Transparency and accountability in Government Financial Management

8/13/2019 Transparency and accountability in Government Financial Management

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ST/ESA/PAD/SER.E/14

Department of Economic and Social AffairsDivision for Public Economics and Public Administration

TRANSPARENCY AND ACCOUNTABILITYIN GOVERNMENT FINANCIAL

MANAGEMENT

United Nations New York, 1999


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TABLE OF CONTENTS

Notes .........................................................................................................................iiForeword ................................................................................................................. iii

Executive Summary ...................................................................................................v

Introduction ...............................................................................................................1

I. Case Study and On-Line Discussion Key Issues...............................................3A. Priority and resources for core public financial management needs..............3B. South-South collaboration: regional consultative group and on-line forum..3C. United Nations study and development of a model public financial

management control system.........................................................................4

II. Report of the Seminar: Issues and Proposals ......................................................6

A. Malfeasance in government .........................................................................6B. Compliance by Governments and donors with laws, rules and regulations...6C. Shortage of skilled manpower and need for longer-term training initiatives .6D. Role of the United Nations in assisting the Governments of developing countries7E. Cash management .......................................................................................8F. Parastatals ...................................................................................................9

III. Conducting On-line Official Meetings ..............................................................10A. Overview...................................................................................................10B. Internet service ..........................................................................................10

C. Participants................................................................................................11D. Results.......................................................................................................12

Annexes:

I. List of Participants............................................................................................14

II. Meeting schedule..............................................................................................15

III. Issues paper on weakened systems of public financial management:Solutions for enhancing transparency and accountability...................................16

Figure 1 - Procurement .....................................................................................21

IV. Country papers on weakened systems of public financial management:Solutions for enhancing transparency and accountability...................................25

1. Ethiopia.....................................................................................................252. Ghana........................................................................................................33


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3. Kenya........................................................................................................354. Swaziland..................................................................................................395. Uganda......................................................................................................40

iv


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NOTES

The designations employed and the presentation of material in this publication do not imply the expression of anyopinion whatsoever on the part of the Secretariat of the United Nations concerning the legal status of any country,territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries.

The designations "developed" and "developing" economies are intended for statistical convenience and do notnecessarily express a judgement about the stage reached by a particular country or area in the development process.

The term "country" as used in the text of this publication also refers, as appropriate, to territories or areas.

The term "dollar" normally refers to the United States dollar ($).

Comments and inquiries regarding this report may be directed to:

Mr. Guido Bertucci

Director, Division for Public Economics and Public AdministrationDepartment of Economic and Social AffairsUnited Nations, New York, N.Y. 10017United States of AmericaFax : 1-212-963-9681Telex: 42231 UN U1

ii


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FOREWORD

The Ad Hoc Expert Group Meeting on Effecting Transparency and Accountability in Government FinancialManagement was held via the Internet from 23 to 30 June 1997 with nine financial management specialists

from five countries in Africa and three United Nations Secretariat officials.

The Ad Hoc Expert Group Meeting was held as part of the Department of Economic and SocialAffairs ongoing programme to strengthen the financial management capacities of governments by improving government accounting and auditing systems and government financial controlsfor improved management of financial resources and greater accountability.

With the review of the public administration and development programme undertaken by theGeneral Assembly, the critical importance of strengthening accountability and transparency wasemphasized. General Assembly Resolution 50/225 (19 April 1996) recognized thatgovernments in all countries should make their procedures transparent in order to avoid andcombat all acts of corruption.

The Ad Hoc Expert Group Meeting on Effecting Transparency and Accountability inGovernment Financial Management is the first Expert Group Meeting to have been held on-linevia the Internet under the auspices of a General Assembly programme mandate. Because of thegrowing interest and demand for use of information technologies in developing countries, thefinal section of this report covers the technical side of the meeting so that the information andexperience of conducting an official meeting on-line can be used in other programme areas.

Guido BertucciDirector

Division for Public Economics and Public AdministrationDepartment of Economic and Social Affairs


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iii

EXECUTIVE SUMMARY

The first on-line meeting of experts underUnited Nations auspices was an Ad Hoc

Expert Group Meeting on EffectingTransparency and Accountability in

Government Financial Management. Themeeting was held in New York, Addis Ababa,Accra, Mbabane, Nairobi and Kampala from

23-30 June 1997. Out of nine Africanparticipants, eight were practitioners, mainly

at the Accountant-General and Auditor-General level, and one was an academic.

