Dominican Republic Public Disclosure ... - All Documents

April 18, 2005

Document of the World Bank, the Inter-American Development Bankand the Government of the Dominican Republic

Report No. 31497-DO

Dominican RepublicCountry Fiduciary Assessment(In Five Volumes) Volume II: Country Financial Accountability Assessment Report (CFAA)

Caribbean Country Management Unit Regional Operations Department 2Operations Support Unit State and Civil Society ProgramsLatin America and the Caribbean Region Division (RE2/SC2)The World Bank Inter-American Development Bank

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DOMINICAN REPUBLIC FIDUCIARY ASSESSMENT REPORT

COUNTRY FINANCIAL ACCOUNTABILITY ASSESSMENT

VOLUME 11

FIDUCIARY ASSESSMENT REPORT - VOLUME 11. CFAA

Abbreviations

AECI Spanish Agency for International

ANJE Asociacion Nacional de Jovenes Cooperation

Empresarios (National Association of Young Entrepreneurs) Central Bank of the Dominican Republic

BCRD

CAS Country Assistance Strategy CFAA Country Financial Accountability

Assessment CGR Comptroller General o f the

Republic CODOCON Colegio Dominicano de Contadores

(Dominican College of

CONEiP

cos0

CPAR

DAF DCP DFID

DGII DGA DPC DMFAS

DR EC EU FINJUS

GAO IBRD

Accountants) Consejo Nacional de la Empresa Privada (National Counsel for Private Companies) Committee of Sponsoring Organizations of the Treadway Commission Country Procurement Assessment Report Financial Administrative Unit Public Debt Office Department for International Development (U.K.) Revenue Office Directorate of Customs Office of Anti-Corruption Debt Management and Financial Analysis System Dominican Republic European Commission European Union Fundacion Institucionalidad y Justicia, Inc. (Foundation for Institutionalism and Justice) Government Accounting Office International Bank for Reconstruction and Development (World Bank)

ICPARD Instituto de Contadores Publicos Autorizados de l a Republic Dominicana (Institute of Authorized Public Accountants o f the Dominican Republic)

IDB Inter-American Development Bank IDA International Development

Association IFAC International Federation of

Accountants IMF International Monetary Fund INTOSAI Institute of Supreme Audit

IPSAS International Public Sector Institutions

JICA

MOE MOF NGO NORAD

OLACEF

PER PFM PLD PRD PUCMM

SIGEF

SIGADE

SWAP SA1 UAI UNDP

USAID

Accounting Standards Japanese International Cooperation Agency Ministry of Education Ministry o f Finance Non-Governmental Organization Norwegian Agency for Development Latin American and Caribbean Organization of Superior Governmental Auditing Institutions Public Expenditure Review Public Financial Management Partido Liberalista Domincano Partido Reformista Dominicano Pontifica Universidad Catolica Madre y Maestra (Catholic University Mother and Teacher) Integrated Financial Management System Sistema de Gesti6n y Analisis de la Deuda (DMFAS i s English equivalent) Sector-Wide Approach Supreme Audit Institution Internal Audit Unit United Nations Development Program United States Agency for International Development


TABLE OF CONTENTS

Acknowledgements ....... . . .... . . .. . . . . . .. . ..... . . . . .... , . . ......... ..... . , .. .......... . .... . . . . . . . . ..... . . ..... ...... . .... , .. .. .... . . . .... . . . .. .. .... . . . ... i Executive Summary ........................................................................................................................................ ii

CHAPTER 1. INTRODUCTION The Political Economy’s Impact on Public Financial Management ............................................................... 1

Overview of Public Sector Financial Management Arrangements ................................................................. 1

Scope, Objectives, and Methodology o f CFAA Analysis ............................................................................... 3

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CHAPTER 2. PUBLIC SECTOR FINANCIAL MANAGEMENT 6

The Planning Process ...................................................................................................................................... 7

The Execution Process .................................................................................................................................. 10

The Accounting and Reporting Process ........................................................................................................ 21

CHAPTER 3. THE CONTROL ENVIRONMENT Internal Controls ............................................................................................................................................ 29

External Controls .......................................................................................................................................... 33

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CHAPTER 4. DEVELOPMENT ACTION PLAN 38


ACKNOWLEDGEMENTS

This Country Financial Accountability Assessment (CFAA) was prepared by Patricia Hoyes (World Bank) and Stephen Doherty (Inter-American Development Bank, IDB), Co-Task Team Leaders. The CFAA team conducted the main fieldwork from February 17 to March 5, 2004. Deborah Sprietzer (IDB), Jose Manuel Lizano (IDB), Kelvin Suero (IDB), Barbara Friday (IBRD), Heman Pfluecker, Enrique Cosio-Pascal, Carmen Palladino, and Wises Guardiola (Consultants) joined for parts o f the main field mission. Maria Feliza Guittierez (PAFI Project Director, Ministry o f Finance) coordinated the CFAA on behalf o f the Government o f the Dominican Republic. Joost Polack (IBRD) provided editorial assistance, and Gilma Unda (IBRD), Marianella Rivadeneira (IBRD), and Karina Bonilla (IBRD Country Office) provided administrative assistance.

Peer reviews were provided by Chris Parel, Sr. Country Officer (LCSPS), Pazhayannur K. Subramanian, Sr. Financial Management Specialist (SASFM), and Linn A. Hammergren, Sr. Public Sector Management Specialist (LCSPS) and by the Management Review Committee o f the IDB .

The CFAA Team would like to thank Mr. Julio Estrella, from the Secretariat o f the President and Mr. Rafael Calderon, Minister of Finance, for their collaboration and support. The Team also appreciates the extensive collaboration provided by Jamil Sopher (CFAA Adviser, IBRD), Marco Mantovanelli (Country Manager and Resident Representative, IBRD), Auguste Kouame (Country Economist, IBRD) Massimiliano Paolucci (Country Officer, IBRD), Moises Pineda (Representative, IDB) and Wolfgand Munar (Country Coordinator, IDB).

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EXECUTIVE SUMMARY

1. The Country Financial Accountability Assessment of the Dominican Republic took place at a critical moment o f growing economic, social and political difficulties. Following the collapse o f the country’s third largest commercial bank and the sharp depreciation o f the Dominican peso, the economy has plummeted into crisis. Social tensions are on the rise given deteriorating l iving conditions due to widespread problems with electricity, water and transport services. Nevertheless, since 2002 the government recognized that serious action needed to be taken, particularly in terms o f i t s public sector financial management (PFM) arrangements. As a result, significant progress has been made under the govemment-led Financial Management Reform Program (Progrumu de Administrucion Zntegradu - PAFI) and the government should be commended for the successful design o f an integrated financial management system (Sistemu Zntegrudo de Gestion Finuncieru -SIGEF) that i s currently being implemented as part of a broader country strategy to modernize the country’s public administration.

2. Economic progress in the 1990s and the modernization o f the private sector has not been matched by the pace o f modernization o f public administration. The country’s legacy o f authoritarian rule translates into today’s realities o f a strong Presidency and weak public entities that lack traditions and systems o f checks and balances and general accountability to the public. Within this context, the CFAA highlights the following overarching findings:

0 A culture that uses public spending to reward the support o f constituents instead of delivering public service as a right and a means o f improving government capacity. This i s evident by the continued concentration o f public spending by the Office o f the President’s Technical Secretary (STP) and the proliferation of commissions and agencies dependent on the Office o f the President that have overlapping functions with ministries.’

A control environment that i s rigid, cumbersome and ineffective. Control i s imposed by the Office o f the President through the Comptroller General’s Office and through the STP via the budget office (ONAPRES). Control procedures often require duplicative pro forma reviews that dilute accountability by spreading responsibility for transactions across several offices. The legal and regulatory framework also plays a role in weakening the control environment by not requiring or providing the means to hold the govemment accountable for i t s administration o f public funds.

A civi l service that has weak capacity. Customary practices o f political patronage result in a civil service that lacks a professional career structure for most public employees, which in turn leads to a lack o f institutional memory or continuity from one govemment to the next, and low technical capacity due to an inability to train and retain qualified personnel.

0

0

As of January 2003, the Presidents Office has 47 commissions and 15 dependent agencies in comparison to 22 ministries and 11 sub-ministries.


3. IBRD’s response to these findings, expressed through the 2003 Dominican Republic Public Expenditure Review (PER), i s to recommend to decentralize functions and controls from the Office o f the President to other central government entities and the local level. While this solution has clear advantages, the gap between the current concentration of power and the proposed ultimate objective presents a formidable challenge. The f i r s t and most difficult step w i l l require the recognition, by those who have power and the population, that they and the country can benefit from the greater responsibility and transparency that decentralization can provide. Thus, the CFAA recommendations focus on incremental change with emphasis in the following areas:

4. Strengthen the Ministry of Finance ( M O F ) and other PFM-related entities. The government should begin strengthening the M O F and other PFM related entities, such as the Supreme Audit Institution (SAI), the ministerial level financial administration offices (DAFs) and internal audit units (UAIs), which are currently underutilized with limited capacity and authority to cany out their roles. In the short term, the government should consider (i) establishing the MOF as the central monitoring entity for the PFM reform agenda, (ii) expanding the Treasury function, now limited to check writing and checkbook balancing, to become i t s cash management and payment agent, (iii) continuing the transfer o f debt management responsibilities from the Central Bank to the public debt office in the M O F and support the functions o f this new office with the passing o f the public debt law currently in draft, and (iv) finalizing the regulations that establish the Government Accounting Office (GAO) as the central agency responsible for accounting, reporting and the implementation o f modern policies and procedures. Over the medium-term, the government should shift responsibility for budget formulation and implementation from STP to the MOF, where systems for accurate reporting, expenditure programming, expenditure execution and personnel management should be developed. Strengthening the M O F i s an essential first step toward decentralizing PFM functions and moving the PFM reform agenda forward.

5. Increase the effectiveness of the control environment. A strong control environment requires laws and regulations that are enforced, a qualified and motivated work force, timely reporting o f financial and operational information to stakeholders, and effective oversight. The public sector i s weak in many o f these areas so it would be unreasonable to expect the government to attempt addressing all these weaknesses at once. The government should begin by focusing on external control by i t s audit institution, civi l society, and the legislature. The government has already begun addressing the weaknesses in external audit by passing the new Supreme Audit Institution (SA0 Law to modernize and allow this function to perform more effectively. Next, i t should focus on addressing i t s weak legislative oversight, which represents a serious issue in terms o f the delay and non-reply by the Executive branch to the recommendations o f internal auditors (Contraloria), external auditors (Camara de Cuentas)’ and the Congress. This issue i s critical because i t must be addressed before the government can shift from i t s heavy reliance on ex-ante and pro-forma reviews to ex-post reviews and verification o f the economy, efficiency and effectiveness o f expenditures and value-for-money o f government programs - a shift strongly endorsed by this assessment. Furthermore, the government should take measures to increase the effectiveness of the internal and external audit functions by clearly delineating the

’ SAI, Camara de Cuentas, Chamber o f Accounts, and external auditors, are all interchangeable terms referring to the same entity.

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responsibilities and functions o f the Comptroller General and Chamber of Accounts. This should be closely coordinated with the establishment o f a Congressional commission to review the audit reports prepared by the Chamber o f Accounts and increasing the independence o f the Attorney General’s Department for the Prevention o f Corruption to perform investigations o f suspected cases o f misuse of public funds and recommend the application o f sanctions or prosecution. B y taking measures to increase the effectiveness of the control environment, the government w i l l send an important message to i t s citizens and i t s development partners regarding i t s commitment to the principles o f good governance, accountability, and transparency.

6. Improve the legal and regulatory framework. As part o f addressing the control environment weaknesses, the government should focus attention on strengthening the legal and regulatory framework that supports PFM so that i t provides a mechanism to enforce rules and impose sanctions when these are not observed. The government has recognized that the legal framework for PFM i s inadequate, and that new or improved laws are needed.3 As laws are difficult to pass through Congress, the government has opted against an umbrella financial administration law in favor o f a set o f smaller and less controversial PFM laws. However, this has raised the risk- currently being realized -that there w i l l be conflicts between two or more laws in some areas o f PFM, while some other areas might go unaddressed. I t i s important that as new laws and amendments are drafted, their objectives and pronouncement are properly coordinated and complemented by related laws and that government entities understand and comply with the spirit o f these laws. Therefore, the government should consider the establishment o f a commission that reviews proposed new laws to determine whether they duplicate or contradict existing laws and decrees, and whether they overlook areas that need to be addressed. Improving the legal framework supporting the PFM arrangements represents a key step towards providing the basis needed to hold the government accountable on how efficiently and effectively i t has administered public funds.

7. Increase the capacity of the Civil Service. In the short term, the government should focus on developing and increasing the technical capacity of i t s civi l servants followed by a strategy to maintain this capacity across administrations. This w i l l require professionalizing civi l service careers, particularly for those responsible for accounting and audit functions, and those responsible for designing and evaluating policies and programs implemented by government; the latter should have specialization in the sectors they w i l l evaluate. The government should also consider implementing a plan to maintain i t s qualified staff through training and continuing professional education programs coupled with appropriate incentives such as competitive salaries, annual evaluations, and promotions or other rewards to staff who perform well, and sanctions up to termination for those who do not. The absence of capacity in the public sector i s a critical factor that the government should address lest it cripple efforts towards modernization and reform.

8. Continue automating and modernizing the PFM process. Several important initiatives toward automating PFM functions have been taken by the government under the PAFI program

Within the past year, the govemment has passed two PFM laws establishing the supreme audit institution (Chamber o f Accounts), and a Government Accounting Office (GAO).

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as well as by individual ministries, most notably the Ministry o f Education (MOE)? Furthermore, the PAFI program contemplates important inputs into the legal and regulatory PFM reforms, including drafting the new Comptroller General Law, Public Debt Law, and Treasury Laws, and regulations for the new Government Accounting Office (GAO). However, funding for the f i rs t phase o f the project wi l l run out in June 2004 and no funding for the two remaining phases has been identified. The government should continue to support the PAFI program and identify funding to support the subsequent phases o f the program.

