmony as to the philosophy or practice of keeping financial,
not to mention non-financial, records.
Because there was very little relationship between financial records
and operational records, governments could never determine the degree of efficiency and effectiveness of their programs and
activities. Often government accounting consisted of what old time auditors called “cigar box accounting” with
separate cubby holes, boxes or other containers for paper items that were different, and separate recording in non-existent
accounting entities or funds to segregate their recording in like manner to the papers’ physical segregation.
Financial records are but some of the records that constitute the
foundation of accountability that in turn supports the edifice of democratic government. Other records are likewise important.
But those records that permit the review and audit of what has been transacted in the name of the citizenry are perhaps even
more important than all others. Well maintained financial records permit accountants to prepare useful financial reports for
managing resources and for communicating their use to the public. Well maintained financial records permit independent auditors
to give the public assurance that financial reports are credible. Well maintained financial records, reports and audits thus
constitute the bridge between the politician, the bureaucracy and the citizen that must exist to provide communication, retroalimentation
and credibility in a democratic state.
This pioneering compilation and presentation of good practices and
guides for the
management of financial records fulfils a century-old need at the
beginning of a new century. Its Reference Model for systems assessment, organization, control and the resultant increased
degree of accountability provides a beacon to guide financial managers and government officials across the world is shedding
light upon the mysteries of the great bureaucratic entities that constitute 21st Century governments.
No publication could be more timely, appropriate or useful, than
one that opens the long closed door of comprehensible transparency to the financial affairs of governments.
Chapter 23 of the Transparency International Sourcebook was originally written
by Jim Wesberry:
Good Financial Management
Just as it is impossible not to taste honey or poison that one may find at
the tip of one’s tongue, so is it impossible for one dealing with government funds not to taste,
at least a little bit, of the King’s wealth.
Kautilya (Prime Minister of a state in northern India)
One of the most powerful anti-corruption devices is the establishment
of sound financial management practices, with timely and efficient accounting systems combined with punctual,
professional reviews by internal and independent auditors. For this to be achieved, top-level management
and political commitment to robust controls is vital – be it in the public or in the private sector. Such a commitment is a missing element in many countries today, and in both the public
and the private sector.
Too often when fraud and corruption are considered, legal and prosecutorial
mechanisms coupled with punitive measures come to mind. However, this is a simplistic approach, and all
it accomplishes is a “feel good” glow when harsh laws and draconian penalties are enacted
- even though, when one looks around the world, such actions have met with scant success.
One of the major purposes of a sound financial management system in business
is to combat and disclose internal white collar crime. Some mistakenly think that the requirement of
annual audits is all that is needed to do the trick. However, auditors’ hands are tied where inadequate
accounting systems obscure the “audit trails” which should permit auditors to find irregularities
and determine who is responsible for them.
Poor, disconnected and untimely accounting systems and disintegrated approaches
to financial management provide opportunities for fraud. They also serve to cover it up, and, worse still, if fraud is discovered or reported, they make it impossible to identify and punish those responsible.
On the other hand, clear and transparent paper trails not only serve to lead quickly to the guilty -
and discharge any suspicion of the innocent - but they also provide a powerful deterrent.
The responsibility of a government is not, of course, limited to ensuring
the proper financial management of central funds in accordance with standards and procedures. It extends,
too, over the whole of the general government sector, including regions, districts and municipalities,
as well as central government institutions. This task can be extremely difficult where there is a large degree of decentralisation accompanied by shortages in management and audit capacity,
or where local democracy and subsidiarity are deeply embedded in political attitudes and cultures.
The government should also ensure that strong financial management systems
are introduced into agencies and organisations that are on the interface of the public and private sectors,
and in public corporations that are subject to government regulation. In all of these, sound and reliable standards of governance are often badly needed. This can be complex in practice - in some
countries, often thanks to Ministerial patronage, cronyism and nepotism - some agencies have almost developed
an independent life of their own. Nevertheless, this only makes the need to bring them under control,
and have them performing to acceptable standards, all the more compelling.
What is good financial management?
The objective of good financial management in the private sector is to provide
information on which decision-makers can base wise and prudent judgements. In the public sector, however,
financial management has been more concerned with compliance with legal mandates than it has been with providing inputs into decision-making. As a consequence, many key financial management
decisions in the public sector tend to be based upon present political realities, rather than on a careful
analysis of future outcomes.