The focus of the Meeting was onweaknesses in systems of accountabilityand transparency that facilitate unethical behaviour, and the aim was to suggestsolutions to these weaknesses. This publication comprises a basic issues paper by the UN secretariat, eightcountry papers covering Ethiopia,Ghana, Kenya, Swaziland and Uganda,and the Report of the Experts.

Comments on the conduct of on-linemeetings are also included.

The Ad Hoc Expert Group Meetingattended by senior governmentaccounting and auditing officials andone academician in the financialmanagement field addressed the issuesof accountability and transparency inspecific financial management systems.One of the key observations made by the

experts was that thereis a critical need for governments andmultilateral and bilateral donors torecognize the importance of theaccounting and auditing systems and todedicate resources and priorities toestablishing sound, basic and timelysystems.

The experts who participated in the AdHoc Expert Group Meeting focused their attention on malfeasance in government,compliance issuesboth as regardsgovernment officials as well as donors with national laws, rules and regulations,the need for long-term traininginitiatives, and the United Nations role

in assisting governments of developingcountries. Specific recommendationswere also made in the practical areas of improving transparency andaccountability in cash management aswell as parastatal management anddivestiture programmes.


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v


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INTRODUCTION

The General Assembly, at its resumed

fiftieth session on Public Administrationand Development held in New York inApril 1996, emphasized the criticalimportance of strengtheningaccountability and transparency. ThisMeeting discussed strengthening thefinancial management capacities of Governments by improving governmentaccounting and auditing systems andgovernment financial controls for improved management of financialresources and greater accountability.

The Meeting addressed the issues of accountability and transparency inspecific financial management systems.It was attended by senior governmentaccounting and auditing officials (see listof participants as Annex I) and anacademician in the financialmanagement field.

One of the key observations made by theexperts was that there is a critical needfor Governments and multilateral and bilateral donors to recognize theimportance of the accounting andauditing systems and to dedicateresources and priorities to establishingsound, basic, timely systems.

The experts who participated in theMeeting focused their attention onmalfeasance in government, issues of compliance by government officials and

donors with national laws, rules andregulations, the need for long-termtraining initiatives, and the United Nations role in assisting Governmentsof developing countries. Specificrecommendations were also made in the practical areas of improvingtransparency and accountability in cash

management as well as parastatal

management and divestiture programmes.

The Ad Hoc Expert Group Meeting onEffecting Transparency andAccountability in Government FinancialManagement is the first expert groupmeeting to have been held on-line viathe Internet under the auspices of theGeneral Assembly programme mandate.

There is growing interest in, and demandfor, the use of information technologiesin developing countries. Accordingly,Part III of this report will cover thetechnical side of the meeting so that theinformation and experience of conducting an official meeting on-linemay be used in other programme areas.Terms of reference

In its resolution 50/225 on publicadministration and development(adopted on 19 April 1996), the General

Assembly reaffirmed its belief thatdemocracy and transparent andaccountable governance andadministration in all sectors of societyare indispensable foundations for therealization of social and people-centredsustainable development and further stated that "Governments in all countriesshould make their procedures transparentin order to avoid and combat all acts of corruption.

The Ad Hoc Expert Group Meeting wasaimed at obtaining the expert views of those involved in governmental financialmanagement in developing countries toadvise on system weaknesses. Systemweaknesses lend themselves toexploitation and create a conduciveenvironment in which corruption may


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Case Study and On-line Discussion Key Issues 2

occur more readily. The underlying premise was that an individual officialdoes not engage successfully in corrupt

activity without finding a weakness inone of the financial managementsystems through which to conduct it.Thus, the focus was not on ethical behaviour of public servants which had been the subject of scrutiny in other fora,nor on the judicial process whichsucceeds or fails in prosecuting violatorsof established law and regulation, but onthe weaknesses of systems whichfacilitate unethical behaviour despite an

adequate legal framework. To our knowledge this approach has not beenaddressed in international fora focusingon corruption, transparency andaccountability with respect to publicfinancial management systems. 1 Finally,the intention was to focus on practical problems and on suggested solutions in aSouth-South, peer-to-peer collaborativeframework. The Secretariat drafted anissues paper (See Annex III) aimed atinitiating discussion.