Fiduciary Risk Assessment

9. The Risk Assessment results5 reflect the need for substantial strengthening o f the PFM framework. The Dominican Republic’s fiduciary risk rating i s high mainly because o f weak accountability and an ineffective control environment. This i s especially relevant now that the World Bank (IBRD) and Inter-American Development Bank (IDB) are providing the government with adjustment lending that requires much greater financial management capacity than project- based lending.

10. Currently, the World Bank i s implementing a new approach to lending known as Sector Wide Approaches (SWAPS), which relies on country systems while at the same time providing for risk mitigating arrangements that improve and build the capacity o f government entities rather than ring fencing around them. This i s particularly relevant for the DR since this approach provides a way o f supporting the country’s development strategy while also providing the means to strengthen the control environment and address the issue o f reducing the high fiduciary risk presented by the government’s current PFM framework. Therefore, both development banks should carefully assess the r isks o f relying on any particular aspect o f the country’s financial management framework and in collaboration with the government, devise the appropriate risk mitigating arrangements following the SWAP approach as described in Annex 4.

Summary Development Action Plan

11. The final chapter of this volume presents a Development Action Plan that outlines in greater detail recommendations presented in this summary. I t can also serve as a tool to promote dialogue between the government and the donor community for moving the PFM reform agenda forward.

In the last two years, the Ministry o f Education (MOE) has implemented i t s own integrated financial management system that w i l l eventually interface with SIGEF and implemented intemet software, Transparencia that allows access through the Internet to i t s accounts, check book and contracts.

The detailed results of the Risk Assessment are provided in a table found in Annex 3 of Volume 4.

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Recommended Action Short Term Medium Long Term Term

1. The Planning Process.

1.1 Strengthen and expand MOF’s role.

1.2 Develop and plan a strategy for adopting the principles of performance based budgeting.

1.3 Improve and increase the budget’s comprehensiveness

2. The Execution Process

2.1 Improve the efficiency of the spending and funds flow process.

2.2 Strengthen cash management and modemize the treasury function.

2.3 Improve revenue collection systems.

2.4 Modemize the debt management function

3. The Accounting Process

3.1 Accelerate the implementation of the SIGEF to all public entities.

3.2 Analyze the existing legal and regulatory framework to identify gaps between existing laws and regulations and Intemational Public Sector Accounting Standards (IPSAS).

3.3. Prepare a strategy and plan for the adoption of IPSAS.

3.4 Implement IPSAS in all central government entities.

3.5 Establish a State Asset Register.

3.6. Strengthen the role of the GAO.

3.7 Strengthen the capacity of ministries’ financial administrative units (DAFs).

4. The Reporting Process

4.1 Standardize format and periodicity of government reports.

5. The Control Environment

5.1 Eliminate duplication of intemal audit and extemal audit functions.

5.2 Strengthen the capacity of intemal audit units (UAIs).

5.3 Amend Chamber of Accounts legislation to separate the judicial and audit functions.

5.4 Prepare regulations for the Chamber of Accounts Law.

5.5 Prepare and define Chamber of Accounts Function.

5.6 Update and implement intemationally recognized intemal and extemal audit standards, methodologies, and guidance.

5.7 Establish, by Statute, a Public Accounts and Audit Committee in Congress

(2004 -2005) (2006-2010) (2011+)

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FIDUCIARY ASSESSMENT REPORT - VOLUME II. CFAA

Recommended Action Short Term Medium Long Term Term

x 5.8 Better define the functions and enhance the capacity and

5.9 Increase the collaboration between civ i l society and the public

independence o f the Attomey General’s Anti-Corruption Office.

sector. x x

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1. INTRODUCTION

1.1 After a decade of rapid economic growth in the 1990s that slowed at the beginning o f the current decade, the Dominican Republic finds itself dealing with an economic crisis that has highlighted the government’s financial management shortcomings. This may be due, in part, to the increasing sophistication and openness o f the Dominican economy, especially i t s private sector, coupled with the slower tempo o f State modernization. This has created a disconnect between the structure, methods and capacities of the public sector and the demands o f a modem economy facing global competition and increasing internal and international scrutiny.

THE POLITICAL ECONOMY’S IMPACT ON PZTBLIC FINANCIAL MANAGEMENT

1.2 While democracy and the rule o f law have progressed since the end o f dictatorship in the Dominican Republic and the political system now functions as a multi-party democracy, the country i s s t i l l struggling to eliminate the last remaining vestiges of “caudillismo” inherent at many levels o f public administration. This system vested vast powers in the Office o f the President, with few checks and balances from other branches o f government. Public contracts frequently rewarded political allies and financial contributors, and civi l service practices favoured clientelism over professional qualifications.

1.3 Many public entities were designed to serve authoritarian regimes. B y the mid-l990s, the progressive globalization o f the economic environment, the implementation of a first generation of structural reforms, and increased democratisation, revealed the limitations of the current PFM arrangements. As the country enters the 2lSt century and faces the demands o f a modem and increasingly open economy with acceleration in global competition and a more vocal citizenry, the government w i l l need to take serious measures, sooner rather than later, to address the disconnect between the needs, structure, methods, and capacities o f public sector financial management.

OVERVIEW OF PUBLIC SECTOR FINANCIAL MANAGEMENT ARRANGEMENTS

1.4 A Country Financial Accountability Assessment (CFAA) focuses on analysing the policies, procedures and arrangements in place to carry out public sector financial management (PFM) - a key component o f public administration. PFM arrangements are comprised o f several components such as planning, execution, accounting and reporting that function as a cycle (Figure 1.1) whose components must work together to provide effective results. PFM arrangements cover central and local governments, autonomous public entities, industrial and commercial enterprises, and social welfare agencies.

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SCOPE, OBJECTIVES, AND METHODOLOGY OF CFAA ANALYSIS

1.8 This CFAA serves as a diagnostic tool to provide the International Bank for Reconstruction and Development (IBRD, World Bank) and the Inter-American Development Bank (IDB) with knowledge of the Dominican Republic’s PFM arrangements as part o f their fiduciary responsibilities, and to help the Dominican government achieve the country’s developmental objectives by providing a tool for designing and implementing capacity building programs.

1.9 The specific objectives of this CFAA include:

0 Recommend concrete actions, which government can implement within the next year, to address the immediate need to improve accountability and transparency in response to the economic crisis and in line with the IBRD and IDB strategies to promote better governance.

0 To serve as an input to assessments o f the financial accountability arrangements included in the IBRD CAS scheduled for FY2005 and provide recommendations that can be supported by IBRD/IDB operations.

0 Provide a reference point in carrying out assessments o f the financial management capacity of project implementing agencies for investment and adjustment operations.

0 Continue to build on the dialogue established by IBRD’s Public Expenditure Review team to address the issues o f governance and to strengthen PFM arrangements so that public resources can be managed more effectively and efficiently.

0 Provide a tool for effective coordination with development partners in identifying and prioritizing public sector reform activities for the short-, medium-, and long-terms.

1.10 The CFAA i s not an audit and does not intend or provide assurance on the specific uses to which loan/credit/grant funds have been, or may be, applied. It also does not seek to quantify specific amounts collected, managed or spent by the government.

1.11 The CFAA focuses on the central government financial management systems, practices, and accountability arrangements. Municipal government operations, which represent a small percentage o f government operations, w i l l only be addressed in terms o f transfer mechanisms between central and municipal operatiom6

1.12 The CFAA represents the work o f a joint team from IBRD and IDB that carried out fieldwork during February and March 2004, and which included extensive consultation and dialogue with government official^.^ The team performed i t s assessment based on

The 2003 PER deals extensively with the challenges of decentralization, fiscal transfers, sub-national debt, and

Annexes 19 & 20 include a detailed list o f persons interviewed as well as documents reviewed. the agenda for the future.


~~

Accounting 8i Financial Reporting Professional Body

international standards and best practices as presented in the guidelines issued by the following professional bodies:

External Internal Internal Auditing Auditing Control

The Intemational Federation o f Accountants (IFAC), and its Public Sector Committee

Intemational Organization o f Supreme Audit Institutions (INTOSAI)

The Institute o f Internal Auditors (IIA)

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1.13 In addition, the Committee of Sponsoring Organizations o f the Treadway Commission (COSO) Framework for Internal Controls has been used as a reference. COSO i s a voluntary US private sector organization formed in 1985 with the aim to improve the quality o f financial reporting through ethics, effective internal controls, and governance. A number o f organizations in the U S and internationally, including the World Bank, have adopted the COSO framework as the basis for internal control policies and standards and recognized that an effective control framework requires the following five general components:*

0 Monitoring

0 Communication

0 Information

0 Control Activities

0 Risk Assessment

0 Control Environment

1.14 The 2003 Public Expenditure Review. In the World Bank’s Latin America and Caribbean Region (LCR), the Public Expenditure Review (PER), the CFAA, and the CPAR are sibling activities. For the Dominican Republic, because o f timing issues, these two activities were not conducted together. However, it i s important to mention that the PER team provided important inputs to the CFAA and CPAR and that these reports complement one another. See Box 1.1 for a general description o f the relationship between the PER and the CFAA.

* The complete risk assessment prepared under the scope of this report i s included as Annex 3.

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Box 1.1 Public Expenditure Reviews (PERs) and Country Financial Accountability Assessments (CFAAs)

The PER'S objective i s to assess the efficiency, effectiveness and equity o f public expenditure. In contrast, the C F A A s objective i s to assess whether the country's public financial management (PFM) systems, practices and accountability arrangements are adequate to ensure that wise decisions with respect to resource allocation can actually be implemented.

In general, the PER and CFAA look at much o f the same material; however, the two exercises consider that material through different lenses. For example, both activities are expected to evaluate the country's budget process. The PER assesses whether the budget process enables a clear articulation o f the govemment's development priorities. In contrast, the CFAA considers the budget from the perspective o f whether (i) budgeted funds can be accounted for in terms o f intended functions and activities; (ii) how well coordinated the budget plan i s to the actual accounting and recording o f spending agencies' expenditures; and (iii) the extent to which actual appropriations and actual spending correlate to the original allocations, at both the agency and program levels.

In certain areas, there i s divergence between the PER and CFAA; yet, the two exercises remain complementary even where they diverge. For example, the PER considers issues o f tax policy while the CFAA i s l imited to assessing tax administration that provides the information needed to determine the success o f tax collections and ultimately the tax policy. Similarly, while the PER considers the prudence o f a nation's debt policy, the CFAA considers how accurately debt i s recorded and provides key information needed for debt sustainability analysis.

In short, if the PER presents a comprehensive architectural plan, the CFAA provides a schematic for the plumbing, ventilation, and power supply. The enumerated utilities are but one aspect o f a complex building; however, without them, the usefulness o f the building i s severely constrained.

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2. PUBLIC SECTOR FINANCIAL MANAGEMENT

2.1 Determining the strength and weaknesses o f the Dominican Republic's PFM arrangements comes at a critical time when the government finds itself implementing an economic stabilization programg in an attempt to recover from the recent economic crisis. This assessment wi l l provide the government and the two international development banks with important information regarding how efficiently the current PFM arrangements allocate resources and control availability and use of funds as well as provide insight on ways to strengthen these arrangements with the objective to increase the impact o f programs and strategies for economic growth and development.

2.2 The Dominican Republic has already recognized the importance o f having effective PFM arrangements as evidenced by the Financial Management Reform Program (Programa de Administracion Integrada - PAFI) started in 2000. The PAFI reform program has three phases that w i l l first address central government agencies, followed by a second phase addressing other national entities, with the final phase addressing local governments at the municipal level.''

2.3 The IDB i s funding the first phase, which i s currently under execution. Among the objectives of the first phase i s the modernization o f several PFM laws as well as the implementation o f an integrated financial management system (Sistema Integrado de Gestion Financiera -SIGEF) in all central government agencies by the end o f 2004. The achievements o f the program to-date represent commendable progress although it does not appear that all o f the objectives o f the f i rst phase w i l l be completed by the deadline. In addition, no provisions have been made for the continuation o f the second and third phases, which represents a serious risk that the government's investment in modernization w i l l not be continued and the progress made to-date w i l l be lost.

2.4 The following section focuses on analyzing the main PFM componentqlanning, executing, accounting and financial reporting-and includes discussions on cash management, the treasury function, the Directorate o f Internal Revenue and the Directorate o f Customs, debt management and the implementation o f SIGEF. Analysis o f the Chamber o f Accounts, the Comptroller General and i t s dependent internal audit units, i s presented in the next section discussing the control environment surrounding PFM.

To address the deterioration in the Dominican Republic's economic performance and prevent a balance o f payment crisis, the government undertook an economic stabilization program supported by a 24-month IMF Stand-by Arrangement. lo The Dominican Republic does not have State level govemments.

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THE PLANNING PROCESS’

2.5 The planning process begins with the design o f a fiscal strategy based on fiscal policies and programs. T h i s process i s lead by the STP via the budget office (ONAPRES), both in the Office o f the President. These policies and programs are then articulated into a budget plan. In the planning stage, the budget should serve as a tool that supports the choices o f elected officials, promotes fiscal discipline, and reduces opportunities for mismanagement and corruption.

2.6 Budget Planning & Preparation. The budget planning process i s lead by ONAPRES, an office o f the STP which makes i t more difficult to coordinate with the supporting execution, accounting and reporting functions carried out by the Ministry of Finance (MOF). Budget preparation i s spread across many public entities. STP leads the process through ONAPRES. Other key entities include the STP’s planning office (ONAPLAN) and i t s Administrative and Personnel Office (ONAP), which provides data on personnel spending. The Ministry of Finance provides some inputs from Treasury, Customs, and Internal Revenue. The Central Bank provides economic forecasts and external debt information while the Comptroller General provides data on actual spending and personnel.