It is this inevitable mixture of politics, law and public scrutiny that makes
governmental financial management so much more difficult and complex than financial management in the
business world. As a result, governmental financial management can be much more challenging than its private sector counterpart. However, it is very important that the objectives for public
sector financial management, including the financial management of internationally financed projects,
be reformulated along the lines of private sector dynamics.
The scope of financial management responsibilities in government or business
includes funding, custodial, analytical and reporting functions, among other elements. The following
tasks characterise financial management in both sectors:
• Analysing and assessing the financial impact of management decision
both prior and subsequent to implementation;
• Ensuring the necessary cash flow to finance planned activities and operations;
• Safeguarding resources through appropriate financial controls;
• Providing a financial framework for planning future activities and operations;
• Managing transaction processing systems which produce information
for the control of planned activities and operations;
• Ensuring legality and regularity in the use of public funds;
• Paying attention to concepts of efficiency and effectiveness; and
• Reporting and interpreting the results of activities and operations
measured in financial terms and thereafter ex post audit and evaluation.
As the demands on government have increased, and as new revenue sources have
been exhausted, there has been a shift in emphasis among the financial management functions. Almost all nations are cash-poor in relation to the accepted demand made on their governments. Hence,
the spotlight of financial management is now on getting cash and managing it - for without cash, budgets
cannot be executed. The existence of uncontrollable external economic influences, the questionable reliability
of traditional revenue sources, and the insatiable demand for more and more public services, have all
acted to bring cash management, including debt management, to the forefront of public sector interest.
Yet, few countries have achieved ade
or acceptable cash management systems. Even developed and industrialised countries have only recently
begun to introduce new and improved approaches to cash management.
The fragmentation of the central financial management functions is another
characteristic peculiar to the public sector. Although businesses commonly designate qualified individuals
as “chief financial officers”, few governments can identify their own key financial executives.
The basic financial management functions are often divided among agencies
which compete for influence, instead of collaborating for the common good. All too
often financial information is not available, is not timely, is not reliable and is not used in making
the key decisions of government. A sense of financial management consciousness is sorely needed in the
public sector. Each government needs an appropriate financial management philosophy, and a clear definition
of the scope of the financial management function.
Then it must assure competent professional financial management leadership
for that function and provide adequate staffing and support.
As countries develop, their need for co-ordinated professional financial management
increases. Thus, among the many needs of developing countries is the need to integrate basic financial management functions and responsibilities into a co-ordinated single system under competent
professional leadership. This can be done without the extensive use of sophisticated computerised systems.
However, increasingly new microcomputer technology and decreasing costs are
bringing integrated financial management systems within the reach of almost every national government.
Individual government agencies, municipalities and other government units
are likewise able to finance and maintain integrated agency-wide financial management systems which provide
information useful and timely in making key managerial decisions, and also provide better accountability to higher levels of government and to all citizens.
How good financial management counteracts corruption
In general, a sound system of financial management and accounting inhibits,
discloses and helps confirm and identify corrupt practices and their perpetrators in the following ways:
• It provides sound information for the various anti-corruption “watchdogs”
– the Auditor-General (or Supreme Audit Institution), the Public Accounts Committee of the Parliament or Legislature, and the investigative and prosecutorial agencies;
• It forces a disciplined on-time approach to public activity and financial
reporting. Sound financial management includes requirements that all transactions adhere to the same rules, eliminating the loopholes and alternative mechanisms which foster and cover up
• It promotes the development of strong internal managerial controls.
These include appropriate “audit trails” (requisites of sound financial management), which
strengthen the probability that corrupt practices are discovered and identified as such, so permitting more prompt investigation;
• Managerial control is further strengthened with regards to oversight
of discretionary power over resources and expenditures which are subject to a high degree of vulnerability.
Typical areas of abuse are travel expenses, consulting contracts often subdivided to
come below thresholds of review, particularly valuable or attractive and portable assets such as vehicles
and portable computers, etc., not to mention the inevitable temptation for kickbacks posed by very large
capital expenditure projects or acquisitions in large amounts;
• It facilitates audit. Professional and timely internal and independent audit
focuses on highest risk areas is made possible
where financial management, especially accounting systems are adequate; and
• It provides psychological control. It has been well established that
fear of discovery and punishment is a prime factor in discouraging corrupt practices. The knowledge that internal managerial controls are in place, constantly being emphasised and improved, and
subject to selective audit review, is a powerful disincentive to the potentially corrupt.
An Integrated Financial Management System (IFMS)
An Integrated Financial management System (IFMS) is a most important tool
for good financial management. Some countries may lack the resources or the capacity to implement a fullblown
IFMS, as described here. However, they should not be deterred from putting basic building blocks in place - such as modern accounting, cash management and internal audit systems –
and so building up an IFMS on a step-by-step basis.
