Assessment of Fiduciary Assessment of Fiduciary Risks in the Use of Risks in the Use of

Country PFM Systems for Country PFM Systems for Bank-Supported ProjectsBank-Supported Projects

Presentation at the Presentation at the Fiduciary Forum Fiduciary Forum

March 2008March 2008

Objectives Objectives

Objectives of this presentationObjectives of this presentation– Present initial ideas on assessing Present initial ideas on assessing

fiduciary risks in the use of country PFM fiduciary risks in the use of country PFM systemssystems

– Elicit suggestions and ideas from the FM Elicit suggestions and ideas from the FM community so as to further develop the community so as to further develop the frameworkframework

Guiding Principles for Developing Fiduciary Guiding Principles for Developing Fiduciary Risk Assessment Framework (for the use of Risk Assessment Framework (for the use of

country PFM systems)country PFM systems)

At the FM Sector Board meeting in At the FM Sector Board meeting in September 2007, the following guidance September 2007, the following guidance was noted:was noted:

No new PFM diagnostic tool should be No new PFM diagnostic tool should be developed; make use of the existing PFM developed; make use of the existing PFM diagnostic toolsdiagnostic tools

Risk-based framework should be Risk-based framework should be consistentconsistent with the risk assessment with the risk assessment framework mandated in the FM Manual framework mandated in the FM Manual

Proposed Elements of country PFM Proposed Elements of country PFM SystemSystem

BudgetingBudgeting Accounting and Financial ReportingAccounting and Financial Reporting Treasury Management- Funds FlowTreasury Management- Funds Flow Internal Controls and Internal AuditInternal Controls and Internal Audit Audit Audit

Mapping of PEFA Indicators to Elements of Mapping of PEFA Indicators to Elements of the Country PFM Systemthe Country PFM System

Map PEFA indicators to the elements Map PEFA indicators to the elements of the Country PFM system (i.e. of the Country PFM system (i.e. Budgeting, Accounting Financial Budgeting, Accounting Financial Reporting, …etc)Reporting, …etc)

PEFA Indicator

Elements of Financial Management

Budgeting

PI-1 Aggregate expenditure out-turn compared to original approved budget

PI-2 Composition of expenditure out-turn compared to original approved budget

PI-4 Stock of expenditure arrears and monitoring of expenditure arrears

PI-5 Classification of the Budget

PI-10 Public Access to Key Fiscal Information

Accounting and Financial Reporting

PI-7 Extent of unreported government operations

PI-23 Availability of information on resources received by service delivery units

PI-24 Quality and timeliness of in-year budget reports

PI-25 Quality and timeliness of annual financial statements

Proposed Mapping of PEFA indicators to elements of PFM system

Treasury Management-Funds Flow

PI-16 Predictability in the availability of funds for commitment of expenditures

PI-17 Recording and management of cash balances, debt and guarantees

Internal Controls and Internal Audit

PI-18 Effectiveness of payroll controls

PI-19 Competition, value for money and controls in procurement

PI-20 Effectiveness of internal controls for non-salary expenditure

PI-21 Effectiveness of internal audit

PI-22 Timeliness and regularity of accounts reconciliation

PI-27 Legislative scrutiny of the annual budget law

PI-28 Legislative scrutiny of external audit reports

External Audit

PI-26 Scope, nature and follow up of external audit

Proposed Mapping of PEFA indicators to elements of PFM system

Conversion of PEFA Scores into Conversion of PEFA Scores into Fiduciary RiskFiduciary Risk

PEFA Scores to be converted into PEFA Scores to be converted into fiduciary risk rating of high, fiduciary risk rating of high, substantial, moderate, and low substantial, moderate, and low

Description for PI-18 Effectiveness of Payroll controls PEFA Rating Fiduciary Risk

Personnel database and payroll are directly linked to ensure data consistency and monthly reconciliation.Required changes to the personnel records and payroll are updated monthly, generally in time for the following month’s payments. Retroactive adjustments are rare (if reliable data exists, it shows corrections in max. 3% of salary payments).Authority to change records and payroll is restricted and results in an audit trail.A strong system of annual payroll audits exists to identify control weaknesses and/or ghost workers.