2.7 The recurrent budget i s prepared by ONAPRES and the capital budget i s drawn up by ONAPLAN, although ONAPRES i s responsible for consolidating and presenting the annual budget to Congress for approval. The annual budget formulation process for the Dominican Republic begins in March for the subsequent year’s budget, affording 7 months preparation time before the budget i s submitted to Congress in November.

2.8 Budget information i s collected and produced on administrative, economic, functional, and program classification and activity level bases. Two formal govemment-wide budget documents are produced during the budget process: an approximately 400-page proposed Budget Appropriation Bill that i s transmitted to the Congress, and a 800-page detailed document printed after the budget i s passed by Congress that serves as the basis for execution. Neither document includes explanatory material to support the budget request, personnel data for agencies, clear differentiation between current and new policies, or the multi-year fiscal impact o f current and new policies.

2.9 Historical budgeting prevails for the routine budget, and the main focus i s on reporting the cost o f implementing existing policies, rather than measuring the effectiveness of those policies. This has a knock-on effect in the accounting process by promoting the recording o f transactions to comply with rigid budget codes that may not necessarily reflect the use of public funds by spending agencies (i.e., Ministries and decentralized entities). The DR’s current budget codes do not provide sufficient information for the proper accounting o f financial transactions. When expenditures are recorded in accordance with their corresponding budget code, a separate accounting entry should be triggered to reflect the

’’ The 2003 Public Expenditure Review provides an extensive description and analysis of the central government’s planning process, therefore this section summarizes the salient points and focuses on analyzing the impact o f the planning process in terms of financial management.


impact o f the transaction on the financial records. Therefore, if the budget codes do not provide the appropriate detail, this wi l l have a direct effect on the ability to determine if funds are spent as planned. In broader terms, for example under performance based budgeting, these codes also serve to reflect the operational efficiency o f spending units and provide a basis for measuring the achievement of objectives when these objectives are articulated in measurable terms.

2.10 The budget proposal sent to Congress i s relatively aggregated for each spending unit. For example, the Presidency i s not broken down into i t s major functional ComponentMongress cannot see how much i s being requested for ONAPLAN, and ONAPRES, for example. Though programs are included for each spending unit, these are not clearly defined. In 2003, the budget system was improved by breaking out each ministry's spending estimates into general fund, special fund, and externally financed categories.'* This could be further improved by articulating the objectives o f each program in measurable terms. This would then allow the accounting process the flexibility needed to record transactions in such a way as to provide important information for monitoring purposes.

2.1 1 One o f the features o f international budget reform since the 1980s has been pressure to make government officials who deliver public services more accountable to governments and program clients for quality and service delivery. T h i s involves identifying performance indicators for each program. One approach to measuring performance i s to look at the relationships between inputs, outputs, and outcomes in terms o f economy, efficiency, and effectiveness with the goal o f ensuring the cost-effective use o f public funds (Box 2.1).

2.12 Although the introduction o f performance-based budgeting could enhance accountability, the government should focus improving the financial management capacity o f i t s spending agencies before attempting to introduce performance-based budgeting. The government could consider, as a f i rs t step, piloting the principles o f performance-based budgeting with Ministry o f Education given this ministry 's degree o f modernization over the past two years, including the implementation of an integrated financial management system.

2.13 In the past, there have been major gaps in budget coverage, including foundations and State-owned enterprises that are not accountable through the normal budgeting process. The technical annexes to the budget proposal include useful information that adds to transparency and supports better decision making. Nevertheless, not all revenue and expenses are included in the budget plan-nor are all agencies in the plan. However, progress i s being made in bringing non-tax revenues into the budget-reporting framework. The government should continue with this effort to make the budget more comprehensive by consolidating all public sector financial resources into the budget plan and including the budgets o f local authorities and autonomous public entities, industrial and commercial enterprises under State control, and social welfare agencies.

'* To provide a comprehensive picture of spending for each organizational unit of responsibility, i t i s important to illustrate total spending for each unit, and financing of that spending.

8

I


plans. This would need to be developed under a broadening o f the ministry’s focus from purely financing issues to PFM issues. In the longer term, the government should consider moving the budget functions into the MOF so all PFM functions rest within one agency.

2.15 Begin using the principles of performance-based budgeting on a pilot basis. Performance-based budgeting can enhance accountability and provide information on the impact o f public expenditure. However, the government should not attempt to introduce performance-based budgets without first developing a plan to (i) improve the capacity o f spending ministries to properly account for their public expenditures, and (ii) have ministries assume a greater degree of financial responsibility-a medium- to long-term objective. Given the modernization efforts carried out in the Ministry o f Education over the past two years, including implementation o f an integrated financial management system, the government could consider piloting the principles of performance-based budgeting within this ministry.

2.16 Increase budget comprehensiveness. The government should (i) consider analysing i t s budget coding to better reflect actual spending categories, and (ii) continue with i t s efforts to consolidate all public sector financial resources into the budget plan. T h i s would include the budgets o f local authorities and autonomous public entities, industrial and commercial enterprises under State control, and social welfare agencies. This information w i l l help provide a basis to compare actual execution to what was planned.

THE EXECUTION PROCESS

2.17 Budget execution begins in January o f each year via quarterly allocations made by ONAPRES to each ministry and i t s spending units. The quarterly allocation system was introduced in 2002 as a means of managing and controlling public expenditures along with strict enforcement o f ex-ante commitment l im i ts . Each agency reports weekly to ONAPRES and the Office of the Comptroller General (which monitors commitment levels) on charges against i t s allotment. ONAPRES aggregates and monitors spending amounts during the execution process, and monitors commitments by electronically recording and reconciling them against allocations. Although no commitment o f funds i s valid without approvals from ONAPRES and the Office of the Comptroller General, the process i s neither interrupted nor delayed without these approvals. In other words, agencies continue to operate, incur commitments, and generate “arrears” or internal debt.

2.18 The implementation o f quarterly budget allocations and the monitoring o f commitments represent a step in the right direction. However, this process i s neither efficient nor effective because o f rigid budget allocation and the inordinate amount o f ex-ante control needed to receive authorization to spend allpcations. Budgets are not allocated to ministries in global amounts but instead by cost object. For example, instead o f allocating the M O E a global amount for school equipment such as chalk boards, desks and chairs, ONAPRES gives the MOE specific allocations for each o f these pieces o f equipment. Therefore, i t i s conceivable that funds are allocated for chalk boards and chairs and not for desks.13 Furthermore, even though a specific amount has been allocated to purchase this

l3 Based on discussions with the MOE, this has actually happened in the past.

10


equipment, the MOE must process a series of forms (now in the process o f being automated in SIGEF) that are approved by ONAPRES and Contraloria before it can actually spend these funds. Therefore, ONAPRES approves the annual budget, the quarterly budget and the payment requests, all processes that give the appearance o f reasonably tight controls but in fact make the process very inefficient without adding any value.

2.19 B y reviewing the most recent execution records available (Figure 2.1), i t becomes apparent that the budget execution process, although closely controlled by ONAPRES, does not necessarily follow the original plan as illustrated by the variations in underspending by some ministries and substantial overspending by others.

20,000

18,000 v) C 0 g 16,000

14,000

- .- E .- E 12,000

v v) 10,000

$ 2 8,000

C 6,000

C E 4,000 0

2,000

0

.- .-

Figure 2.1: 2002 Budget: Approved versus Actuals

Overspending I Underspending

Central Government Spending Agencies

m: 2002 Court o f Accounts Report to Congress, Box No. 11, Variation of Budget Execution from January to December 2002.

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2.20 The variations in spending reflect that what i s planned at the central government does not appropriately reflect what i s actually spent. I t i s unreasonable to expect that the budget analyst at the central level w i l l have an understanding o f the daily operations o f each line ministry and decentralized and autonomous entities at a level of detail needed to attempt to accurately articulate this via the budget allocation process. Therefore, the government should consider allocating funds in global amounts based on a transparent and consultative process with spending ministries. In addition, spending ministries should also be given more authority to determine how to spend the funds allocated. This authority must also come with increased responsibility to properly account for spending which should be closely monitored by the MOF via i t s Treasury and Accounting offices. Understandably, in the past, spending ministries have not had this level of responsibility and the MOF has not had an enforcing function which l i m i t s their current capacity to assume these new roles. The government w i l l therefore need to gradually begin building the capacity o f the M O F to regulate, and the spending ministries’ capacity to manage their funds so that they may effectively assume these new functions. As already recognized, the MOE has made important advances in modernizing i t s internal FM systems and capacity, and would be an excellent candidate to begin assuming the authority and responsibility for i t s public expenditures.

Flow of Funds

2.21 In addition, the inefficiencies in the flow o f funds process have been a key factor in the under spending o f approved budgets. The heads of spending units initiate the flow o f funds via payment requests. Each spending unit must f i rst work internally with i t s own ministry’s financial administration office (DAF), the unit’s internal auditor, and the ministry’s internal audit unit (MU), and then externally with ONAPRES, the Office o f the Comptroller General and the Treasury to effect payment for services or goods received.

2.22 The internal process begins upon receipt o f the goods or services and a matching invoice. The spending unit’s DAF prepares a payment order, along with the supporting documentation, which it forwards to i ts internal auditor, who in turn reviews the supporting documents to ensure the request includes the final invoice, evidence o f appropriate procurement procedures, receipt for the goods or services, vendor’s tax identification number and the appropriate signatures. He/she forwards the request and supporting documentation to the ministerial IAU (a satellite office o f the Comptroller General), which re-performs the review and returns the document to the DAF with any corrections or comments.

2.23 If the ministerial auditor does not provide corrections or comments, the external process begins with the forwarding o f the payment request and documents to ONAPRES, where a budget analyst reviews i t to ensure i t s consistency with the quarterly allocation and the availability o f funds (a treasury function), based on daily account balances reported from Treasury. Once approved by ONAPRES, it i s sent to the Office of the Comptroller General, which reviews the documents for completeness and correctness following s imi la r procedures as the IAU. If approved, a copy o f the request i s sent to Treasury for payment and another to the Accountant General to record the obligation in the accounting system. Once Treasury receives the request, i t performs an arithmetical and document review before releasing the funds, via check, to the spending unit for payment to the vendor or service provider.

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2.24 The process operates similarly for payroll, with the exception that approximately 10,000 employees, less than 10 percent of the work force, receive payments directly from the Treasury through electronic transfers. A unique individual identification number i s used to check for duplicate payments. Currently, only the Office o f the Comptroller General has a database o f public sector workers. The National Personnel Administration Office (ONAJ?) does not have a database o f employees, though i t i s the official personnel management institution. The Treasury receives the payroll on diskette from the Office o f the Comptroller General (compiled from information provided by agencies), electronically processes the payments, and issues checks to the remaining 90 percent o f public sector employees.

2.25 The entire process, from receipt of goods to actual payment can last well over two weeks in the best cases and months in the worst.14 Not only i s the process time consuming and cumbersome but i t also affects the ability o f spending agencies to effectively implement their programs since there i s no certainty on the timing and release of payments. A more specific impact i s on costs. According to preliminary findings o f an assessment currently being undertaken by the World Bank, many project implementing units (PIUs) choose to use the services of co-management agencies, such as UNDP, not because o f lack o f capacity but rather to circumvent this cumbersome process. The services provided by co-management agencies can run as high at 5% o f the total amounts managed. In the case o f loans in the millions, this cost can easily escalate to significant amount^.'^

2.26 Therefore, the government, as a top priority, should consider making the budget execution process more efficient by eliminating the redundant reviews and approvals now required. It should also seek to make the process more effective by designing controls that evaluate whether funds are going to the intended purposes and objectives. However, this wi l l depend on the articulation o f program objectives in measurable and monitorable terms as discussed in the previous section. Also, spending controls should move away from the current pro-forma reviews that determine whether the appropriate signatures and stamps are present and focus more on ex-ante reviews, discussed in the control environment chapter of this report. This wi l l require the full implementation o f the SIGEF, discussed in the next section, as well as the capacity building o f ministries through training which should be set as a short- to medium-term objective.

2.27 Unspent Funds and Fund 1401. Under spending o f budget translates into surplus funds that are transferred to Presidential Account 1401. Unexecuted assigned funds are required to revert to their original fund source for programming, reallocation, and disbursement (within the framework o f the total appropriation) during the subsequent budget quarter. In practice, however, if an excess arises in a program, the unused funds get transferred to a Presidential Account 1401 and then reallocated to other programs.

l4 Estimate of the length of time to process i s based on a joint IDB/IBRD assessment prepared in August 2003 of the time to process payment requests for project implementation units (PIUs). PIUs must follow the same process as any other spending unit in a ministry.

l5 A recent example i s a project being executed by the Central Bank, where UNDP i s being used as a pay agent and i t i s costing the government nearly half a mil l ion U S dollars ($14 mil l ion x 3%) for this service.

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2.28 The Organic Budget Law provides that revenue collections in excess o f estimated revenues should be automatically apportioned, with 25 percent going to a General Budget Reserve and 75 percent to Account 1401, and that if the general budget reserve reaches 5 percent o f budget revenues, all additional revenues should be deposited into Account 1401 for use in meeting “pressing public needs.” The Office o f the President can bypass normal procurement and competitive bidding procedures when using Account 1401 funds to finance construction projects. The use of the fund i s given further legal sanction that allows the Office o f the President to directly contract for any public work it deems in the best interest o f the public. Most projects executed through the Office o f the President are contracted directly and often circumvent the scrutiny o f the Legislature.16

Box 2.2 Extra-Budgetary Execution 1995-2003 POP)

1996 24,550,569,070 42.2% 1997 24,184,235,237 34.4% 1998 8,601,828,810 11.7% 1999 8,535,516,489 10.3% 2000 9,723,501,413 11.7% 2001 7,290,287,283 7.2%

2.29 Within the last decade, spending of extra- budgetary funds, including those from Fund 1401, has declined considerably (Box 2.2) since the issuance o f Presidential Decree 646 in 2002. Spending from this account now represents an insignificant amount, about 1 percent o f the total budget. This can be associated in part with the complete liquidation of fund 1401 in 2003 and the new regulations that govern how monies from this fund can be spent.