An IFMS consists of an interrelated set of sub-systems which plan, process,
and report on resources, quantifying them in financial terms. The basic sub-systems normally are accounting,
budgeting, cash management, debt management, and their related internal controls. Other
sub-systems sometimes included are collection and receivable management, acquisitions and supply management,
information management, tax and customs administration, retirement or social security system administration,
etc., together with their own related internal controls.
One of the most important elements of modern internal control in any government
agency consists of an independent and professional internal audit function, which constitutes, together with the other internal controls, an integral part of an IFMS.
The principal factor which “integrates” the system is a common,
single, reliable data base (or several interconnected data bases) to and from which all data expressed
in financial terms flows. All of the sub-systems, and all users of financial data, must be required to
participate in common data sharing. The validation, classification and recording of data is a function
of the accounting sub-system which produces timely reports of classified data for use by all systems,
and others who use financial information.
An IFMS can be developed regardless of a specific organisational structure,
but it is likely to function better where the four basic sub-systems - accounting, budgeting, cash management,
and debt management - are closely related within the organisational structure, under a common, professionally qualified financial management executive.
The failure to integrate financial management information traditionally results
• fragmented and unreliable data;
• duplications of data difficult to reconcile;
• failure to utilise actual results in the planning and budgeting processes;
• failure to fully and publicly report results of operations and financial
• hidden fiscal transactions, including contingent liabilities, quasi-fiscal
transactions, government guarantees and the like, which can surface unexpectedly and cause major fiscal disruption;
• undue emphasis on one of the component
sub-systems (usually budgeting) which tends to dominate, duplicate and crowd out the others.
Components of an IFMS
The principal four components of an IFMS are accounting, budgeting, cash management
and credit management. These component sub-systems of the IFMS must be permeated by sound
internal managerial controls, imbedded and virtually invisible. Each of them must be supported by an
environment of ethics and integrity, which must stem from the highest levels of government.
The accounting sub-system is at the heart of the IFMS, because the other sub-systems
depend on it for useful, timely and reliable data. If the accounting sub-system fails to produce timely
data (which is all too frequently the case), the remaining sub-systems cannot function properly. In this case, substitute data is often sought, new ad hoc records are set up to produce indispensable
data, and management decisions are made without the information necessary to apply good judgement. Thus,
sound development and maintenance of the accounting sub-system are absolutely necessary to the success
of the IFMS, and constitute a very important factor in its “integration”.
Among other things, the accounting system allows for:
• providing information to programme managers for use in making informed decisions;
• the substantiation of financial transactions based upon duly organised
• making it possible to report results in financial terms, and where
performance data is maintained, to report costs;
• control over current year budgetary execution as disbursements are
made, and preparing future year budgets based upon actual expenditures made; and,
• providing periodic financial reporting and audit-ability, so lending
credibility to governmental operations, and strengthening accountability.
It is very important that all accounting and budgeting classification or coding
schemes be fully integrated into a single common classification which remains constant over a period
of years. Changes in classifications from year to year impair the ability to compare data and to analyse trends.
For accounting purposes the chart of accounts should contemplate and integrate
all accounts containing assets, liabilities, government equity, revenues and expenditures in such a manner
so as to facilitate the preparation of financial statements in accordance with the accounting principles applicable in the public sector.
The International Federation of Accountants’ Public Sector Committee
(IFAC/PSC) has issued a series of official pronouncements which discuss and interpret the applicability
in the public sector of the International Accounting Standards and International Auditing Standards.
These Standards were developed in a continuing effort to harmonise the professional standards of the accountancy profession across the world.
More recently the IFAC/PSC has issued accounting standards, based as closely as possible on the
International Accounting Standards (IAS) applicable in the private sector, and which are specifically
designed for all governments to follow. Although these pronouncements obviously cannot be binding on
national governments, they do provide professional guidance which governments can use in determining
which standards to recognise and apply.
For central government, a relatively uniform accounting system based upon
a single general ledger is preferable. However, publicly owned corporations normally require sophisticated
accounting systems designed according to the nature of their activities.
IFAC/PSC has generally stated that regardless of the nature of the enterprise
(i.e. public or private), the international standards should apply. However it recognises that some government
institutions have non-financial or social objectives, and may require different types of information,
thus demanding certain modifications in the application of standards designed initially for the private sector.