The terms of reference of the Expertswere as follows:(a) To examine subsystems of the overall publicfinancial management systems which arerelatively weak and are therefore susceptible toexploitation or use as a vehicle for corruptactivity; and

(b) To propose remedies and practical solutionsfor strengthening key systems in order to assistGovernments in restoring transparency andaccountability.

Opening

The Meeting was opened on 23 June1997 by the Moderator, Cheryl B.

1 This type of inquiry was the subject of path-breakingwork by Mr. Malcolm Sparrow of the John F.Kennedy School of Government, Harvard University,

License to Steal, Westview Press, 1996.

Larsen. She delivered a message fromthe Division Director, Guido Bertucci,welcoming participants to the historic

event and advising experts that their substantive deliberations would benefitall countries facing problems of corruption which underminetransparency and accountability. Mr.Bertucci noted that solutions experts proposed would lend practical support tothe efforts of Governments to addresscritical weaknesses in public financialmanagement systems.

The meeting schedule is given in Annex

II and follows the topics identified in theSecretariat's issues paper, which is inAnnex III. Annex IV contains specificcountry papers and the expertsresponses to the issues paper.

The first topic covered weak accountingsystems. It was noted that strengtheningaccounting systems was perceived to bea critical issue by Governments, civilsociety, or donors. The experts observedthat accountability was as important for the United Nations as the preservation of human resources or peacekeeping, as acountry's internal strength depends alsoon its financial and physical resources. If there were proper accountability for financial and physical resources, senior public officials would not be able to loot public properties and the treasury.Experts argued that officials know whenthere is inadequate recording of publicfinancial resources. Accountability islost when Governments fail to ensurethat financial basics such as recording,calculating balances, summarizingreceipts and expenditures and reportingto the people are not properlyundertaken.

The second key topic concerned aid


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management and the legal framework.There was intense and lengthy debateabout donor accountability and

mechanisms for ensuring that both donor officials and government officialscomply with national laws, rules andregulations.

Other topics which were addressed in theon-line sessions were mechanisms for improving cash management and proposals for strengthening the financialcontrol of state-owned enterprises andimproving their relationship withGovernments. The experience of a

number of Governments of developingcountries has been that loans andguarantees to parastatals have not been properly recorded and have become amajor area for financial favouritism anddeteriorating accountability.

The on-line sessions were supplemented by the Secretariat's issues paper whichcovered weaknesses in foreign exchangeallocations, accounts payable, payroll,and procurement. In addition, country papers (Annex IV) highlighted a rangeof specific national concerns including public debt and investment, advancesand loans, fixed assets, inventory, and pensions.

Attendance

The following Group members attendedthe on-line sessions: Mr. Ato Mammo

Gitto Foli (Head, Department of Inspection, Ministry of Finance,Ethiopia); Mr. Assefa Desta (DeputyAuditor- General, Ethiopia); Mr.Raphael K. Tufuor (Deputy Controller and Accountant-General, Ghana); Mr.Daniel Mathokoza Dlamini (Auditor General, Treasury Department,Swaziland); Mr. David Duma Dlamini(Accountant-General,TreasuryDepartment, Swaziland); Mr. David N.

Nzomo (Professor, University of Nairobi, Kenya); Mr. Henry KanyaiheBamutura (Principal Accountant,Treasury, Uganda); and Mr. SinghGurubachan (Director of Audit of Central Government Ministries, Officeof the Auditor General, Uganda).

Ms. Cheryl B. Larsen (Moderator), Mr.Peter Heijkoop (Rapporteur), and Mr.Robert Rigolosi (Secretariat) of theDivision for Public Economics andPublic Administration providedsecretariat services. It should also benoted that Mr. Osei Tutu Prempeh(Auditor-General, Ghana) was unable toattend the on-line sessions, butcontributed one of the country papers(Annex IV).