2002 9,389,218,122 8.9% 2003 928,263,645 1 .O% 2.30 Nevertheless, Decree 646 s t i l l provides

ample room for interpretation, including scope to - - Source: Ministry of Finance, 2004 spend funds for the “public good.” Therefore, to increase the transparency o f how extra-budgetary and surplus funds are spent and avoid the risk that Fund 1401 expenditures increase to a significant amount, the government should seek to completely eliminate the Office o f the President’s authority to spend undisbursed funds from other ministries through Fund 1401 and replace it with the establishment o f contingency funds that need Congressional approval in order to be spent.

Cash Management

2.31 Cash management’s main objective i s to provide smooth financing of expenditures during the year to minimize borrowing costs and facilitate meeting fiscal and monetary targets. Cash management in the Dominican Republic i s led by ONAPRES in coordination with the Treasury, the Central Bank, the Banco de Reservas (a national commercial bank), and the Office of the Comptroller General. Unlike other Latin American countries, in which the Ministry o f Finance leads this process via the Treasurer and Accountant General, ONAPRES i s legally responsible for managing cash flow and balancing outflow with available revenue data based on aggregate information from the Customs and Internal Revenue Departments provided by the Treasury within 10 days of the end o f each month. The Treasury reviews the transaction records o f Banco de Reservas and enters the data into the

l6 Some authorities claim that Fund 1401 no longer exists, the reality i s that under a Presidential decree issued in 2002 the fund s t i l l exists but i s more highly regulated.

14


government collection account. When i t receives approved payment orders from the Comptroller General i t transfers funds from the General Fund to the disbursement account and Banco de Reservas to ensure sufficient funds.

2.32 ONAPRES now requires that agencies record their expenses using the accrual method while for revenues i t requires the use o f the cash method. This w i l l make effective cash management very difficult. Liabilities (accrual method) w i l l have been created for expenditures, but there wi l l be no accounts receivables to match against them because revenues w i l l be recorded as they are received (cash method) instead of when they are earned or expected (accrual method). In addition, even though the government requires spending ministries to report their commitments on a monthly basis, this does not represent a reliable monitoring system. In fact, there i s no evidence that a mechanism exists to detect and penalize unauthorized commitments or overspending. Therefore, i t i s reasonable to expect that ministr ies may exceed their commitment l i m i t s without any repercussion.

Treasury

2.33 The Law 563 of November 20, 1920, created the position o f Treasurer within the former Secretariat o f State o f Finance and Commerce. With the enactment o f the Law of Treasury (Law 3893 o f August 9, 1954), the Office o f the Treasurer was turned into the National Treasury (TN), a subordinate entity o f the Secretariat of Treasury and Public Debt which today i s the MOF. Law 3893 i s s t i l l in force and i s the main legal instrument used by the Treasury.

2.34 The TN manages the Dominican Republic’s accounts and funds, apportioning revenues between general and special funds (earmarked revenues), credit funds (foreign loans) and donation funds (primarily, foreign-sourced grants and gifts). The TN issues checks for payments approved by ONAPRES and validated by the Comptroller General. The TN, however, i s not a paying entity. The checks that i t draws are given to the entities who generated the obligation and who also are in charge of paying the providers. Therefore, the TN i s also excluded from payment procedures and this brings into question the destiny o f public funds and reduces the transparency of the payments made by the State. Therefore, in order to ensure that public funds reach the intended beneficiaries and to eliminate the use o f discretional criteria in drawing checks beyond control by the TN and the SIGEF registry, the government should consider implementing a payment system through bank transfers by direct instruction o f the TN. Not only would this improve transparency but i t would also translate into a cost savings to the government given the number o f checks it normally prints.

2.35 The TN draws a monthly average o f 750,000 checks that are given to their beneficiaries through the budget executing entities. Under current legislation, the check i s the only negotiable instrument used to pay obligations o f the State. The process o f issuing checks has become costly in terms o f the entities that require payment offices as well as the TN that needs specialized equipment to record and s i g n the checks. B y implementing an electronic transfer system, the government could reduce the costs to the entities and the TN. A Decree 9-04 supports this suggestion but, for unknown reasons, i t i s not yet in force.

15


2.36 Since the Central Bank does not have tellers for the regular public, the TN uses the Banco de Reservas (with branches nationwide) as a financial agent to receive fiscal revenues and print checks. The TN maintains several accounts at the Banco de Reservas although all checks are drawn against a single account, a commendable best practice that reduces the cost o f unutilised cash in accounts. Therefore, each time a check i s drawn, the Treasurer transfers the amount due to this single account. The short-term cash management practice of transferring funds to and from various bank accounts should be improved to capture modem treasury practices such as forecasting daily, weekly, and monthly cash requirements. Cash forecasting i s critical to minimize cash surpluses and borrowings. However, i t s effectiveness i s limited by the accuracy and timeliness of expenditure commitment information provided by line ministries, particularly those with significant project expenditures. Therefore, the government w i l l need to invest in improving spending agency’s capacity to plan and report their spending needs in order to provide the TN with the information it w i l l need to prepare accurate cash forecasts.

2.37 In some cases, as promulgated annually in the budget law, spending ministries are allowed to have revolving funds used to make direct payment^.'^ These funds may be used only for minor expenditures, such as acquisition o f office supplies or other expenses that are not related to wages, salaries or other staff services. These funds do not require a separate budget allocation and the total amount o f the fund cannot exceed 2% of the assigned amount to the account for non-personal services and acquisition of material and office supplies for each institution. The reimbursement o f funds i s made periodically against the documentation supporting the expenditures.

2.38 The TN also operates as the receiver o f public revenue. The public funds that are entered into the TN’s accounts have the following sources: a) tax revenue collected by the General Directorate o f Internal taxes (DGII) and -in a smaller scale- revenue from the financial system collected under DGII’ s instructions to collect specific taxes; b) revenue collected by the General Customs Directorate (DGA) originated from international trade transactions and other custom services; c) diverse revenue collected by other public entities; and, d) revenue collected through the enforcement o f specific regulations. The TN i s also in- charge o f safekeeping diverse securities o f the State, such as bonds, fiscal seals and other documents.

2.39 These functions add up to l i t t le more than administering the State check book. The Treasury receives payment instructions from an agency (ONAPRES) outside the MOF, instead o f according to established procedures under i t s own control. Furthermore, its administration o f revenue accounts i s limited to double checking whether balances are consistent with registered entries rather than whether funds received reflect what should have been collected. Therefore, the government should consider modernizing the Treasury functions by (i) updating the current law to reflect the modem TN procedures, functions and accountabilities that should include using the new technology provided by the SIGEF in i t s treasury module, (ii) increasing the TN’s responsibilities and accountability for cash

l7 In 2004, Articles 18 and 19 of the budget law establish the limits for revolving funds and how they are to be reimbursed.

16


management and payment functions, and (iii) allowing i t to assume a more active role in administering and controlling public funds by participating in the formulation o f policies and implementation guidelines for cash management, including payment priorities, participating in the verification functions and monitoring cash needs and position, and providing input into the debt management function. The last two recommendations w i l l require the implementation o f a training and capacity building process.

Revenue Systems

2.40 The tax and customs directorates report revenue collections daily to the TN, ONAPRES, and Office of the Comptroller General. This information i s not available concerning funds originating from other entities and there i s no mechanism to verify whether the amounts deposited in the TN accounts by those sources are complete.

2.41 General Directorate of Internal Taxes (DGII). The Directorate i s an autonomous entity under the Ministry of Finance. DGII collects taxes through a process that i s inefficient, costly, and tedious for taxpayers. The legal framework i s complicated, has internal incompatibilities with the tax code, and i s outdated. The institutional organization i s complex and operational costs are unnecessarily high by international comparison.” Control of taxpayer accounts i s performed mostly via a laborious manual process and i s not reconciled with the Taxpayer Registry.

2.42 DGII undertook a modernization process in 1997 aimed at defining institutional objectives, improving and modernizing management, reducing expenses, and increasing tax revenues. I t created a Tax Information System (SIT), local administrative entities, collection offices and a branch for the large taxpayers. The government should also consider transferring tax collection activity to the banking system, as 99% of tax collection i s made through expensive local collection facilities.

2.43 In addition, the government should consider reviewing the Tax Code to make it compatible with the current legal framework. There are cases where some tax regulations approved by the Congress contradict the Tax Code, creating lack o f clarity or lack o f authority by the DGII, the tax administration. In general, i t i s necessary to review the entire legal framework for taxation to ensure i t s consistency.

2.44 There i s a Taxpayer Registry with more than 300,000 registered taxpayers that contains important information that should be but i s not routinely updated. In many cases, i t i s not a trustworthy source o f information and i t s contribution to the efficiency o f tax collection process i s limited. Only 50% o f the registered taxpayers are active and declare taxes. This also has a negative affect on the TN which uses the registry to determine the existence and legality o f a beneficiary before issuing a check. A DGII initiative to create a new registry i s under consideration by the government.

2.45 The government i s currently implementing a new tax information system to replace the current manual system. However, it i s important to note that the system alone w i l l not

More than 60 percent of the agency’s budget i s assigned to collection.

17


provide an adequate tool for tax administration. The information entered into the system must reflect accurate and updated data in order for the system to truly serve i t s purpose as the main supervision and tax intelligence tools. Therefore, it i s imperative that information be entered into the system correctly and on a timely basis with periodic reconciliations between the system data and the taxpayer registry.

2.46 As part o f this initiative, the government should also clarify the taxpayer classification. Currently, there are three classifications - large, medium and small - that require clearer definitions with periodic updates. This w i l l help monitor taxpayers' behaviour as well as changes in category which some taxpayers may try to avoid ta~at ion '~.

2.47 Finally, the DGII should pursue a program to develop a tax culture amongst the population and to project an image o f professionalism, effectiveness and efficiency. To this end, the DGII should consider launching a campaign to simplify administrative procedures and provide taxpayer orientation and support.

2.48 General Directorate of Customs (DGA). During the mission, i t was not possible to meet with officials o f the DGA. However, from work currently in execution with IDB support2o, it i s known that the underlying customs law dates from 1953 and such an antiquated law clearly cannot contemplate the demands on the Customs Service o f the World Trade Organization nor the Kyoto Round, or other measures needed to facilitate trade liberalization. The Customs Service's accounting and verification procedures parallel the law in their antiquity and inadequacy and are in grave danger o f constraining trade liberalization, and thus impeding economic growth. Furthermore, the DGA employs in excess o f 7,000 staff, mostly untrained and politically appointed individuals, whereas countries with s imi la r economic, geographic and demographic structures manage well with no more than 2,000.21

Debt Management

2.49 The Dominican Republic does not have a law governing public debt, and no agency i s responsible for managing domestic debt. Spending agencies incur domestic debt on an ad hoc basis without structured or ex ante programming of domestic public indebtedness. The Banco de Reservas monitors domestic public debt transactions and the govemment plans to use SIGEF to concentrate management o f domestic debt within the Public Debt Management Office (DCP) in the Ministry o f Finance. The DCP has already loaded domestic debt data into an automated system (SIGADE), including domestic debt related to bank loans, private banks and the Banco de Reservas. External debt i s registered and maintained in SIGADE. DCP has acquired the capacity to use SIGADE and has begun to prepare some basic debt analysis. This i s an important step toward promoting active debt management. To ensure that the

The Review of Standards and Codes (ROSC), currently under preparation by the World Bank, w i l l include recommendations to assist the govemment in strengthening accounting and auditing practices in the DR which w i l l help support the objective of reducing tax evasion. 'O Technical Assistance grant ATN/SF-8107-DR, Support to the General Directorates of Customs and Intemal Revenue. Nov 15,2002. '' When comparing the DR customs service to other countries, such ds Peru and Ecuador, that have s imi lar populations, the percent o f collection in terms of GDP is significantly lower. Data based on the IDB's Technical Assistance grant to the General Directorates of Customs and Intemal Revenue.

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information contained in SIGADE i s reflected in the consolidated statements o f the state, the government plans to establish a on-way feed from SIGADE to SIGEF by the end o f 2004.

2.50 The only law (2002) related to debt created a Monetary Board, composed of the Central Bank, Ministry of Finance, and the Superintendent o f Banks, and gives the Central Bank responsibility for publishing a quarterly statistical bulletin, including data on external debt, A 1988 decree assigns the Central Bank responsibility for servicing external debt by establishing an account that receives revenues from the fuel differential, a tax applied to gasoline that i s earmarked to provide revenues to a specific account that in turn i s earmarked to cover specific expenditures, and foreign exchange transaction taxesz2 which are earmarked for debt service. The Central Bank also monitors private non-guaranteed debt in a database maintained on computer spreadsheets, even though SIGADE can provide this capability.

2.51 STP takes the leading role in negotiating and signing external loans and grants, which are then sent to Congress for approval. T h i s can be expensive, as most loans incur commitment fees immediately after signature; if a loan i s not accepted by Congress, cancellation penalties have to be added to those commitment fees.z3

2.52 Domestic debt. Most domestic debt i s floating debt generated from budgeted and ”budgeted expenditures from arrears in payments to government suppliers o f previous fiscal years. Domestic debt owed to banks i s estimated at DOP$ 13,300 mill ion (US$120 million). All public debt acknowledged or issued by the central government, besides this banking debt, i s related to previous fiscal year arrears in payments to government suppliers.

2.53 A 1999 law attempted to consolidate floating debt by authorizing a DOP$5,000 mill ion bond issue to pay of f claims against the government. Despite claims totalling DOP$8,500 million, only DOP$3,000 mill ion in bonds were issued. In 2003, a second law authorized an issue o f DOP$5,140 mill ion to pay intra-governmental debt. This bond issue has i t s value linked to the DOP devaluation against the USD, the central government bearing the exchange rate risk.