There should be clear responsibility for the setting of accounting standards
in the public sector, and for directing the accounting function throughout the government so as to assure
the proper functioning of the accounting system and its adherence to professional standards.
Each public transaction, operation or event quantifiable in monetary terms,
should be recorded in the accounting system and reported on. These should include funds outside or “off
budget” as well as funds of third parties held in trust or agency, or which are in any other manner
under the custody of public officials.
There is more literature available on public sector budgeting than all the
other sub-systems of public sector financial management put together. Notwithstanding, it is extremely
important to highlight the fact that budgeting must be integrated with the other financial management
areas, even if it exists in an independent high level agency outside the finance ministry or treasury department.
Furthermore, budget execution data must be derived from the accounting system,
and not separately recorded and processed. Many developing countries have lost control over their financial
affairs due to the segregation of budgetary execution data from other financial data, and/or
due to the maintenance of ad hoc budgetary execution records outside the accounting system. This aspect
is probably the most problematic and most important area of integration in an IFMS.
No agency of the public sector should administer public funds outside the
budget. Budgetary principles of universality and unity demand that all forecast revenues and all programmed
expenditures of all types be accounted for within the government’s budget, including all transfers
to other levels of government and autonomous entities or public corporations. This means that any use of “special” (or “earmarked”) revenues that are not paid into the general pool
of revenues, should be minimised. So, too, should the use of supplementary budgets, which can distort the fiscal targets and ceilings set in the main budget.
The budgets of public corporations and substantially self-financed entities,
need not be centralised within the budget of the state, but should be formally presented to the national
The budgetary sub-system should
be designed in such a simple and practical manner as to facilitate smooth operation in co-ordination
with the other IFMS sub-systems. At the end of the day it is essential to ensure that the budget out
turn for a year does not over-run by a substantial margin the figures set in the budget itself.
Cash management seeks to ensure that the achievement of budgeted goals and
objectives are not frustrated by a lack of cash liquidity. This is the over-riding problem in governmental
financial management today across the world. Meeting cash management objectives requires forecasting the combined flow of funds, and planning to meet financing needs, including short-term
borrowing, as budgeted.
The scarcity of financial resources, in the face of growing demands for expenditure
on public and social services, has compounded the problems posed by traditional practices of maintaining
a multiplicity of idle funds languishing in numerous accounts, with various banks, and for multitudinous purposes. Thus, in the modern and efficient financial management system it is obligatory
to unite all cash flows in what is sometimes called the “single bank account”.
financial inflow from any source which results in public funds, should be deposited directly into the single cash depository account of the National Treasury. In the same way, all disbursements should be drawn against the same account, and based on authorisations which conform to the cash
flow plan of the government.
To assure operational flexibility, public corporations and other substantially
self-financed entities should not participate in the unified treasury system. However, like the central
government, they should carefully plan and forecast their cash flows to avoid idle cash maintained in accounts, and to ensure that liabilities are met when they fall due.
As governments have incurred more and more indebtedness in recent decades,
those institutions who market and underwrite public debt have assumed greater importance. There has been much emphasis on sound debt management since the developing world’s external debt crisis
of the 1980’s, and the Asian crisis of the 1990’s.
There is certainly unanimity on the need to improve debt management. However,
it is important not to lose sight of the fact that public debt is not, and cannot be, isolated from the
rest of the financial management system. It has been the collapse of other financial management sub-systems, especially budgetary control, which have provided the motor for the phenomenal increase
in public sector debt over the past two or three decades in almost every country.
Planning indebtedness is just as essential as planning cash flow, and many
feel that these two sub-systems should be considered as one owing to their close relationship. Unfortunately,
the present situation in nearly every country means that planning of indebtedness is indispensable to “balancing” the budget. Public sector borrowing has become the “finaglefactor” to budgetary stability.
5 Public indebtedness is often the result of a political decision not
to raise taxes or to reduce expenditures to affordable levels, or else as a periodic response to seasonal
fluctuations in revenue and disbursement.
At the national level, any financing operation
based on committing the credit of the state should be channelled through the agency responsible for public
credit. This will assure the oversight and proper recording of the transaction as a liability to new
debt, and the planning of the corresponding inflow of cash.
Internal control, which may be considered synonymous with managerial control,
is of great importance within each of the IFMS sub-systems. Appropriate internal control measures should be integrated within each sub-system in such a manner that their application becomes an
integral part of the normal processing of transactions. Internal control comprises all the coordinated measures
and methods adopted within an entity to:
• safeguard its resources;
• promote the reliability and accuracy of financial and operational information;
• promote efficiency in operations;
• stimulate adherence to legal provisions, policies and standards; and to
• achieve programmed goals and objectives.
