September 4, 2012Doug Hadden
GRP or Integrated Financial Management Information Systems (IFMIS) can be cornerstone to anti-corruption
We were asked last week about how FreeBalance software contributes to reduced corruption in developing countries. There can be a significant effect on reducing corruption.
What is the linkage between “anti-corruption” and GRP?
- Governments implement Government Resource Planning (GRP) or Integrated Financial Management Information Systems (IFMIS) to improve fiscal management and governance as part of Public Financial Management (PFM) reform
- GRP systems and PFM reform have been found to improve governance where governance is the door to anticorruption
- Countries with better-performing PFM systems have lower corruption perception indexes because robust PFM systems raise the risk of detection and the cost for bad behavior
- The reduction of corruption is the result of a committed desire to change and the use of appropriate tools, like GRP, to affect change
- There are no systematic assessments of the impact of IFMIS impact on corruption but the literature considers that IFMIS can have a deterrent function on corruption by increasing the risks of detection and the absence of an IFMIS is considered an enabling factor for corruption
- GRP addresses three principal-agent framework dimensions of institutional structure that are most critical in reducing opportunities for corruption: (1) the monopoly power of officials; (2) degree of discretion that officials are permitted to exercise; and (3) degree to which there are systems of accountability and transparency in an institution
- The computerization of public financial management processes can create new opportunities for corruption by monopolizing information access and control, so additional institutional and capacity factors are needed to leverage GRP for anti-corruption efforts
- GRP systems when combined with the proper institutional environment augments anticorruption efforts although not all forms of corruption can be detected by these systems
- The anticorruption capabilities of GRP systems are augmented when leveraged via e-governance transparency portals and it has been suggested all types of petty bureaucratic corruption can be diminished through the increased transparency achieved by using modern electronic media
What is the linkage between “governance” and “anti-corruption”?
- Governance: the manner in which the acquires and exercises its authority to provide public goods & services
- Corruption: the use of public office for private gain and is an outcome – a consequence of the failure of accountability relationships in the governance system
What is the consensus on the role of PFM for anti-corruption?
The relationship between sound and orderly PFM systems and reduced levels of corruption is also receiving increased attention. Mapping freedom from corruption (using Transparency International’s (TI) Corruption Perception Index (CPI)), against the quality of PFM (using the World Bank’s Country Policy and Institutional Assessment (CPIA)), suggests that higher quality PFM systems correlate with lower perceptions of corruption (Dorotinsky and Pradhan 2007). Heilbrunn (2004) argues that the creation of anti-corruption commissions is a token effort that lacks substance, if reforms in PFM do not take place.
GRP has a significant effect on financial institution and investor corruption and is enabler for reducing corruption by executives. Based on the World Bank study in 2000 , GRP has a possible positive effect on more than half of attributable corruption in developing countries.
What are the corruption effects on public finances?
- a one-point increase in the corruption index reduces tax revenue collected by 2.7 percent of GDP
- estimated $400 Billion lost worldwide through procurement corruption because the procurement of goods and services by public bodies amounts on average to between 15 and 25 percent of a country’s Gross Domestic Product (GDP)
- estimates of annual worldwide bribery of about US $1 trillion dollars annually
Where are the PFM vulnerabilities to corruption?
There are numerous corruption PFM vulnerabilities throughout the government budget cycle including:
- Budget Execution: is considered fertile ground for corruption because it provides opportunities to undertake transactions and for money to exchange hands through gaps between formal processes and informal practices
- Budget Preparation: vulnerability for corruption is considered to be low at the stages of planning and preparation but is important to have full budget coverage
- Extra-budgetary accounts: or “off-budget” accounts funneled through foreign aid or other methods
- Payments: includes authoring officer withholding the issuance of a payment order on account of cash flow shortage while in effect, his real reason is expectation of a bribe and in the form of payments to ghost companies or workers, for the delivery of no goods or services, queue jumping, retention of payment in return for quick backs, transfer of less than the stated amounts and pocketing the balance, and favoritism in approving eligibility
- Payroll: including “ghost employees”, dead pensioners and demands by managers for payroll kickbacks
- Procurement: is a common source of corruption and can include violation of procurement laws and regulations, ordering of unauthorized goods and services, exceeding budget ceilings, bid-riggings, orders addressed to fictitious companies, acceptance of inflated prices
- Public Investment Projects: as a special case for procurement where some individuals or political groups [gain] opportunities to receive “commissions” and executives have significant degree of discretion in influencing the scope of these projects
- Tax Administration: can be a major problem to tax and customs administrations including bribes to reduce or evade tax
- Treasury: The manipulation of bank accounts outside the control of the Treasury
How do GRP systems detect corruption?