2.54 There i s no systematic debt sustainability or risk analysis performed by the DCP prior to the assumption of debt. The government should consider creating an analytical unit within DCP and a debt sustainability task force with members from the STP and the Central Bank. The government should also reorganize DCP, structuring to follow modem best practices which call for front, middle, and back offices. The modern organization o f a financial institution i s composed o f three levels which are the front, the middle, and the back office:

The front office i s responsible for funding transactions, through loans and security issues including external loans negotiations and domestic government debt auctions, and in this process seeks the most efficient funding cost, taking into account the guidelines and the risk parameters established by senior management.

s

’’ All around the world countries apply a ‘margin’ to foreign currency exchange transactions. In the case of the DR, a deeper analysis would be needed to determine if this margin present any kind of distortion. 23 Congress has on occasion refused to approve a signed legal agreement.

19


T h e middle office i s responsible for analysis and advice on the debt management strategy, which wil l enable the senior management to choose the most suitable debt management strategy, and also monitors the front office performance in terms o f compliance with the chosen strategy and established risk l imits, as well as it implements risk controls as permissible degree o f deviation from specific benchmarks.

0 T h e back office i s responsible for debt registration, and handles transactions confirmations, settlements, payments, as well as maintaining records of all debt contracts, disbursements, payments, debt restructuring, on-lending, issued guarantees, settlement o f transactions, etc. The back office creates and maintains a high quality and updated database o f the debt portfolio that w i l l allow timely debt registration, disbursements, servicing, statistical information and accounting.

2.55 It i s also important that debt management be supported by applicable laws and regulations. The MOF, through PAFI, has presented a comprehensive law governing public debt to Congress, but there i s no indication as to the likelihood of i t s being passed. The implementation o f SIGEF and the shift of responsibilities from the Central Bank to DCP in the Ministry o f Finance are steps toward consolidating debt management within one department for more efficient debt maintenance and analysis. However, this should be supported by the laws and regulations, which should include clear provisions for negotiating and assuming debt, and provides for a negotiation team, ideally led by the M O F with the flexibility to negotiate financial terms with no further authorization from the Congress as long as the new borrowed net flow remains below an approved ceiling.

Recommendations for the Execution Process

2.56 Improve efficiency of spending and fundsflow. The government should eliminate the duplicative and ex-ante review procedures performed by the DAFs, MUS, ONAPRES, Comptroller General, and Treasury to make the funds flow process less cumbersome and more efficient. In the medium- to long-term, the government should increase the responsibility and capability o f agencies to manage their spending. Once this capacity i s established, the government should also provide more spending flexibility by removing the rigid requirements that forbid spending agencies from moving funding across programs.

2.57 Strengthen cash management and modernize TN function. The government should draft and pass a modern Treasury law that includes the functions o f a payment agent and cash manager and provisions for modern Treasury functions, that allows full use o f electronic transfers. Once the law i s passed, the government w i l l need to focus on increasing the capacity of Treasury staff to forecast cash requirements to minimize surpluses and borrowings. The Treasury should also assume a more active policy role in administering and controlling public funds, participating in the verification functions and monitoring cash needs and position, and providing input into debt management.

2.58 Improve revenue systems. The government should modernize tax collection system by review the tax code and tax laws to ensure compatibility, applicability and enforceability and begin transferring tax collections to the financial system. Laws should be modified to reflect


modem tax collection practices. In the medium to long term, the government should seek to update and clarify taxpayer classifications, regularly update and reconcile information in the tax registry and taxpayer accounts, and install a modem information system to manage taxpayer accounts.

2.59 Modernize debt management. The govemment should focus on passing the draft public debt law, upgrading SIGADE’s software, and linking SIGADE and SIGEF to provide the information to prepare a consolidated debt statement in 2004. In the medium to long term, the government should reorganize the debt management office to reflect modem best practices of having front, middle and back offices(exp1ain meaning for the average reader), and create an analytical unit within DCP and a DCP, STP and Central Bank task force responsible for debt sustainability analysis.

THE ACCOUNTING AND REPORTING PROCESS

2.60 Although accounting and reporting represent two separate processes in the PFM cycle, they are so closely related that for purposes o f this assessment, their analysis i s presented together. The accounting process i s very closely related to the reporting process because accounting i s the means by which economic transactions are recorded for fiduciary as well as management control purposes. The entity responsible for such a function, theoretically the GAO, i s in effect a source o f information, producing statements using the language o f business and i t s impact on the decision making process limited only by i t s quality and timeliness. Therefore, the quality o f accounting data i s essential for producing useful reports. Quality includes factors such as accuracy, completeness, applicability, reliability and context. The latter ensures the comparability o f reported information as well as presenting the universe in which it exists.

2.61 Public Sector Accounting. Until 2003, the public sector accounting process was governed by a 1954 law that integrated the functions o f the internal auditor (Comptroller General) and Accountant General and mandated the use o f single entry cash accounting, a modality ill suited for modem public sector accounting. Even though the law mandated an Accountant General function, it did not become active until about three years ago.

2.62 Therefore, the government maintained i t s accounts based solely on budget accounting. Budget accounting simply records the sources and uses o f funds and does not record assets, liabilities and capital. As such, when assets were bought with government resources, it was left up to the spending agency acquiring the asset to account for i t s purchase, location, depreciation and maintenance. In many cases, information on asset holdings were not maintained so that, at any given time and particularly during the transition between administrations, i t was virtually impossible to know the amount, the whereabouts and the use o f public assets.

2.63 Recognizing the weakness o f budget accounting as well as having the Accountant General within the Comptroller General’s Office, the government established a separate General Accounting Office (GAO) in the Ministry o f Finance in early 2003. The new law requires that the GAO establish the uniform and integrated application o f modem principles o f accounting. I t also requires the use o f SIGEF to automate data flows and integrates

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accounting for the central government, decentralized agencies, State-owned enterprises, and municipalities. The law specifies the objectives and characteristics o f the government accounting system through a requirement to account and record all financial transaction information to produce the basic financial statements required for decision making.

2.64 Principles and Methods of Accounting. Until the establishment o f the GAO, the central government used single entry cash accounting. The values of assets, liabilities, and capital were not recorded, so that the government did not have consolidated financial statements presented in accordance with generally accepted accounting principles.

2.65 Establishing the GAO was the first step in addressing this deficiency. The law establishes the GAO as the central authority for the integrated financial management system with responsibility for producing reports on the administration of public funds, the balance o f national accounts, statistical analysis o f PFM, and the consolidated financial statements o f the government. I t i s charged with the responsibility o f recording financial transactions in- accordance with generally acceptable accounting principles for the public sec t~~- :~ preparing financial statements in accordance with these principles, reconciling government accounts, and maintaining an asset registry. GAO must also prepare regulations and manuals, although a review o f the draft regulations found that much o f the terminology and principles o f accounting were out o f context and needed better explanation o f their applicability in the public sector.

2.66 Accounting by the Treasury. The Treasury law has a section dealing with government accounting, specifically the accounting o f financial transactions and preparation o f the general statement o f income and expenses for presentation to the Comptroller General and the Accountant General within 25 days of the close o f each month. The Treasury should not be responsible for preparing the general statements o f income and expenses, as this falls under the jurisdiction o f the GAO and should be eliminated under the new Treasury law currently in draft.

2.67 The Treasurer also monitors daily closing cash balances o f expenditure and revenue in bank accounts. While both the Treasurer and the Accountant General perform bank reconciliations-a duplication o f effort and a violation o f the separation o f duties principles that attempts to separate functions such as collecting revenue, making payments and reconciling these transactionnhis could be seen to create a conflict o f interest if performed by the same agency. Responsibility for reconciling the State’s bank accounts should rest entirely with GAO.

2.68 Accounting by the Budget Office. Under the 2004 Budget Law, ONAPRES called for the accounting o f expenditures using the accrual method o f accounting and accounting for revenues using the cash method. The law also establishes the principles o f universality; meaning that transactions are recorded even if they do not generate cash movements, with the exception of depreciation of assets related to budget costs. Both these responsibilities are

24 The International Public Sector Accounting Standards (IPSAS) issued by the Intemational Federation of Accountants (IFAC) in May 2000. IPSAS represents international best practices and, as such, have the potential for enhancing the accountability and transparency of the information prepared by government and their agencies.


accounting-related and should be handled by GAO through the preparation and application o f guidelines for accounting and reporting for the entire public sector and not by ONAPRES in i t s annual budget law.

2.69 Integrated Financial Management System (SIGEF). The SIGEF program being implemented through PAFI i s expected to improve the quality o f data for decision making, raise administrative efficiency through collaboration, improve cash management, resource allocation, and payments via more timely and accurate cash flows and forecasts, and reduce opportunities for mismanagement and corruption. It has made important advances in improving budget formulation due to political support for the program and technical expertise within the implementing unit. Nevertheless, SIGEF s t i l l remains heavily focused on the budget aspect o f financial management, and i s only in the nascent stages o f implementing revenue, accounting and reporting modules.

2.70 SIGEF i s mandatory for all public sector agencies. Currently, PAFI manages and maintains the system but no decision has been made as to where SIGEF wi l l be housed after the project i s completed. The Accountant General’s Office i s the logical candidate to manage and maintain SIGEF, and develop information technology policies and guidelines for application by all public sector agencies. If ministr ies choose to implement their own financial management system to interface with SIGEF, the Accountant General should be in a position to r e q u i r d e f o r e purchas-he suitability o f such systems. In addition, the PAFI program contemplates three phases dealing not only with the systems aspect o f PFM reform, but also the legal and regulatory aspects as well as components regarding capacity building. Therefore the government should quickly establish which agency w i l l assume control of SIGEF, and seek financial support for the second and third phases of PAFI in order not to lose the benefits this investment has yielded thus far.25

2.7 1 SIGEF has effectively automated cumbersome ex-ante execution and spending review and clearance procedures. Before removing ex-ante controls, the government should increase the capacity o f spending agencies to manage the funds allocated to them. One approach could be the creation o f a Comptroller function within each DAF, dependent on the GAO, which would be responsible for coordinating planning, spending, accounting and reporting o f public funds. However, success o f this recommendation w i l l depend on the government’s ability to pass the appropriate laws and regulations to support this function and the strengthening of the capacity o f the civi l service to assume this function, two control environment issues discussed in the next chapter.

2.72 SIGEF i s operational in ONMRES, Treasury, the GAO, and the Comptroller General’s Office, and a full rollout o f the system to all central spending agencies i s expected by June 2004. The implementation plan calls for computer terminals at central agencies connected by telephone. However, installation o f the connections has fallen behind schedule and may delay implementation.

25 IDB funding for PAFI’s first phase expires at the end of 2004, and no steps have been taken to secure funds for its second and third stages.

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2.73 Public Sector Asset Registry. The government does not have an asset registry, an important weakness that can be easily overlooked. An asset registry not only provides a historical account o f how public funds have been spent, but i t also i s an important source o f information that can be used to hold the government accountable, particularly during the transition between administrations, regarding the where abouts and current use o f public assets.

2.74 An inventory o f assets prepared in 1999 by the Office o f Public Goods has not been updated or maintained. GAO, as part of i t s new role, intends to begin an inventory o f central government assets to set up and maintain an asset registry. GAO and the public goods office should coordinate efforts and follow the same methodology for valuating and recording assets. To save on the cost o f such exercises, it i s recommended that the government establish an asset registry that w i l l only need periodic and physical updates. IFAC standards provide guidance for this purpose.

2.75 Public Sector Reports and Reporting. The majority o f the reports prepared come out o f ONAPRES or represent reporting requirements from the spending agencies to ONAPRES. The information required i s related to budget sources o f funds and expenditures. The budget reporting system generates little information on program objectives and results, making i t difficult to identify programs that use resources inefficiently, or for which increased funding would yield greater social benefits. As there i s no performance-based budgeting, reporting consists o f budget-monitoring reports and other ad hoc reporting prepared by spending units in each ministry. The Comptroller General and the Chamber o f Accounts generate, review, and audit reports but their limited staff resources prevent these reports from being comprehensive.26 Only since 2003 have spending agencies been required to prepare reports on their estimated revenues and expenditures, as well as commitments, and most lack the capacity to prepare these reports in an accurate and timely fashion.

2.76 Reporting plays an important role in monitoring public expenditure through out the year as well as providing information with which to hold the government accountable. Effective monitoring requirements are twofold:

0 Within-year monitoring i s important for identifying possible overspending as the budget year progresses, particularly in demand-driven programs such as assistance for the unemployed. This information provides valuable input into the supplementary budget process.

Post-budget monitoring o f the outcome o f the full year against budget estimates i s used to diagnose implementation problems, such as underspending o f budget allocations by ministries. It i s also necessary for assessing the impact of the government sector on the economy as a whole.

0

2.77 Post-budget monitoring reports are more difficult to prepare, as the distribution of accounting responsibilities rests among different offices in the MOF, the STP and ministerial

26 GAO has only recently begun to exercise i t s mandate, and does not yet generate reports with substantial information.

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DAFs. GAO i s charged with producing post-budget monitoring reports although it has assumed this responsibility more as a controlling process rather than ensuring the quality and integrity o f the numbers. GAO must rely on other agencies, which may not view producing timely and reliable financial data as a priority. Within-year monitoring are also difficult to prepare because o f the lack o f overall financial management sk i l l s and responsibility in line ministries.

2.78 Current reporting arrangements require a great deal o f information to be prepared by central government entities, but circulation for review and assessment i s limited to a few agencies, primarily the Comptroller General and ONAPRES; the public does not demand or expect public disclosure of government activities. With the exception o f the Ministry o f Education, which posts i t s financial and procurement activities on the Internet, and Treasury, which posts check payments in a local newspaper, no ministry or agency openly distributes or makes information readily available to the public on administration o f public funds. This deters accountability and transparency, as the government and the public do not have relevant and timely information to analyse whether public funds are used cost effectively and for intended purposes.

2.79 While post-budget reports on budget realization are available, they are distributed only after a two-year lag. At the spending ministry level, several reports are produced but they are more in the nature of payment summaries for control o f spending against individual allocations. These reports offer very little value in terms o f helping managers control program delivery efficiency or revealing weaknesses in accountability.