Internal control measures and procedures should be installed in each entity
and integrated within its administrative operating procedures. Pre-control and approval of administrative
operations and transactions are performed by the same employees who are responsible for the ordinary flow of operations. No organisational unit should be specifically set up to perform pre-control
functions (sometimes erroneously called “pre-audit”).
Internal audit, an important part of internal control,
should be exclusively dedicated to “post audit”, which includes a review and evaluation of
the internal controls in place. Internal audit is a part of the internal control structure dedicated
to measuring and evaluating the other internal controls. Thus, internal auditors must be professionally
independent and should not participate in, or approve, administrative acts or financial transactions.
Internal auditors should observe the Standards for the Professional Practice of Internal Auditing promulgated
by the Institute of Internal Auditors.
The particular anti-corruption advantages of IFMS
Integrated Financial Management Systems is a term first coined in the 1970’s
to describe the systems developed after the near financial collapse and impending bankruptcy of both
the City and State of New York. The financial management inadequacies and fragmentation highlighted by this collapse led to the development of high-technology tools for use in the fight against
financial corruption, no less than against mismanagement.
IFMS counters corruption in a variety of ways:
Multi-level budgetary control –
Budgetary review and control may be exercised at the operational, supervisory, and central levels, based
on varying thresholds of activity or other factors. Automatic flash points may be built in to call attention
to deviations in areas of high vulnerability as well as to repetitive inappropriate budgetary
Avoidance of cash flow “surprises” – Actual cash flows can be monitored at appropriate levels through effective and timely
cash management practices. Cash flow forecasts can be prepared, and the typical cash unavailability “surprises”
which can provoke draconian austerity crises, can be avoided.
Spotlighting weaknesses – “Exception
reports” can be designed to provide prompt feedback
to managers in areas where weaknesses are becoming a trend.
Internal validation of integrity –
Validation of the integrity of transaction data is provided for at each key step during the processing
of transactions, and is duly documented electronically both to avoid delay in internal controls execution
and to limit external controls to those of a “post-audit” function.
Accounting control over resources –
The accounting system maintains general ledger controls overall valuable resources which are independent
of operations. Governments in developing countries have generally been unable (both for internal purposes
and project accountability) to control or account for important assets such as receivables, land, buildings, other fixed assets, vehicles, computer equipment, software, and all types of
electronic equipment. An absence of such controls facilitates the “looting” of state resources
by officials and their friends.
Transparency in public reporting –
Complete and timely financial reports are available for disclosure to legislative oversight committees,
and to the public at large, as provided for in most national constitutions but without such a system
are rarely produced. Once transparency is achieved it is hard for officials to cover up “bad news”
when it is contained in financial reports. The tendency to ensure that “bad news” was never published has been a major reason why disciplined and transparent financial reporting has
long been avoided.
Consistent enforcement of criteria –
The consistent policies and practices required by an IFMS, such as the use of a single unique Treasury
bank account for all public funds and the prohibition of “off budget” expenditures, inhibit
corrupt and collusive practices. Where they persist, they are entered into the accounting system of non-acceptable
transactions, unless responsible officials are dismissed - which, in itself, results in
disclosures of corrupt practices.
Decentralisation of authority and accountability – Each unit or activity chief is in charge of financial planning and transaction authorisation
within his or her specific area of responsibility. Original transaction entry is at the operational level,
while managerial reports are about execution of their own financial transactions, but, all are subject
to either on-line or very timely supervision and oversight from higher levels.
Reduced need for accountants –
Typical and repetitive transactions are pre-coded according to type and amount entered, and therefore
appropriate accounting entries are made automatically, reducing the need for accounting expertise while
at the same time reducing the possibility that transaction data can be manipulated.
Immediate audit capability –
Timely entry of transaction data at the point of origin permits internal auditors to pay immediate attention
to areas and activities identified as being vulnerable to corrupt practices.
Disclosure through comparability –
High speed computer comparison of data available in comparable form (such as double salaried staff, retirees
also drawing remuneration, duplicate payments to suppliers, etc.), can quickly and efficiently disclose
patterns of corrupt practices and their overall impact.