GRP systems are used to detect corrupt activity through:
- Audit: audit trails in GRP tools identifies who entered, adapted and approved every step in a government process enabling fraud pattern recognition
- Exceptions: identifies exceptions to normal operations
- Reporting: GRP reporting tools and analysis by internal and external stakeholders detects fraud
- Transparency: publishing of budget plans and budget reporting opens up information to civil society scrutiny
How do GRP systems prevent corruption?
Internal controls within institutions are considered the most effective for GRP anti-corruption:
- Controls: through automation to ensure legal processes followed and appropriate approvals for government eliminating opportunities for corruption because of the link to the transaction cycle, preventing the circumvention of procedures and blurring of cash disbursements and reducing informal practices
- Decentralization: of functions to impede centralized corruption
- Payments: eliminate cash payments through secure cheque printing and electronic funds transfer making financial transactions fully traceable and reducing cash fungibility including use of the Treasury Single Account to prevent manipulation
- Reporting: knowledge that fraud patterns can be uncovered in reporting or audit changes the behaviour of politicians and public servants
- Segregation: of duties for processes across many people reduces the ability of any one person to commit fraud
What forms of corruption are restricted through the use of GRP?
- Accrual Accounting: prevents hiding arrears and assets that are possible in cash accounting
- Asset Management: reduces theft of public goods by cross-reference of asset inventories with equipment purchase
- Audit and Reporting: reduces theft of public funds through fraud detection and automatic exception alerts
- Human Resources: reduces nepotism, ghost employees through audits, kick-backs by tracking payments, comparing addresses, using national identification cards, cross-referencing birth and death records, civil service and executive financial disclosure, coherent alignment of salary scales to responsibilities and recruitment controls
- Procurement: controls aimed to detect and deter corruption and can provide feedback about irregularities from competitors through on-line reporting
- Revenue: controls show full revenue collected for fees, fines and taxes, the introduction of computerized support for the processing of customs documents provides the opportunity to implement standardized procedures that leave little to the discretion of the officials
- Tax Administration: reduces tax fraud through land ownership and vendor records and rent-seeking from revenue collectors
- Tendering: reduces “contract steering” fraud by cross referencing employee and vendor information and quotes from fake vendors
What factors in the GRP system are necessary for anti-corruption?
- Comprehensiveness: the GRP system is covering a significant portion of the PFM system otherwise fraud will occur in manual and non-integrated systems and must common standards, rules and procedures, with the view to reducing risks of mismanagement of public resources
- Integrity: the GRP software and underlying database have maintained data integrity and built-in integrity checking identifies data manipulation attempts
- Reconciliation: GRP sub-systems like bank statements, tax administration or payroll need to be frequently reconciled to trap fraud
- Secure: the GRP system provides good access controls on secure networks to reduce data manipulation
Can we put corruption in perspective?
Although there has been a strong narrative about corruption in developing countries, it should be noted that under much more propitious conditions, the rampant corruption in the United States that spanned from the late nineteenth century through the early twentieth century was presided over by the industrial robber barons and Tammany Hall leaders and took decades to overcome and some PFM reforms in these countries have taken up to two centuries to evolve.
How does transparency and e-governance reduce corruption?
The ability of the public to review the full performance and financial statements of government entities leads to confidence and trust in the public sector and roots out corruption. PFM transparency should be considered a major force to animate civil society engagement and protest by turning on the capacity of the society to interact with data:
- Bribery: transparency minimizes the opportunities for public officials to monopolize access to relevant information and to extract bribes from clients
- Comparability: budget transparency enables civil society to compare expenditures across multiple years to identify corruption patterns
- Freedom of information: along with open data, enables civil society to act as corruption watchdogs, credited with combatting corruption
- Monitoring: civil society leveraging transparency to identify where and how corruption is actually taking place
- Independent reporting: through social media enables the public to uncover corruption patterns and augment government auditing
- Procurement manipulation: competitors and civil society can object to fraudulent tendering, find collusion between vendor and procurement officer, identify patterns of bribery, favouritism, patronage systems and bid rigging
- Surveys: Public Expenditure Tracking surveys, when made public and linked to public information campaigns, can contribute to reducing leakages
What additional factors are needed to achieve anti-corruption potential for GRP?
