March 15, 2009Doug Hadden
This is section 2.4 of a series of blog entries creating a Government IFMIS Technology Evaluation Guide. This includes information to assist in evaluating IFMIS options and the technology requirements for FreeBalance IFMIS implementations. These series will be combined with feedback to produce a comprehensive Technology Evaluation Guide to be published on our web site.
Compliance. Rule, regulations and oversight. There is a view that an engineered regimen expressed in IFMIS software will ensure that civil servants comply with the rules. These rules should be detailed and coded. This view is based on the assumption that expected results will follow only if rules are followed. Control becomes “command and control”. Without this level of control many believe that the government budget plan cannot be properly executed. There are many situations where government budgets were not executed to plan. Command and control is not always the answer.
Governments have learned that improving development results requires improving decision-making and providing sufficient discretion to civil servants to make better decisions within the budget envelop.
Government Budgets are not Detailed
A budget is the legal embodiment of government intentions. Most government budgets that are signed into law are not highly detailed. The legal document provides details about government intentions, programs, initiatives and spending by organizational unit. Some expenditures are earmarked. The government fiscal framework provides details on how revenues and expenditures are to be handled. This guidance is rarely provided at the detailed level in the Chart of Accounts. Therefore, the individual detailed budget item is a guideline or a working assumption. The budget law provides ceilings for aggregations of these detailed budget items.
Aggregate Controls in Government
The IFMIS must prevent potential expenditures from exceeding the aggregate budget. There are numerous techniques for providing the appropriate mix of control and discretion for civil servants. The budget and appropriations can be configured to support hard controls (cannot exceed amount without budget transfer). Controls can be flexible for detailed budgets and appropriations (can exceed with warning, can exceed by amount, can exceed by percentage) for a fiscal period (month, quarter) as long as an aggregate control is not exceeded. There could be more than one aggregate control in place.
Approvals within the Budget Cycles
Automated controls prevent requisitions for goods or services if the budget is exceeded. A civil servant cannot attempt to begin a procurement cycle if the total of current commitments, obligations and expenses exceeds the budget. In the case of aggregate budgetary controls, this means that the requisition would exceed an aggregate of numerous budget items.
These automated controls are one technique. The amounts and type of expenditures can range. These require different levels of approval throughout the entire budget cycle – budget plans, purchase requisitions, purchase orders, expense approvals, and budget transfers. The amount or type of transaction may require different levels of approval within the civil service. The process of seeking and receiving approval should be automated.
Discretion in Budget Execution
Governments with high civil service capacity provide more discretion for budget execution decisions. Civil servants have become accountable for results rather than for rule compliance in these countries. Many governments implement a new IFMIS using the detailed budgetary control approach. This provides a detailed visibility into every step of the budget cycle. These governments witness civil service capacity improvements. More discretion is provided to civil servants who are experts in their fields. This improves development results within the envelope of the budget law and fiscal discipline.
Segregation of Duties
Budget execution discretion has the risk of encouraging poor fiscal decisions. This is particularly the case when individuals are able to handle many steps in the purchasing cycle. Many governments realize that duties within the cycle need to be segregated. For example, the person who requested the purchase should not be able to approve it, select the vendor or indicate that the goods were received.
The segregation of duties with approval methods and budgetary controls can reduce fraud.
Changes to the government financial position during the fiscal year results in the need to adjust budgets. An emergency situation may require funded at the expense of other government programs. A budget transfer is created. Some types of budget transfers require legislative approvals. Some require new or supplementary budgets. Some types of budget transfers are not permitted in some countries. For example, some countries do not allow transferring funds from capital to recurrent budgets.
Some budget transfers are accomplished without the need for significant oversight because they are at levels less detailed than the budget law. Many government organizations have experienced the burden of managing detailed budgetary controls. This has required frequent daily budgetary transfers. For example, an office may have exceeded its computer supplies budget for the month but have available office supplies budget. There is very little distinction about buying toner cartridges for photocopiers or printers. Nevertheless, a budget transfer is required when there are detailed budgetary controls. The burden to request, approve and execute so many budget transfers that are not material to fiscal discipline or the budget, can be significant. Focusing civil servants on the process of compliance reduces the opportunity for good decision-making.
The control regimen for a government IFMIS should support:
- Multiple controls
- Adjustable levels, depending on the control
- Adjustable period, depending on the control
- Adjustable tolerance levels, depending on the control
- Segregation of duties across the commitment cycle, including approvals
- Rules related to each step of the commitment cycles
- Differences in configurations across the government
Role of Audit
Auditors ensure compliance with government regulations. Auditors ensure that the rules have been followed and find examples of waste and fraud. The role of auditors is changing from a focus on compliance to improving results. This is especially the case when civil servants are provided with budget execution discretion.
The IFMIS software must track all the steps in the budget cycle to enable audit. Auditors need good reporting tools to identify those items that warrant more investigation. There are specialized tools for computer-aided audit that can assist in identifying trends and fraud.
Auditors can leverage audit information to assist governments to improve controls and improve results. As will all elements of government financial management, the audit role modernizes as capacity increases and governments undergo reform.