Recommendations for the Accounting and Reporting Process

2.80 Review accounting law and draft regulations for consistency with international standards. Both the law and the draft regulation contain phrases and technical terms that are out of context or do not reflect the spirit o f international standards. The government should require a close review of the law and i t s regulations to ensure th’at best practices are reflected and applied.

2.81 Strengthen and define GAO’s role. There i s significant overlap between GAO, ONAPRES and Treasury regarding accounting functions and the responsibility for reporting principles. This weakens the role o f the Accountant General and should be addressed in the GAO’s new law and regulations, which should establish the GAO as the single entity responsible for accounting, reporting, and the maintenance o f the integrated financial management system. In the short-term, the GAO’s role should expand to include analysis of the financial impact o f decisions, working in close coordination with the Treasury to assure the cash flow to finance planned activities and operations, and working in coordination with the Comptroller General and the Chamber o f Accounts to safeguard public resources through financial controls. In the medium- to long-term, the Accountant General should work toward increasing the impact of his role to include providing a financial framework for planning future activities and operations, managing transaction processing systems to produce information for monitoring and controlling planned activities and operations, and interpreting and reporting the results o f activities and operations measured in financial terms.

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2.82 Create a Comptroller function within ministerial DAFs. Spending ministries lack the capacity to adequately manage the funds allocated to them. The government can begin to address this weakness by creating a Comptroller function within agency DAFs that i s dependent on GAO. Establishing a modem financial control with responsibility for financial planning, budgeting, accounting, and reporting could improve overall financial control and accountability while increasing financial flexibility at the ministry level, which would lead to more effective budget execution. Given the importance o f this function, it i s recommended that the financial Comptroller role be piloted in one or two large ministries so that a template o f lessons learned can be created for use in others.

2.83 Continue to support the PAFZ program and implementation of SZGEF. The SIGEF has the modules needed for an integrated financial management information system. However, the reliability and usefulness o f the system wi l l depend on the capacity o f users to access and apply the modules and a legal framework that ensures their compliance with laws and regulations. The government should consider several actions to support and sustain the achievements o f the program by:

0 Accelerating SIGEF’s implementationlinterface in all central government agencies; at the current rate o f implementation, the program wi l l not meet i t s June 2004 deadline to have all agencies connected. Establishing ownership and maintenance o f SIGEF within GAO.

Securing financial support for the implementation o f the second and third phases o f the program.

Ensuring continuity in trained PAFI project staff and other public officials to retain investments in knowledge sharing and training.

Developing a training agenda for ministry staff to ensure full and proper use of SIGEF.

0

0

0

0

2.84 Prepare a strategy andplan for adopting ZPSAS. GAO should prepare a strategic plan for adopting IPSAS for government accounting and reporting. The plan should include provisions for transitioning to principles that require longer periods o f time, such as the adoption o f accrual accounting, and indicators for measuring the impact of, and compliance with, the new standards. The plan should also provide for continuous staff training to ensure proper application o f these standards.

2.85 Establish a central government asset registry. This wi l l require coordination between the GAO and the Public Goods Office to carry out a systematic inventory and valuation o f government assets and set up an asset registry and periodic and physical inventories. I t i s strongly recommended that the government use IFAC’s guidelines for the inventory, valuation and accounting o f public sector assets and maintenance of the asset registry.

2.86 Standardize the format and periodicity of financial reports. The Ministry o f Finance should set standards, using IFAC public sector guidance, for financial reporting requirements, including the form and content o f annual reports prepared by government agencies, including audited annual financial statements and financial and non-financial indicators to show progress toward meeting key success factors established to monitor performance, and

26


guidelines for government agencies on disseminating financial and performance accountability information to the public.

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3.2 Figure 3.1 shows the control environment as the collective effect o f managerial, administrative, and financial controls. These include the legal framework, methods o f assigning authority and responsibility, control methodology, personnel policies and practices, internal controls and overall management culture. Management culture reflects the emphasis placed on following policies and procedures aimed at achieving compliance with laws and regulations, preventing and detecting errors, irregularities and fraud, safeguarding assets, and complete and reliable recording o f accounting data to ensure integrity o f financial information, and timely and accurate reporting.

INTERNAL CONTROLS

3.3 Znternal audit. The Comptroller General, an office within the Office o f the President, i s responsible for internal auditing. I t has internal audit units (MUS) in central government bodies, non-financial decentralized public entities, and municipalities. The Comptroller General carries out its mandate via ex-ante and ex-post audits and reviews. The ex-ante reviews apply to all payment requests from spending units, ministries, and central agencies. The office has 800 employees, two thirds o f whom have professional degrees, mostly registered accountants.28

3.4 The Comptroller General’s office has developed a reputable image in society and the public sector in part due to the control derived from ex-ante review o f payment requests. Ex- ante reviews, a process that has been removed in the international context owing to the significant delays it possess to public administration, continues in force in the DR’ s public sector. These delays manifest themselves in the following manner: (i) the maintenance o f routine actions based on arithmetic (numerical) and documentary (legal) revisions and not based on knowledge o f the operation or objective o f the expenditure, (ii) duplicity o f control functions (DAF, UAI, Comptroller & ONAPRES) that generates additional administrative procedures and dilutes accountability by spreading responsibility across many offices, and (iii) the centralization of controls within each office that promotes power centers. However, moving away from reliance on ex-ante controls w i l l require not only new systems and procedures but also a change in management culture.

3.5 With the implementation o f the SIGEF system and i t s modules, the government w i l l have the opportunity to change its management culture through the training that w i l l be required to instruct s taf f in new system procedures. Furthermore, i t w i l l require the implementation o f a modem internal control system (ICs) already mentioned in the current draft Comptroller law although clarification i s still needed regarding how and what agency i s responsible for i t s development. Therefore the government should consider adding this responsibility to the Comptroller’s mandate and begin implementing the steps needed for i t s successful implementation. This w i l l require (i) the establishment o f technical internal control standards applicable to all the public sector, (ii) the strengthening o f I A U s (discussed

** Registered accountants in the Dominican Republic require only a college degree in accountancy and a license application. An examination or previous work experience i s not required, nor are their continuing professional education requirements.

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later in this section), and (iii) the modernization o f the Office o f the Comptroller General , including the organizational structure.

3.6 Comptroller General’s Organizational Structure. As a result of the PFM reform initiative, some o f the functions o f the Comptroller General have been removed while others have changed. For example, as already mentioned in the accounting process, Law 126 established a separate government accounting office within the MOF when i t used to exist as part o f the Comptroller’s office. This function has not yet been removed from the organization chart o f the latter. On the same token, there are offices with functions that are not formally contemplated in’ the official organizational chart. Annex 15 provides a depiction of the current official organization chart plus the unofficial functions that take place.

3.7 With the establishment o f an ICs, in accordance with COS0 standards, the current structure w i l l require important modifications. Therefore, given that the current structure does not reflect actual functions, the government should begin the process o f updating and modernizing the organizational structure o f the Comptroller General’s office so that i t i s set up to assume the responsibilities contemplated in the draft law. This should be done in a phased approach to allow for the training and capacity building needed by each office.

3.8 The Comptroller General has in the past acted as the de facto supreme audit authority, performing both the internal and external audit functions. This has now been corrected to some degree under the new Chamber o f Accounts law that more clearly delineates the responsibilities of these public entities. However, the regulation o f the new Chamber o f Accounts Law and the new Comptroller General Law, s t i l l in draft, have important issues that should be addressed. Among these are (i) the contradiction between the Chamber of Accounts Law and the draft Comptroller General Law which establish each institution as the leading audit institution, and (ii) the lack of specific clauses or regulations establishing the coordination and reliance between these two entities.

3.9 The government should take the opportunity that these documents are s t i l l in draft to identify any contradictions or duplication o f functions or gaps between the laws and international standards. In terms o f the contradiction between laws, the Chamber o f Accounts should be established as the Supreme Audit Institution (SAI) that establishes the audit standards to be followed in the public sector. Furthermore, the regulations o f both laws should provide explicit provisions for the coordination between the S A I and the Comptroller’s Office2’. In some cases, the Comptroller may audit the same organization as the Chamber of Accounts. This i s to be expected as it represents different audit objectives, internal for the former and external for the latter. However, when possible, the Chamber o f Accounts should follow International Standards for Audit (ISA) regarding the reliance on the work of internal auditors.

3.10 The Comptroller General reports directly to the President, provides periodic reports to the President o f all significant findings, and prepares an annual report that consolidates i t s findings and recommendations. However, the Comptroller does not have the legal authority

29 International Standards for Audit provides guidance on how and when an SA1 can rely on the work of the internal auditor (i.e., Comptroller General’s Office).

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or other mechanism to enforce sanctions or other consequences when irregularities or negligence are discovered. Furthermore, these reports are not made public nor are they widely distributed. Therefore, i t i s difficult to determine the quality and comprehensiveness o f the reports as well as the status of any follow up actions to the findings and recommendations made in the reports?'

3.11 Internal Audit Units (ZAUs). The government should be commended for recently making all IAUs directly dependent on the Comptroller's office instead of to each individual minister. This has helped increase the independence o f the I A U s and also represents the first step towards standardizing the application of internal control procedures. Nevertheless, the function o f the IAUs continue to add little value and i s limited to legality checks, supporting documents, and arithmetic accuracy. Furthermore, the repetitive verification o f payment documentation has the unintended consequence of diluting the accountability o f line ministries by spreading responsibility o f payment requests across many offices?' The primary responsibility for reviewing payment requests should rest on IAUs of each ministry. However, this capacity does not now exist and should be established before the government can relinquish i t s reliance on ex-ante review and controls. T h i s process w i l l require training and capacity building o f ministry level auditors as well as the elimination of the same type o f review carried out by the Comptroller General's staff.

3.12 Staff Capacity. Assessing public sector staff capacity does not fall within the specific scope o f this report although it w i l l be touched upon in the Report on Observance of Standards and Codes (ROSC - see Box 3.1) scheduled for completion by the end o f 2004. Nevertheless, the issue o f staff capacity plays an important role in the control environment o f the public sector and this warrants a limited discussion o f how it should be addressed in general terms.

3.13 Although the pool of candidates with the appropriate background in financial management should not necessarily be limited to "authorized public accountants" (contador publico autorizado or CPA32), ideally the candidate should have some background in basic accounting and audit standards. The requirements for obtaining a CPA license include the submission of an applicant's proof of a university degree in accounting to the Institute of Authorized Public Accountants o f the Dominican Republic (ICPARD), which in turn makes a formal request to the government for the issuance o f a license. There i s no requirement to pass a standardized examination, or for a minimum level or years o f professional experience. In addition, CPAs are not required to pass an ethics exam or comply with an ethics code, and there are no continuing education obligations for keeping the license so it i s conceivable that CPA' s who graduated decades ago can continue to practice without any assurance that they have received training or instructions on the application o f new accounting and audit standards. Moreover, each university sets i t s own accounting curriculum so graduates from different universities may have varying levels o f education in the different accounting and

30 The CFAA team requested copies of the most recent reports but were unable to obtain any. 31 As discussed in the execution process, ONAPRES and each ministry's DAF also performs reviews o f payment requests. 32 The abbreviation CPA, happens to coincide with the US term for a Certified Public Accountant but does not represent the same credentials.


audit topics such as law, tax, cost accounting and finance. Therefore, the quality o f the graduates cannot be considered homogeneous.

3.14 In addition to ICPARD, which i s the leading institution governing the accounting profession in the DR and i s legally recognized by an act, there i s another group called the Colegio Dominicano de Contadores (CODOCON) which i s also recognized by the authorities. CODOCON was created in 1976 through a Presidential decree and effectively competes with ICPARD in terms of their respective mandates. There was an attempt to merge the two institutions in 1997 but it failed as the membership of ICPARD did not endorse the proposal by the ICPARD's Board at the time.

Box 3.1 DR Report on the Observance of Standards and Codes (ROSC)

As part of the Report on the Observance of Standards and Codes (ROSC) initiative, the World Bank i s currently conducting an assessment of Accounting and Auditing (A&A) practices within the Dominican Republic's corporate sector. The ROSC A&A will focus on, among other issues, the efforts to build the accounting profession's capacity to apply the applicable accounting and audit standards and practitioners' effective compliance with those.

The ROSC-A&A recommendations will cover various issues associated with the accounting and auditing practice, seeking to assist the authorities' efforts to achieve the following objectives:

0 Enhancing the quality of accounting and auditing standards in the country, with reference to IFRS and ISA as a primary benchmark;

C Strengthening governance and public oversight of the accounting profession, including by improving the professional bodies' institutional capacity and developing quality assurance mechanisms among audit firms and individual auditors;

7 Reinforcing regulatory agencies' capacity enforcement of accounting, financial reporting, auditing and professional ethics requirements;

Developing arrangements for high quality accounting and auditing education and training. d

Upon completion of the ROSC-A&A, a workshop will be organized to present the findings and recommendations to a wide constituency of stakeholders and define appropriate follow-up actions. I t i s expected that the Multilateral Investment Fund (MIF, a regional trust fund managed by the Inter-American Development Bank - IDB) would provide funding for the implementation by the authorities and other stakeholders of the ROSC A&As recommendations.

3.15 Neither ICPARD nor CODOCON play an active role in enforcing professional standards and ensuring quality o f the accounting and auditing practice. There are no quality control mechanisms and sanctions for lack of due diligence are nonexistent, which seriously hampers the quality o f accounting and audit professionals. Furthermore, the c iv i l service does not provide adequate incentives, in terms o f salary or training, to attract qualified professionals. Therefore, the government should consider (i) making licensing requirements more stringent, (ii) creating a professional accountant and auditor track within the civi l service, and (iii) requiring that these professionals receive periodic training to ensure the proper application o f applicable standards and regulations.

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EXTERNAL CONTROLS

3.16 External audit. The Chamber o f Accounts, appointed by Congress, serves as the Dominican Republic’s SAI, providing consultations, external control and oversight of, and for, the government. The DR’s SA1 i s mandated to protect public goods and assets and public funds, and responds to requests for special audits and investigations made by the Congress and ministries. Although the Constitution and law required i t to perform oversight and carry out external control for the national govemment, this was primarily done by the Comptroller General until 2004, when Congress passed a law establishing it as the SAI.