I. CASE STUDY AND ON-LINE DISCUSSION KEY ISSUES

A. Priority and resources for corepublic financial management needs

Throughout the Meeting of Experts, participants observed that a significantcontributing factor to the generalsystemic weakness in public financial

management derives from the relativelylow importance attached to financialmanagement. It was noted that neither Governments, citizens and donorsemphasize the critical importance of strong financial management systems.


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Mr. David Nzomo (Kenya), reflectingafter the first three days of discussion,opened session four with the followingstatements: "Before focusing on the draftreport, three issues bother me and I

would like to hear what others think: (a)The course of action that a nationalGovernment should take when aidagencies violate laws of the land; (b)Accountability of legislators to their constituencies; this in my view has beena major problem where we see thelegislators mainly during the election period when they are campaigning;thereafter, they disappear to the city untilthe next elections when they are either

rejected or re-elected; this situation leadsme to the next question; and (c) Voter apathy. What actually would be thenature of education (enlightenment) thatwould eradicate or reduce voter ignorance and apathy?"

One of the Ugandan experts, Mr. HenryK. Bamutura, made the observation thatthe United Nations role is very clear.But, until recently, it has been focusedon human resources preservation or

peacekeeping only. The United Nationshas forgotten or failed to understand thatthere are other resources of a publicentity, financial and physical, that give acountry internal strength to fight anyexternal threat. If there were proper accountability of financial and physicalresources in countries, people would not be fighting for survival or power to loot public properties or finance. But because people know there is no recording of

public financial resources in governmentand therefore they will not be followed,they fight for the opportunity to managecountries and loot. After looting andgovernment collapse, they [civil servicemanagers] run to other countries to enjoytheir loot safely. It is after this that theUnited Nations comes in and protects

only the human resources from danger.The main solution is to ensure that people elect Governments which will besubjected to accountability of financialresources. Governments must allow, and

the people must demand, financialrecording, calculating of balances,summarizing receipts and expendituresand reporting to the people.

A great deal of thought and discussionwent into proposals to improve therecognition that strengthening publicfinancial management is a keygovernance issue. It was recognized thattraining initiatives are often too short-term and, in some cases, focus on senior

management to the exclusion of the veryessential operational, hands-on trainingthat is required at all levels of government in auditing and accounting.

B. South-South collaboration:regional consultative group and on-line forum

It was brought to the attention of theExpert Group that a donor consultativegroup had been meeting quarterly since

1989 to focus on the financialmanagement system needs of countriesin Latin America and the Caribbean.From its inception, it had focused onaccountability and anti-corruption beforethose issues were considered"acceptable" to discuss. It has hadremarkable success in coordinating theimpact of donor assistance in order toachieve coherent and sustainableimprovements in national financial

management systems. In recent years,emphasis has extended to thesubregional and municipal levels. Withthe backing of the donor consultativegroup, multilateral donors have beenable to continue to work in manycountries as they have undergonesignificant political change. This has


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ensured that the importance of strongfinancial management to theGovernment itself, to investors and tothe public is well understood and issupported by the necessary political will.

The Ad Hoc Expert Group requested thatthe United Nations support Governmentsin Africa in initiating a similar donor consultative group to focus on thefinancial management requirements andthe need for good accountability andtransparency in Africa. Considerationshould be given to includingrepresentatives of the developingcountries themselves in that group.

The Ad Hoc Expert Group alsoencouraged the United Nations to take a prominent role in providing informationto countries through its electronicclearing house and its publications programme. There was a call for development of a "model" of best practices in public financial managementto be used for reform programmes andnational training initiatives. It was alsorecommended that the United Nationscollect and document effective training programmes that could be replicated inother countries. Promulgation of modelanti-corruption legislation, national policy statements on ethical conduct for public officials and summaries of thekey constitutional provisions andfinancial management laws andregulations for each country wererecognized as an invaluable aid to bothhost countries and donors engaged innegotiations involving disbursementsand accounting for external assistance.

In response to the post-Meeting survey,experts who had been involved in thefirst official Internet meeting to have been held in accordance with a GeneralAssembly mandate strongly supportedthe idea that the United Nations move to

create an ongoing on-line discussionforum in which professional accountantsand auditors could participate on aquarterly or biannual basis to discusscommon problems in public financial

management and accountability. An on-line forum dedicated to substantivefinancial management issues in whichregional professionals could participatewould be a low-cost, effectivemechanism for supporting South-Southdialogue and cooperation.