A Low

Personnel data and payroll data are not directly linked but the payroll is supported by full documentation for all changes made to personnel records each month and checked against the previous month’s payroll data.Up to three months’ delay occurs in updating of changes to the personnel records and payroll, but affects only a minority of changes. Retroactive adjustments are made occasionally.Authority and basis for changes to personnel records and the payroll are clear.A payroll audit covering all central government entities has been conducted at least once in the last three years (whether in stages or as one single exercise).

B Moderate

Conversion of PEFA rating into Fiduciary Risk Rating

Description PEFA Rating Fiduciary Risk

A personnel database may not be fully maintained but reconciliation of the payroll with personnel records takes place at least every six months.Up to three months delay occurs in processing changes to personnel records and payroll for a large part of changes, which leads to frequent retroactive adjustments.Controls exist, but are not adequate to ensure full integrity of data.Partial payroll audits or staff surveys have been undertaken within the last 3 years.

C Substantial

Integrity of the payroll is significantly undermined by lack of complete personnel records and personnel database, or by lacking reconciliation between the three lists.Delays in processing changes to payroll and nominal roll are often significantly longer than three months and require widespread retroactive adjustments.Controls of changes to records are deficient and facilitate payment errors.No payroll audits have been undertaken within the last three years.

D High

Conversion of PEFA rating into Fiduciary Risk Rating

PI Element of the country PFM system PEFA Score

Fiduciary Risk

Budgeting

PI-1 Aggregate expenditure out-turn compared to original approved budget

B Moderate

PI-2 Composition of expenditure out-turn compared to original approved budget

B Moderate

PI-4 Stock of expenditure arrears and monitoring of expenditure arrears

B+ Moderate

PI-5 Classification of the Budget A Low

PI-10 Public Access to Key Fiscal Information B Moderate

Accounting and Financial Reporting

PI-7 Extent of unreported government operations D+ High

PI-23 Availability of information on resources received by service delivery units

B Moderate

PI-24 Quality and timeliness of in-year budget reports C+ Substantial

PI-25 Quality and timeliness of annual financial statements D+ High

Sample Summary Risk Table

PI Element of the country PFM system PEFA Score

Fiduciary Risk

Treasury Management-Funds Flow

PI-16 Predictability in the availability of funds for commitment of expenditures

D+ High

PI-17 Recording and management of cash balances, debt and guarantees

B Moderate

Internal Controls and Internal Audit

PI-18 Effectiveness of payroll controls D+ High

PI-19 Competition, value for money and controls in procurement

D+ High

PI-20 Effectiveness of internal controls for non-salary expenditure

C+ Substantial

PI-21 Effectiveness of internal audit C+ Substantial

PI-22 Timeliness and regularity of accounts reconciliation A Low

PI-27 Legislative scrutiny of the annual budget law B+ Moderate

PI-28 Legislative scrutiny of external audit reports D+ High

External Audit

PI-26 Scope, nature and follow up of external audit D+ High

Element of the country PFM system

Risk Rating Risk Mitigating Measures Earliest date by which time risk mitigating measures will begin to have an impact (month & year)

Residual Risk Rating

Budgeting Moderate (a)(b)(c)

Accounting and Financial Reporting

Substantial (a)(b)(c)

Treasury Management-Funds Flow

Substantial (a)(b)(c)

Internal Controls and Internal Audit

Substantial (a)(b)(c)

External Audit High (a)(b)(c)

Overall Risk Substantial

Sample Risk Matrix

Seek Your Views Seek Your Views

General:General: What are your broad views on the What are your broad views on the

proposed framework?proposed framework?

Specific:Specific: How do we factor in governance and How do we factor in governance and

corruption?corruption? Should we use judgment or mathematical Should we use judgment or mathematical

aggregation to arrive at the overall risk for aggregation to arrive at the overall risk for the component?the component?