3.17 The Chamber o f Accounts has undergone extensive reform and strengthening over the past two years. I t has hired new staff, moved to a larger, more spacious building, and acquired more computer equipment. With the assistance o f external consultants, it has prepared a strategic plan, developed audit standards, guides, and a code o f ethics, and has begun training i t s audit personnel in the new methodologies.

3.18 Staffing remains the Chamber o f Account’s weakest area. It has some 450 staff, including 260 auditors, with the rest being lawyers, engineers, economists/ financial analysts, and administrative staff. T h i s i s a vast improvement from just a few years ago, when it had only 69 auditors. However, i t s mandate now encompasses al l entities receiving funding or subsidies from the national govemment- nine provinces in three regions, with hundreds o f municipalities, and some C S O S . ~ ~

3.19 The Chamber of Accounts should continue to build up i t s pool of human resources through hiring and training. Once it i s at adequate capacity, i t should provide ongoing technical training for staff, and provide them the tools-such as computers-necessary to do their work. Specialists in investigations and systems audits need to be hired to supplement the audit and budget analysis staff.

3.20 Before February 2004 the Chamber o f Accounts had few policies, procedures, guides, or manuals for audits and investigations. With the assistance o f external consultants, financed through the IDB modernization project, it has drawn up government auditing standards, a code of ethics, an annual audit planning guide, a quality control guide for audits, and guides for financial, management, and project audits. These guides are in the process of being implemented, and audit staff are being trained. Guides s t i l l need to be prepared for audits o f decentralized and autonomous government entities and municipalities. In addition, guides should be prepared for the performance o f investigations and for planning their work based on risk assessments.

3.21 The Chamber o f Accounts has not been able to audit all central government entities, much less decentralized and autonomous entities dr government projects. Starting this year it

33 In 2002, the S A I conducted 35 financial audits, 106 NGO account inspections, 127 municipal account inspections, defended 96 court cases, and performed budget analysis o f the accounts of 43 decentralized and autonomous entities, 3 1 municipalities, 65 district municipalities, and 41 consolidated municipalities. In 2003, the S A I conducted 46 financial audits, 376 NGO account inspections, and 277 municipal account inspections. Even though this encompasses a substantial amount of work, s t i l l much more needs to be done.

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may get involved in social audits, in response to requests from communities or government agencies.

3.22 The Chamber also needs to flesh out the new law with regulations, and update i t s policies and procedures manuals to reflect these changes. I t should also decide whether to adopt ISA, INTOSAI or OLACEF standards and become members of these organizations. To sustain this undertakineincluding, perhaps, hiring outside auditors to assist in i t s tasks- it w i l l need to be allocated significant budget resources, which could be supplemented by donor support.34

3.23 Notwithstanding these issues, the amendment to current legislation to segregate the supreme administrative law court from the SA1 functions should be initiated and passed by the National Congress. This would allow the Chamber o f Accounts to focus i t s efforts on external audits and investigations, and help with respect to institutional capacity problems, not to mention eliminate the appearance o f a lack o f independence between the SA1 and i t s judicial functions.

3.24 The Attorney General and Department for the Prevention of Corruption. The Attorney General, appointed by the President, investigates and prosecutes corruption in the public sector, assisted by district public prosecutors. A Department for the Prevention o f Corruption (DPC) was created within the Attorney General’s Office in 2000. The corruption prevention office has collaborated with the Attorney General to prosecute over 20 cases o f corruption involving civi l servants. Functioning with only half the staff i t needs, the department has also handed over suspected cases o f accounting or auditing irregularities to the Comptroller General and the President’s legal counsel for further investigation and possible prosecution.

3.25 The Attorney General, the head o f the DPC, and district prosecutors are Presidential appointees, so their control functions are extremely vulnerable to partisan pressure and budgetary constraints. A bill before Congress would give independent status to the anti- cormption office, and provide a five-year term for i t s director, who would be chosen by the Senate from a l i s t o f nominees proposed by the President.

3.26 Legislative Oversight. Legislative oversight helps ensure that the government i s held accountable for i t s operating policies and i t s management o f public funds. Normally, as the legislative branch o f government, Congress would exercise this oversight via a Public Accounts Committee. However, the Dominican Republic does not have such a mechanism, and instead the Chamber o f Accounts audit reports are turned over to Congress for general review by i t s members. This weak legislative oversight represents a serious issue in terms of the mechanism in place to respond and implement the recommendations of internal auditors (Contraloria) and external auditors (Camara de Cuentas) in response to their findings. This issue i s critical because i t must be addressed before the government can shift from i t s heavy reliance on ex-ante controls which represents another serious issue regarding the efficiency o f public administration.

34 For 2003, the S A I was assigned DOP$93.5 million. For 2004, the SA1 has been assigned DOP$130 million,

34


3.27 Civil Society. Civi l society comprises a wide range of actors organized around specific sets o f purposes, including overseeing government accountability. It represents wide and competing interests and includes policy advocacy groups, grass-roots community-based organizations, think tanks, business and professional groups, human rights organizations and the media. There i s no single definition of the term “civil society”. There are theoretical bases for at least three conceptual frameworks, each complicated by popular uses o f the term. There i s considerable debate regarding the specific entities that comprise c iv i l society. Some argue that the media are part of civi l society while others maintain they are not. No one disputes, however, that free and professional media are forces that increase transparency and hold governments accountable. Access to information and the freedom to debate and publish public information are fundamental concerns shared by civi l society and the media.

3.28 Civi l society in the Dominican Republic i s large and diverse. There are 5,000 registered CSOs and 15,000 overall. O f these, however, very few focus on basic public sector management. The CSO community ranges from single-person entities to large complex organizations with budgets in excess o f US$1 million.

3.29 When compared with the country’s past, Dominican c iv i l society operates in a relatively open environment. When the topic o f intimidation was discussed, local civi l society organizations cited threats to reputation or economic well-being, rather than fear o f bodily harm. The media also work in a relatively safe environment, and according to the Committee to Protect Journalists, media personnel have not experienced physical harm since the Balaguer era. That said, reports of human rights violations perpetrated by security forces in recent months and years are disturbing.

3.30 In the Dominican Republic, both print and electronic media are vocal and vibrant. This does not mean, however, that they are completely open and free. I t i s estimated that 90 percent of news outlets belong to three groups which l i m i t s debate and hampers investigative journalism. Both CSOs and journalists encounter barriers when pursuing cases o f corruption.

3.31 There are serious limitations to c iv i l society’s effectiveness, including legal and non- legal barriers. The absence o f key legislation related to access to information and anti- corruption poses significant constraints. Non-legal barriers include the use o f slander and economic intimidation. Perhaps that most insidious barrier i s that c iv i l society i s often ignored, and many o f i t s efforts to engage in policy dialogue yield disappointing results. The State often dismisses civi l society initiatives to analyze and draft proposed legislation, advocate for reforms, or oversee public policy implementation as inappropriate, rather than legitimate forms o f engagement in democratic governance.

3.32 In fact, CSOs such as the FINJUS, PUCMM, Participacion Ciudadana, CONEP and ANJE, can offer serious policy analysis, help draft potential legislation, and conduct policy dialogue. They can organize seminars/workshops with legislators and their staff to review and comment on or revise potential bills, organize workshops with other civi l society organizations to increase the consultative process, and bring in outside and international expertise. However, CSOs must also be independent, transparent and accountable in order to effectively carry out their oversight and advocacy functions instead o f taking actions as an extension of the political establishment.

35


Recommendations for the Control Environment

3.33 Eliminate duplication of internal control and external control functions. As the Comptroller General has in the past acted as the de facto supreme audit authority, i t i s important that the draft Comptroller General Law not contradict the 2004 Chamber o f Accounts law or duplicate i ts functions. Audit units should focus more on evaluating control environment adequacy, rather than the current focus on verifying the authenticity o f supporting documentation for expenditures.

3.34 Strengthen ministerial internal audit units. Internal audit units in the ministr ies are not adequately staffed with trained internal auditors. The majority of the staff working in these units are trained in the agencies’ sector rather than in accounting. Therefore, the UAIs need a new audit charter35 and a comprehensive training program to upgrade staf f sk i l l s and capabilities.

3.35 Draw up regulations for the Chamber of Accounts. The 2004 Chamber of Accounts law lacks implementing regulations that clarify and provide further details as to what i s meant by the law and how i t should be implemented. These regulations should provide at a minimum provisions for the discretion to discharge their responsibilities, including the appointment o f staff and their conditions o f service and remuneration and their right to full, free, and unrestricted access to information. Penalties should be included for providing false information to Auditor General or preventing their staff from access to information. Furthermore, accountability o f the Auditor General should be established by law and reporting should be directly to the Congress and not the Executive. Annex 14 presents suggestions for what the regulations should include and which w i l l provide a basis for designing a medium to long term strategy to strengthen the capacity and independence of the Chamber o f Accounts taking into account the country’s present political and cultural context.

3.36 Separate the Supreme Administrative Law Court from the Chamber of Accounts. Serving as an administrative court places too great a burden on the Chamber’s resources, and there i s a potential conflict o f interest in the entity responsible for audits or investigation then judging the issue as a court. Congress should, therefore, pass legislation spinning the administrative law court o f f as a separate institution.

3.37 Increase DPC’s independence and autonomy. The DPC would be more effective if it enjoyed more independence, especially as regards the appointment and tenure of i t s head. Among the many bills now under study in Congress i s one that would give independent status to the anti-corruption office by having i t s director named for a five-year te rm on the basis of l i s t s provided by the President, but ultimately chosen by the Senate. The government i s encouraged to consider the bill proposed and enact i t as soon as possible.

3.38 Establish a Public Accounts Committee within Congress. The government should consider establishing a Public Accounts Committee within Congress charged with examining the public accounts, Chamber o f Accounts audit reports, and other matters relating to the

35 Annex 16 contains an example of a modem audit charter.

36


effective and efficient use of public funds appropriated by Congress through the Budget. The committee’s responsibilities should be broad enough to include matters related to revenue collections and borrowing, tax collections and tax policies, and the review o f the effectiveness o f government programs. Committee members should meet minimum qualifications that should include professional background in the fields o f accounting, auditing, financial management, revenue management and tax policy, or related fields that provide the appropriate knowledge needed to interpret financial statements and audit findings. The Committee should also be required to prepare a memo addressed to Congress indicating the results o f i t s reviews as well as the actions needed to support and follow up the findings and recommendations made by the Chamber o f Accounts in i t s annual reports. Once the capacity o f the PAC has been established, the government should consider making the memoranda to Congress and the committee meetings available and open to the public as a way o f showing i ts commitment to transparency and accountability.

3.39 Increase collaboration between the public sector and civil society. Given the demonstrated analytical and organizational capabilities o f some CSOs, the donor community should consider a two-pronged approach that could tap into civi l society’s technical abilities on the one hand, while also supporting programs that would strengthen the analytical and technical capacity o f key public entities. B y promoting a collaborative approach, the donor community could help deepen traditions o f citizen participation in policy design, advocacy and implementation on the one hand, while creating new andor strengthening existing key technical government units - perhaps within the Congress, the Technical Unit o f the Presidency, or selected ministries. Annex 17 provides a l i s t o f potential contributions that the CSOs mentioned in this analysis could provide.

37


4. DEVELOPMENT ACTION PLAN

4.1 The upcoming transition o f administration could present a risk that the momentum for change build in the last few years w i l l be lost and the government’s investment in terms o f knowledge and resources w i l l have limited or no impact at all. Fortunately, the leading political parties have both expressed their commitments to the modernization o f PFM evidenced through the proposal of the reform program by the PLD and i t s subsequent implementation by the PRD. Nevertheless, the tradition o f removing all vestiges o f the previous administration may s t i l l take place at the ministerial levels and in key PFM entities, such as ONAPRES, Contraloria, and the Cumuru de Cuentus.

4.2 Therefore, the incoming administration should consider establishing the MOF as the central monitoring agency for reform and ensuring that i t has the authority and capability to effectively carry out this role. T h i s w i l l require that the MOF:

assume the leadership to monitor and follow up on the progress o f the reform agenda,

have the authority to require follow up actions on the findings o f the audits performed by the Comptroller General’s office,

establish close working relationships with national institutions and with organizations outside government, such as with development partners,

mobilize support for the reform agenda, and

establish a continuing forum o f oversight agencies, civi l society organizations, and individual champions for the enhancement of accountability, transparency and the rule o f law.

4.3 The following matrix presents the recommendations made in this report. The matrix highlights the main action in bold followed by a break-out o f steps framed in terms o f short-, medium- and long-term objectives. The timing o f these objectives also represent their priority, meaning that short-term recommendations reflect a high priority action. In the furthest column, the matrix also provides additional comments that include any financing that has been identified to support the actions.

38


Recommended Action Short Term Medium Long

Term Term (2004 -2005) (2006-2010) (201 1+)

Other

~ -~

1. The Planning Process.

1.1 Strengthen and expand the MOF’s role.

1.1.2 Modemize current PFM laws, such as Budget, Treasury, Public Debt, and Comptroller General, to reflect the MOF as the leading institution in terms of PFM which includes the planning process.

1.1.3 Increase the capacity of the MOF’s current offices and staff to assume the responsibilities and functions that the new laws will bestow.

1.1.4 Shift responsibility for budget formulation and implementation, meaning ONAPRES, from the STP to the MOF.

1.1.5 Develop sector experts in the MOF that can provide input in the planning process and also act as interlocutors with the agencies, NGO’s and civil society experts involved in their sectors.

1.2 Develop a plan and strategy for adopting the principles of performance-based budgeting.

1.2.1 Develop of strategy for piloting performance based budgeting in central government entities.

1.2.2 Based on the strategy, prepare a plan to pilot the principles of performance based budgeting in a ministry that demonstrates sufficient capacity (Le. Ministry of Education).