Computer assisted audit – Computer
audit software can be utilised in selecting transactions for audit sampling, greatly reducing audit costs
and enabling increased attention to be given to areas which demand more frequent audit coverage. This
is an anti-corruption measure which hitherto has traditionally been unavailable in developing
Advantages of IFMS to the honest
Finally, there is the constant need to protect honest employees from the shadow
of suspicion. This invariably falls over the honest no less than the dishonest whenever corruption is
pected or discovered, and whether it
involves international projects or public sector activities in general.
IFMS can provide a safety net for dedicated and honest public servants in several
It limits the number of people placed under suspicion – Sound financial management and internal control systems, especially IFMS, establish clear
lines of responsibility and authority. They provide for appropriate segregation of incompatible duties,
and for clear audit trails which limit the number of individuals placed under suspicion during investigations when irregularities are discovered.
It ensures appropriate documentation –
Appropriate paper-based and electronic documentation of evidence supporting financial flows ensure the
eventual exoneration of the honest, even when they may have been placed temporarily under suspicion.
It discourages pressure and executive override – Direct pressure from higher officials or peers may be applied on financial staff or others
to breach established standards and policies which inhibit corrupt practices. Pressures may also be indirect,
such as when financial staff are urged to do nothing but where duty demands action or the reporting of irregularities. In this situation, honest staff soon leave public service if they
try to resist such pressure. IFMS provides a disciplined environment and a series of specific control
practices which diminish the force of corrupt official and/or peer pressure on financial staff. This
in turn makes their professional career service more personally rewarding, instead of being an unbearable
burden on their consciences.
Much more could be written about the role of the internal system of managerial
controls accompanied by sound financial management systems. The Treadway Commission and the Committee of Sponsoring Organizations (COSO) in the United States, the Cadbury Commission in
the United Kingdom, and the Criteria of Control Board in Canada have all focused considerable private
sector attention on the importance of internal control for the safeguard of resources and assets.
The concept of internal control, which originated in the accountancy profession
during the 1940’s, has been expanded to encompass the entire scope of managerial responsibility.
It forms today’s generally accepted framework for safeguarding and maximising the use of limited
resources in the private sector, and it should do the same in the public sector.
Fraud and corruption can never be wholly eliminated,
but they can be substantially counteracted, and diminished by the use of sound financial management policies
The IMF Code of Good Practices on Fiscal Transparency
“Fiscal transparency” can be defined as “openness”
to the public as to the structure and functions of government, fiscal policy intentions, public sector
accounts, and fiscal projections. Greater transparency in these areas can lead to better informed public
debate, better functioning markets, and stronger accountability of governments for the design and implementation
of fiscal policy. Certainly, awareness of government policies and intentions can only be for the benefit of all – be they major economic decision-makers or ordinary citizens. Just as certainly,
accountability is sharply restricted where such openness does not exist.
To promote “fiscal transparency”, in 1998 the International Monetary
Fund (IMF) adopted a Code of Good Practices on Fiscal Transparency.
6 The Code is
a highly significant development because it represents
the first coherent attempt to set a framework of international standards for the conduct of fiscal policy.
Government activities relating to taxation and spending are at the core of the exercise of power. They
have a major impact on economic growth and equity, and are a major source of opportunities for corruption.
The Code itself is based on four interlocking high level principles, which provide
7 These four general principles reflect the essential elements of fiscal
transparency. Collectively, they have the potential to create a self-sustaining fiscal integrity system.
The general principles are:
Clarity of Roles and Responsibilities –
roles and responsibilities within government, and between different levels of government, should be clearly
defined, with a clear boundary being drawn between the government and the private sector;
Public Availability of Information –
governments should commit themselves to providing the public with comprehensive and timely information
on a full range of fiscal and quasi-fiscal activities;
Open Budget Preparation, Execution and Reporting – the complete budget process, from preparation through to reporting and auditing, should
be conducted in an open and public manner; and
Independent Assurances of Integrity –
there should be mechanisms independent of the Executive to scrutinise and ensure the integrity of fiscal
Each high level principle stands at the pinnacle of a hierarchy of specific
principles, which in turn are underpinned by good fiscal transparency practices.
Although the Code is aimed primarily at improving governance and fiscal performance
across the board, and is not directed specifically at reducing corrupt practices, critically important
elements of the Code do bear directly on the incidence and severity of corruption.
Of particular relevance in this regard are the following provisions:
1.1.2 Government involvement in the rest of the economy (e.g. through regulation
and equity ownership) should be conducted in an open and public manner on the basis of clear
rules and procedures, which are applied in a non-discriminatory manner.
1.2.1 Fiscal management should be governed by comprehensive laws and administrative
rules applying to budgetary and extra-budgetary activities. Any commitment or expenditure
of government funds should have a legal authority.