C. United Nations study anddevelopment of a model publicfinancial management control system

In the view of the experts, as notedabove, too little importance is given toaccountability and transparency. Thus, itwas not surprising that a complementaryand dominant theme expressed at theMeeting was that the basic accountingsystems themselves are weak. There waslittle discussion about integrating andcomputerizing financial managementsystems despite Ghana's recent strongmove in that direction (see in AnnexIVA, paper IIB by Mr. Raphael K.Tufuor). The dominant theme was theneed for attention to basics. The pointwas eloquently made that Governmentsdo not really have a clear andcomprehensive basic financial controlsystem. In the next chapter, it will beseen that parastatals are a unique subsetof this concern in that loans andguarantees from Governments to themare often inadequately documented.

One of the experts from Uganda, Mr.Henry K. Bamutura, submitted a detailed paper on public financial managementsystems (Annex IV, paper VB). In it, hediscussed the characteristics of suchsystems, detailed the public financialresources that need to be managed andcontrolled, identified weaknesses in


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national public financial managementsystems, and highlighted the mostserious problems and potential solutions.

It was observed that there can be notransparency without achievingaccountability first. There can be noaccountability without maintaining books of accounts in the centres of government responsibility. There can beno effective accounting process unlessGovernments and donors prioritize it and provide the needed resources. It should be known therefore that financialresources may continue to be planned for (budgeted), and laws may be passed byGovernments, but this will not

necessarily produce effective results(accountability and transparency) if thecontrol process (accounting) is defectiveor malfunctioning.

It was argued that Governments shoulddocument the public financial controlsystem, put in place a system to reviewits elements and components on anannual basis (especially accounting processes), realign them and make themcomplete to match the environmentalchanges.

During its on-line sessions, the Ad HocGroup discussed the need to develop andshare a model of an effective financialmanagement control system. It wasagreed that the United Nations was wellsuited to coordinate a regional studywhich could then be used as a model or yardstick by developing countries bothto assess the strength of their own

systems and to propose appropriatesolutions for the weaknesses identified.While it was noted that every publicentity or country has a financialmanagement system to control itsfinancial resources, entities andGovernments differ in the individualelements and ingredients as well as

processes followed to ensure thatfinancial resources are used in the mostefficient and effective way.

A number of experts expressed interestin participating in a regional study toidentify and analyse individual elementsand ingredients of a "complete" and"standard" public financial managementsystem (PFMS). In studying anddescribing a model PFMS system,attention would be given to threeaspects: budgeting, accounting, andestablishing control structures for thefull range of financial resources under government control, viz.: Tax and non-tax internal revenuescollected by or due to the Government; Donations (cash and other forms of assets) received in government books; Grants (cash and other forms of assets) received in government books;


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Loans received by the Government(internal and external); All other moneys raised or receivedfor, on behalf of, or in trust for theGovernment; Cash/bank balances in theconsolidated fund and with accountingofficers and receivers of revenues; Unsettled advances to individual

persons/companies; Stores, equipment, motor vehicles, plants, buildings and surveyed land, etc.; Government investments in public and private enterprise (equity and debt); and

Any resource item the Governmentcan easily convert intomoney/convertible asset


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II. REPORT OF THE SEMINAR:ISSUES AND PROPOSALS

A.

Malfeasance in governmentIt is not useful to have well designed andwritten laws and regulations that are notfollowed. In many countries, the feelingis that too little is done once malfeasanceis found. This sends the wrong messagethat it really does not matter even if oneis caught for wrongdoing. Sufficient punishment should be meted out so as todiscourage others from doing the samething. It was noted that steps are neededto strengthen government resolve to prosecute and punish offenders, whichultimately requires that the public bemade aware of its entitlement to soundfinancial accountability and demand it.

The Meeting recommended that nationalentities, either government or non-government organizations, beencouraged to formulate orientation programmes for legislators to enhancetransparency and accountability. TheUnited Nations can support this effort bycollating information on successful programmes and making it widelyavailable through its clearing-houseinformation service or its publications programme. Wherever possible, itshould also work with national entities toassist in obtaining technical assistanceand/or funding for such programmes.