1.2.3 For ministries who do not have sufficient capacity, prepare a plan to begin building their capacity to properly account for their public expenditures and eventual assume the responsibility of performance-based budgeting.

1.3 Increase budget comprehensiveness

1.3.1 Include the budgets of local authorities and autonomous entities, industrial and commercial enterprises eligible for State assistance, and social welfare agencies.

1.3.2 Continue efforts to bring non-tax revenue onto the budget

1.3.3 Analyse the budget coding process so that i t better reflect actual spending behaviour and provides a more accurate measurement tool for accounting purposes.

x

x

x

x

x

x

x

x

x

The IDB financed PAFI program includes the modemization of PFM laws in i t s first phase.

The government i s already discussing this, in principle. No formal actions yet taken.

2. The Execution Process

2.1 Improve the efficiency of the spending and fund flow process

39


Short Term Medium Long Recommended Action Term Term Other

(2004 -2005) (2006-2010) (201 1+)

2.1.2 Develop a plan for rolling out a capacity development X x plan that wil l improve the ability of spending ministries to record and account for their spending.

eliminating the ex-ante controls which make the spending and fund flow process cumbersome and inefficient.

2.1.3 Once the capacity has been developed, begin X X X

2.1.4 Allocate budget in global amounts and allow spending ministries more flexibility to determine how their quarterly funds are spent.

2.2.4 Completely eliminate the ability of the Office of the President to automatically spend undisbursed funds of other spending agencies.

2.2 Strengthen cash management and modernize Treasury function.

2.2.1 Review the current draft law to ensure that it contains modern (ie,. cash manager) and best practice (Le. electronic transfers) provisions.

2.2.2 Pass new law and prepare supporting regulations and manuals that ensures the active participation of the treasury in programming the fiscal cash flow, establishing guidelines for preparing revenue and expenditure estimates and providing input into the debt management function.

2.2.3 Establish methodology for the quarterly and annual forecasting of cash needs including receipts, payments and commitments.

2.3 Improve revenue collection systems.

2.3.1 Review the tax code and tax laws for their compatibility, applicability and enforceability.

2.3.2 Based on the analysis, revise the laws and codes to reflect modem tax collection practices.

2.3.4 Develop a strategy and plan for transferring tax collections to the financial system.

2.3.5 Periodically update and clarify tax payer classifications.

2.3.6 Update the information in the tax payer registry and tax payer account database.

2.3.7 Periodically reconcile the information in the tax payer registry with the tax payer account database.

2.3.8 Install a modem information system to manage tax payer account information.

X X

X

x X

X

X

x

X

x

X

x

X

X

X

2.3.9 Analyze the staffing and organization structure of the x intemal revenue and customs departments.

40



Term Term (2004 -2005) Other

(2006-2010) (201 1+)

2.3.10 Based on the analysis, make the appropriate changes X to improve the effectiveness of the intemal revenue and customs departments.

2.3.11 Develop a campaign to improve the institutional image of the intemal revenue and customs department that promotes compliance and an understanding of civic values.

2.4 Modernize debt management.

2.4.1 Approve the new Public Debt Law currently in draft, ensuring that i s makes provisions for active debt management (Le., debt and sustainability analysis) and that all public debt i s centrally managed by the office of Public debt.

2.4.2 Once new law i s passed, prepare supporting regulations and manuals that ensures that a l l debt i s recorded and managed by the public debt office and that the office undertakes a proactive role towards debt management via the performance of risk and sustainability analysis.

2.4.3 Upgrade the debt management system, SIGADE, with the latest version, 5.3.

2.4.4 Link SIGADE with SIGEF.

2.4.5 Provide periodic training in the use of SIGADE as well as best practices in terms of proactive debt management.

3. The Accounting Process

3.1 Accelerate the implementation of SIGEF in all public entities.

3.1.2 Ensure the legal and regulatory support of SIGEF by the passing of PFM related laws, such as the (i) Comptroller General, (ii) Treasury, and (iii) public debt and the upgrading of Decree 9-04, which created the SIGEF, to a law goveming PFM.

3.1.3 Provide periodic training needed by government staff in order to ensure the proper application and utilization of SIGEF’s system features as well as the managerial and administrative procedures needed to support the system.

3.1.4 Ensure adequate allocation of resources so that once the IDB funding that supports the project implementing the SIGEF runs out, the project can continue to execute the objectives of the 2nd and 3rd phase of implementation .

x

x

X

X

X X

X

X

X

x

X

The CFAA team has already discussed with the DR FTAL project team, the possibility of incorporating some of the debt management recommendations within the debt component of this project.

X

X

X

These recommendations are already considered in the first phase of the IDB financed PAFI program.

3.1.5 Explicitly assign the managerial and administrative X

41



(2004 -2005) (2006-2010) (201 1+)

responsibilities of the SIGEF to the GAO.

3.2 Analyze the existing legal framework to identify gaps between existing laws and regulations and International Public Sector Accounting Standards (IPSAS)

3.2.1 Analyze PFM related laws and regulations, such as (i) accounting law, (ii) public debt law, and (iii) Treasury law, for the consistent application of govemment accounting principles ensuring that they do not contradict one another, the principles established in IPSAS nor the requirements of other PFM related functions, such as cash and debt management.

3.2.2 Review and analyze the current regulation in draft goveming the new GAO law (Ley 126) to identify phrases and technical terms that are out of context or do not reflect the spirit of intemational standards.

3.3 Prepare a strategy and plan for the adoption of IPSAS based on the results of the analysis of the existing legal framework.

3.3.1 Identify the laws, regulations and other actions needed to implement IPSAS and prepare a strategy and plan for their implementation that takes into consideration the country’s current political and cultural context.

3.3.2 Obtain the participation of a l l central govemment agencies, particularly the DAFs, for the role out of the plan.

3.3.3 Pass amended or modemized laws that will permit the official adoption of IPSAS.

3.4 Implement IPSAS in all central government entities with a phased approach.

3.4.1 Once the supporting laws and regulations have been passed, prepare accounting manuals, to be used by all the ‘organos rectores’ and DAFs, that provide detailed instructions and procedures for the application of IPSAS and related standards. T h i s exercise will need to coordinate with the PAFI project to ensure the procedures are consistent with the system capabilities of SIGEF.

3.4.2 Perform periodic updates of the accounting manual to reflect updates in IPSAS and changes in PFM system features.

3.4.3 Provide continuous training to accounting and financial management staff to ensure the proper application of PFM laws and regulations. This training should form part o f the staff‘s profile and evaluation and therefore should be coordinated with the government’s personnel office, ONAP.

x

x

X

x

X

x

X x

Th is recommendation fal ls within the scope of the first and second phase of the IDB financed PAH program.

T h i s may require technical assistance by an expert in the field of intemational accounting standards.

3.4.4 Establish indicators to measure the effectiveness and impact of implementing IPSAS.

X

42



Term Term (2004 -2005) (2006-2010) (2011+)

Other

3.4.5 Perform evaluation of implementation process based on measurement of previously agreed indicators and incorporate lessons learned in the implementation strategy.

3.5 Establish a State Asset Register

3.5.1 Prepare a lawlregulation for the registry and maintenance of State assets. The GAO should lead this action but coordinate with the DGBN.

3.5.2. Once the law/regulation i s approved, apply intemational standards for the valuation and registration of State assets.

3.5.3 Implement a system for the recording and maintenance of an asset registry.

3.5.4 Prepare manuals for the use and application of the system.

3.5.5. Role out system in a phased approach and with adequate training to ensure proper use of the system.

3.6 Strengthen the role of the GAO.

3.6.1 Expand the GAO’s role to include the analysis of the financial impact of decisions.

3.6.2 Provide specific provisions in GAO’s regulations for i t s coordination with the Treasury functions - in terms of cash management - and the Comptroller General and Chamber of Accounts - in terms of safeguarding of public resources through financial controls.

3.6.3 Expand role to include (i) providing a financial framework for planning future activities and operations, (ii) managing the SIGEF, (iii) producing information and reports for monitoring expenditure activities, and (iv) interpreting operation results and financial activities.

3.7 Strengthen the capacity of Financial Administrative Unit Staff (DAFs) 3.7.1 Strengthen the capacity and quality of DAF staff by:

i) Developing and maintaining competent staff ii) Recruit and hire licensed accountants iii) Terminating non-performing staff iv) Rewarding and promoting strong performers v) Implementing a coaching program for staff

3.7.2 Establish a financial controllership function within sector ministry DAFs to coordinate planning, budgeting, accounting and reporting. Th is function should depend and report directly to the Accountant General.

x

x

x

x

x

3.7.3 Prepare an operations manual defining the role of the x DAF in the planning, executing, accounting and reporting

x

X

x

43




(2006-2010) (201 1+) process and include a specific provision that requires DAF staff to report to the Accountant General.

3.7.4 Ensure that a l l DAFs have access to SIGEF and the capacity to use the system.

3.7.5 Provide periodic training to DAFs in the use of SIGEF and periodically update the operations manual.

4. The Reporting Process

4.1 Standardize format and periodicity of financial reports.

4.1.1 Standardize form and content of Annual Reports to be prepared by government agencies

4.1.2 Establish periodicity of financial reports.

4.1.3 Design form and content of the govemment's Annual Report to Congress.

5. The Control Environment

5.1 Eliminate duplication of internal and external audit functions.

5.1 .I Organize an inter-institutional committee between the Chamber of Accounts and Comptroller General to coordinate their functions.

5.1.2 Prepare amendments to the Chamber of Accounts Law and the draft Comptroller General law to reflect agreements reached by the inter-institutional committee.

5.1.3 Pass the Comptroller General law and prepare regulations to make i t effective.

5.2 Strengthen the capacity of Internal Audit Unit staff

5.2.1 Strengthen the capacity and quality o f the intemal audit staff by:

vi) Maintaining competent staff vii) Hiring qualified audit staff viii) Recruiting and hire systems audit and

investigations specialists ix) Terminating non-performing staff x) Rewarding and promoting strong performers xi) Implementing a coaching program for staff

X

X

x

X

X

X

X

x

X

X

5.3 Amend Chamber of Accounts legislation to separate judicial and audit functions

obtain buy-in from significant stakeholders 5.3.1 Prepare a proposed amendment to the legislation, and X

44




(2006-2010) (2011+)

5.3.2 Present amended legislation to Congress for review x and ratification

5.4 Prepare implementing regulations related to new Chamber of Accounts law

5.4.1 Assign responsibility for preparing the implementing regulations and identify key deliverables and milestone dates

5.4.2 Prepare and submit to Chamber o f Accounts and then to Congress implementing regulations for approval and ratification and begin preparing for implementation of regulations

5.4.3 Update Chamber of Accounts policies and procedures manuals and current practices 5.5 Strengthen and Define Chamber of Accounts Functions

5.5.1 Make strategic decisions on audit function by: i )

i i )

iii)

iv)

v)

vi)

Deciding whether to become a member of INTOSAI or OLACEFS. Review and update the current long and short-term strategic plans. Approve and implement the new organizational structure. Empower senior management and middle management to make decisions, based on the risk and nature of the issue Formally adopt ISA or INTOSAI standards, as well as the COS0 methodology. Maintain ongoing and open communications with the Comptroller General and Attorney General

These recommendations fall within the scope of the IDB financed Modernization of the SA1 project.

x

x

x

Same as above.

x

5.5.2 Improve and maintain Chamber of Accounts audit and investigations staff s k i l l s by:

i) Allocating resources for training ii) Formulate and or update an annual training and

evaluation program for CC staff iii) Identify minimum training requirements for staff iv) Modify future training programs based on the

results of evaluations 5.5.3 Strengthen the capacity and quality o f Chamber of Accounts audit personnel by:

Obtain budgetary resources to hire and maintain competent staff Recruit and hire qualified audit staff Recruit and hire systems audit and investigations specialists

i)

ii)

iii) Terminate non-performing staff

x

x

45



(2004 -2005) (2006-2010) (201 1+)

iv) Reward and promote strong performers v) Implement a coaching program for staff

5.6 Update and implement internationally recognized internal and external audit standards, methodologies, and guidance. 5.6.1 Implement by:

i )

i i )

Prepare annual audit plans and budgets, based on risk and legislative mandates Require each staff person to sign a document to affirm his independence and agreement with the code of ethics, on an annual basis

iii) Fully implement the audit standards and guides, for each audit

Develop and implement guides for audits of municipalities, decentralized and autonomous entities, and investigations Review and update the audit guides, as necessary Develop a reference database for each audit

5.6.2 Implement by: i)

ii) iii)

5.6.3 Review and update the audit guides, as necessary Develop a reference database for each audit

5.7 Establish by statute a Public accounts and Audit Committee in Congress

5.7.1 Establish by statute a congressional Public Accounts Committee (PAC) charged with examining the public accounts and the audit reports prepared by the Chamber of Accounts and the Comptroller General.

5.7.2 Select committee members based on the their meeting following minimum qualifications: Professional background in accounting, auditing, financialhevenue management, tax policy or related field that provides appropriate knowledge for interpreting govemment accounts and audits.

5.7.3 Require the committee to prepare a memo addressed to Congress, at least once a year i f not more often, indicating the results of i t s examinations and the actions needed by the Executive, Legislature and Judiciary to support the recommendations made by the auditors.

5.7.4 Once the capacity of the PAC has been established, the govemment should make the PAC’s memos a matter of public record.

5.8 Better define the functions and enhance the capacity and independence of the Attorney General’s Anti- corruption Office (DPC).

X

X

X

X

X

X

X

X

A report on PACs, prepared by the Commonwealth Parliamentary Assoc. in November 2002 provides a reference for best practices.

X 5.8.1 Consider passing the bill currently under review by Congress which would grant independent status to the DPC.

46




(2006-2010) (201 1+)

5.9 Increase collaboration between civil society and public sector

T h i s recommendation should be implemented in collaboration with local CSOs.

5.9.1 Provide CSOs with a mechanism to participate in the X x policy design process (see Annex 17 & 18 for suggested inputs)

47

MAP SECTION