1.2.2 Taxes, duties, fees and charges should have an explicit legal basis.
Tax laws and regulations should be easily accessible and understandable, and clear criteria should guide any administrative discretion in their application.
1.2.3 Ethical standards of behaviour for public servants should be clear and well-publicised.
2.1.3 Statements should be published with the
annual budget giving a description of the nature and fiscal significance of contingent liabilities, tax
expenditures, and quasi-fiscal activities.
2.1.4 The central government should regularly publish information on the level
and composition of its debt and financial assets. Government transactions should be on a gross basis, distinguishing revenue, expenditure and financing, and classifying expenditures
on an economic and functional basis. In addition expenditure should be classified by administrative category.
Data on extra-budgetary operations should be similarly classified. Budget data should be presented in
a way that allows international comparisons.
3.2.4 The annual budget and final accounts should include a statement of the
accounting basis (i.e. cash or accrual) and standards used in the preparation and presentation of budget data.
3.3.1 A comprehensive, integrated accounting system should be established.
It should provide a reliable basis for assessing payment arrears.
3.3.2 Procedures for procurement and employment should be standardised and
accessible to all interested parties.
3.3.3 Budget execution should be internally audited, and audit procedures
should be open to review.
3.4.2 Timely, comprehensive, audited final accounts of budget operations,
together with full information on extra-budgetary accounts, should be presented to the legislature.
4.1.1 A national audit body, or equivalent organisation, should be appointed
by the legislature, with the responsibility to provide timely reports to the legislature and public on the financial integrity of government accounts.
Each of the general principles, specific principles, and good practices, is
explained in a manual on fiscal transparency which is being made available on the IMF web site. The manual
aims to provide practical guidance for the implementation of the Code, by illustrating in more detail the specific minimum practices which are required of countries if they are to adhere
to the Code. The manual also provides information and examples of best practice from a number of countries.
The good practices on which the Code is based are conceived, not so much as
“best practices”, but as practices which all 182 IMF member countries should adopt. At present it is likely that no country fully meets every standard in the Code, although a small number
of industrial countries are close to doing so. For developing countries and countries in transition,
however, a significant number of the practices are not yet established.
All countries are encouraged to adopt the good practices proposed in the Code,
but the emphasis is on voluntary implementation. For those countries starting from a low base, in terms
of the principles and practices required in the Code, the manual will identify a sub-set of good practices which could form the core focus for initial efforts to increase fiscal transparency.
A “fiscal transparency questionnaire”,
and a “self evaluation report” have also been prepared, as tools to assist assessments of
the level of compliance of individual countries with the Code. The questionnaire is cross-referenced
to the manual, and both follow the structure of the Code. The expectation is that country authorities
will be interested in completing the questionnaire and self evaluation report as a basis for developing
country-specific plans to increase fiscal transparency, and to identify their need for technical assistance
in this area.8 It is open to anyone, however, to use the fiscal transparency framework developed
by the IMF to conduct their own assessments of compliance of individual countries with the Code. Indeed,
while the IMF will promote transparency in connection with its surveillance and technical assistance activities, the impact of the Code will be greatest if a wide range of official and nongovernmental organisations and interests use the Code to assess country performance and to bring pressure
to bear for improvements.
For TI National Chapters, the Code and supporting material represent a potentially
very useful means of assessing the integrity of their countries’ fiscal management systems. The
transparency code brings together the interconnections between the different elements of a high integrity fiscal system, including many that bear directly on corruption. It therefore has value in
that it provides a framework for developing coherent proposals for reform in individual countries, focusing
on the highest priority areas where there is the potential for creating a selfreinforcing and self-sustaining
financial integrity system.
What has been done so far?
In recent years the bilateral and International Financing Institutions (IFI’s)
have taken measures to improve financial management both in their own projects (the enclave approach)and
in national governments. However, a strengthening of financial management limited only to projects may shield the donor from embarrassment, but does not protect the recipient government and
its people from fraud and waste. Funds are fungible, and national funds may easily be taken and replaced
by those from international sources, leaving no record of any irregularity in the books of the project
or their “audited” financial statements.