- Autonomous audit: can have a critical role in strengthening government accountability if structural dysfunctions in the system of fiscal control are eliminated
- Capacity: ICT, PFM, investigative services and legal capacity among public servants and citizen education to leverage transparent government information
- Civil service reform: create a culture of professionalism and ethical values with instilling meritocracy while providing workers with salaries comparable to the private sector
- Decentralization: effects on anti-corruption are largely depend on the design of the fiscal transfers from the central government
- Discretion limitation: where politicians have limited discretionary authority
- Institutional practices: internal audit, external audit, anti-corruption commissions and strong rule of law are need to make corruption accountable
- Internet access: internet access is positively associated with reductions in corruption
- Legislative oversight: by strengthening of the rights of members of parliament in the budget preparation process
- Media competition: ensures good quality of information provided to citizens helps to reduce public acceptance of corruption
- Mobile infrastructure: mobile and social media enables rapid organization to create critical mass of protesters and closes the digital divide
- Political will: clear commitment of authorities and effective political motivations are required to ensure capacity building and relevant institutional practices
- Revenue de-concentration: separation of functions is a trend in revenue administration has been to organise activities by function e.g. audit services, collections, rather than by tax type e.g. Value Added Tax (VAT) or Income Tax, in the belief that this increases collections and reduces the potential for corruption
- Risk management: risk mitigation strategies that results in changing processes
- Rule of law: legal ramifications and accountability when corruption is detected
- Tax simplification: reduces discretion in tax collection and reduces exemptions
What is the linkage between corruption and aid effectiveness?
- Corruption and lack of transparency, which erode public support, impede effective resource mobilisation and allocation and divert resources away from activities that are vital for poverty reduction and sustainable economic development. Where corruption exists, it inhibits donors from relying on partner country systems.
- Donors are more likely to fund projects “off-budget” when there is high perceived corruption. This increases transaction costs for reporting and introduces inefficiencies because of the lack of coordination and harmonization among donors and with governments.
Why should donors use “country systems”?
Country GRP systems can reduce aid fungibility when the whole of the state’s revenues should be accounted for in its official budget.
- The Paris Declaration on Aid Effectiveness, the associated emphasis on the use of country systems… placed PFM reform in centre stage, both from a poverty reduction and sustainable peace (in post-conflict countries) perspective. For donors, the importance of sound PFM systems in recipient countries also relates to concerns about funds not being used for intended purposes and the associated impact on development effectiveness and their own reputation.
- When donors avoid using government systems designed to guarantee a degree of integrity, this provides the opportunity for corruption. This has been especially true in countries with a large donor presence
- There is a lack of evidence to show that corruption lessens when expenditures use a donor’s PFM system rather than reasonably strong PFM systems of a post-conflict country. In fact, there are numerous cases of well-publicised abuses when donors deliver aid directly.
- There is an international donor commitment to use country systems, including GRP, to improve aid effectiveness
What are some real-life examples of GRP anti-corruption success stories?
- Afghanistan: around seven signatures were needed for every payment in the paper-based system and each signature required a small bribe. This avenue for corruption was eliminated with the implementation of the Afghanistan Financial Management System. To date, only one case has been reported where there was an allegation of improper use of the system and the individual was caught. It should be noted that the vast majority of corruption found comes external to the Afghanistan Financial Management Information System. A transparent financial system guarantees fast economic growth of a nation. AFMIS provides controls, delegation of authority and audit trails that limits the opportunity for corruption to informal systems. The AFMIS has helped the government in the management and execution of budget, control of public expenditures, reduction of corruption, collection of revenues and on-time payment of salaries to government employees . The Ministry of Finance publishes an accounting manual and regular monthly budget reports to improve transparency in public finances. The beneficiaries of manual financial system in Afghanistan were the corrupt officials.
- Morocco: 225 wage suspension and about 363 radiations between 2005 and 2007
- Sierra Leone: the introduction of IFMIS and subsequent improvement of record management helped uncover anomalies in personnel records of 2000 civil servants, leading to 16% of the subset employees being immediately suspended from the payroll as a result
What are some useful corruption indicators?
Many corruption indicators are based on public perception surveys. There is growing concern among anti-corruption agencies that perception-based indexes are not accurate measures. There is also some evidence that there can be gaps between informal procedures and technical PFM reforms leaving room for discretion and corrupt practices. Good corruption and transparency indices include:
- Global Integrity Index
- Open Budget Survey
- Revenue Watch Index
- Transparency International Corruption Perceptions Index
- World Governance Indicators: Control of Corruption
What are some of the problems with GRP-enabled anti-corruption?
- Cost and Failure: can be high costs of automation, and there is a high failure rate of among automation projects, particularly in government
- Graft shifting: corruption can move from the procurement officer level to those with control over the new automation system
- ICT sophistication: civil servants with superior ICT skills could manipulate systems
How can GRP anti-corruption issues be overcome?
- Data Integrity: in back-end databases and validation for data input and data imports identify transaction manipulation
- Oversight ICT training: so that auditors are capable of managing system audits in addition to financial audits
- Patterns: through the development of fraud patterns that produce alerts and are used in exception reporting
- Phased implementation: through approaches to FMIS implementation that reduce the risk of failure, and build capacity and to allow absorption of key government reforms
- Security: through encryption, controlled audit trails, integrated controls and tying user permissions to the government organizational structure and chart of accounts
- Systems configuration: rather than customized or custom-developed GRP that can introduce poor practices
What GRP good practices aid anti-corruption efforts?