A much stronger position than hitherto has been taken by the World Bank since
its President, Jim Wolfensohn, speaking at the 1996 World Bank – IMF Annual Meeting, said: “…Let’s not mince words: we need to deal with the cancer of corruption. In country after country, it is the people who are demanding action on this issue. They know that corruption diverts
resources from the poor to the rich, increases the cost of running businesses, distorts public expenditures,
and deters foreign investors…it is a major barrier to sound and equitable development…
…Working with our partners, the Bank Group will help any of our member
countries to implement national programmes that discourage corrupt practices. And we will support international efforts to fight corruption…
…Let me emphasise that the Bank Group will not tolerate corruption in
the programmes that we support…”
During the past decade the World Bank
and other IFI’s have greatly increased the number of country projects in which they are assisting
in the modernisation and professionalisation of financial management and auditing systems at the national
level.9 However, donor “enclave-based” efforts to strengthen project accountability
have, for the most part, entirely ignored the importance of sound internal controls, and the role of
internal auditors in reviewing and reporting on them. Most donors have been extremely lax in enforcing
their own accountability requirements, and have chosen austerity over accountability where accountability oversight staffing has been involved. Most donor agencies, other than USAID, have
failed to exploit the resources available through the accountancy profession, which has long played a
leadership role in this area of the private sector.
In summary, although the IFI’s have begun to face up to the problem
of financial corruption in several ways, there is much more that can be achieved.
Some indicators of the effectiveness of the Financial Management System as
an integrity pillar
• Does the financial management system provide complete and timely financial
reports for Legislative and Parliamentary oversight committees, and to the public at large?
• Does the system promote the development of strong internal managerial controls?
Does it create appropriate “audit trails”, so facilitating prompt
and effective investigation and prosecution?
• Is the complete budget process, from preparation through to reporting
and auditing, conducted in an open and public manner?
• Are steps being taken to develop and improve tools for good financial management?
• Is there clear responsibility for the setting of accounting standards
in the public sector, and for directing the accounting function throughout government so as to ensure
the proper functioning of the accounting system and its adherence to professional standards?
• Does the financial management system in practice provide timely, reliable
and comprehensive information for public decision making?
• Do agencies of government administer public funds outside the budget?
1 Kautilya was writing more than two thousand years
ago. Quoted in the Arthashastra (New Delhi: Penguin Books, 1991 at page 281).
2 The World Bank has carried out pioneering work in codifyingthese kinds of transactions
and encouraging countries to measurethem and to publish information about them as part of regularbudget documentation and
government financial reports.
3 E.g. the IMF’s Government Finance Statistics (GFS) system.
4 In practice this will often be a series of linked accounts in respect of
which information is continually available, and which can be pooled at the end of each day.
5 Finagle = to get or achieve by trickery, craftiness or persuasion; to use
trickery or craftiness (on a person). Collins English Dictionary Millennium Edition.
6 The IMF is supporting the Code through preparation of a manual on fiscal transparency,
a fiscal transparency questionnaire and self-assessment report. It has a dedicated web site on its home page for further information
(http://www.imf.org). The Fund has also established an email address (email@example.com) to which anyone seeking further information or technical support can address inquiries.
7 The full text of the Code is reproduced in the Best Practice documentation
on the web site version of this Source Book (http://www.transparency.org), and it also appears on the IMF web site.
9 In the Latin America and Caribbean (LAC) Region, the IFI’s have established
or are planning Integrated Financial Management Systems (IFMS) in Bolivia, Argentina, Guatemala, Honduras, Ecuador, Colombia,
Venezuela, Nicaragua, El Salvador, Panama and the Dominican Republic. The Spanish government has been collaborating with Uruguay
and Costa Rica. USAID was a pioneer in the field, with its Model Integrated Financial Management System for Latin America
(SIMAFAL). This has served as the conceptual model for all such systems. Other regions have begun to adopt the IFMS approach,
including Ghana and Vietnam.
Many of the projects have not fully developed the concept of internal managerial
control as a management responsibility, nor have they included the strengthening of the internal audit function. Most heads
of LAC Supreme Audit Institutions are not qualified auditors, but rather are political appointees, a factor which severely
limits the effectiveness of their organisations in contributing to anti-corruption efforts. (For example, a Comptroller General
of Ecuador (a vocal supporter of anti-corruption efforts) who had already resigned, was impeached and formally discharged
from office by the Congress owing to corruption al legations involving his review of confidential expenditures authorised
by the Vice President. More recently a highly controversial appointment was made in Peru, following the tarnished election
of President Fujimori in 2000.)
Whenever you find you
are on the side of the majority, it is time to pause and reflect
--- Mark Twain
We have never observed
a great civilization with a population as old as the United States will have in the twenty-first century; we have never observed
a great civilization that is as secular as we are apparently going to become; and we have had only half a century of experience
with advanced welfare states...Charles Murray
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