The Meeting recommended that the

United Nations assist Member Stateswith :(a) Promulgation of comprehensive anti-corruption legislation; and

(b) Compilation of national policy statementson ethical conduct in order to develop a genericcivil service code of conduct setting standards of leadership and professional conduct for public

officials.

B. Compliance by Governments anddonors with laws, rules andregulations

Concern was expressed regarding thelevel of compliance with financialmanagement rules and regulations.Donor agencies need to respect thefinancial rules and regulations of national Governments. This meansensuring that funds, or meaningfulaccounting data, pass throughgovernment books of accounts on atimely basis and therefore can, andshould, be audited by governmentauditors.

There is a clear need for transparencyand accountability issues to berecognized at the outset of all hostcountry/donor negotiations, and properlyincorporated into any agreements

subsequently ratified. Statements of government policy defining thisrequirement need to be unambiguous,widely promulgated and officiallysupported in any dialogue with donor agencies.

Neither government officials nor projectmanagers should receive money that isnot documented in the public statementsof revenue and expenditure of thecountry. Ongoing discussions are needed between donors and recipientGovernments to find a workable solutionto the donors need to manage funds andto account to their own constituents, particularly where donors are concernedabout the level and quality of financialmanagement and accountability in arecipient country, while ensuring that


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Report of the Seminar: Issues and Proposals 7

their contributions are reflected in thecountrys national accounts.

Donor officials need to obtain formalreceipts and to account to both the donor agency and the national Governmentconcerned for all money advanced toevery project. United Nations agenciesand other donors must ensure thatnational auditors are not denied access to project documents, including procurement documents, by any agencyor official claiming diplomaticimmunity.

The Meeting called upon the United Nations to play an active role insummarizing the essence of constitutional provisions and financialmanagement laws, as well as nationalGovernments' policies and procedures,to assist both host countries and donorsin negotiations involving disbursementand accounting for external assistance.This review should also identify for amendment any provisions that mayfoster corruptive behaviour.

C. Shortage of skilled manpower and

need for longer-term traininginitiatives

Participants commented on the shortageof skilled manpower in governmentagencies of developing countries andstressed the need for trained accountantsand internal auditors as a major steptowards the professionalization of thefinancial management systems of their countries. This will lead to Governments becoming not only more effective inmanaging scarce resources, but alsomore transparent.

Effectiveness will be reinforced by the presence of adequate numbers of professionally qualified accountantswithin Governments' financialmanagement and control systems. The

size of the task is captured by the needsassessment for Kenya. It is estimatedthat over 7,000 qualified accountants areneeded by its Government; the Instituteof Certified Accountants of Kenya

currently registers 1,720 members in both private and public practice.Government training initiatives areunlikely to meet the need without specialtraining programmes.

The Meeting suggested the followingactivities as a complement to direct professional training:(a) Attachments to those national Treasuriesthat have effectively carried out the accounting process, of six-month duration and on two

occasions;(b) Two-week regional workshops onhow to account for public financialresources, with one workshop at the beginning of every financial year; and(c) Workshops on public accountability issuesand not only on aid accountability, as mostdonors seem to prefer.

Transparency will be enhanced, in part,as a result of the professional ethics thatare infused into training programmes for qualified accountants. Early guidance oncodes of professional conduct will deter government officials so trained fromengaging in purposeful malpractice.

Since government accountants andinternal auditors rely on governmentsalary scales, many trained staff leavefor the private sector for better pay.Attracting already qualified professionals to the office is another

issue. Partial solutions lie in training onthe job, attachments, and workshops toenhance effectiveness so that the outputsof this cadre can be useful tostakeholders (ministers, financialmanagers, Members of Parliament,donors and lenders). People will tend toalways leave for the market-place


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This would ensure that information andadvice can be readily and economicallyaccessed and that studies on detailedrevenue budgeting as well asmethodology for detailing all

government financial resources can beundertaken. This can be distributed inhard copy as well as through theelectronic medium.

The Meeting requested the United Nations to convene a regional meeting todiscuss the importance of transparencyand accountability in national financialmanagement. It noted that since 1989donors have collaborated to good effectin a working group on the importance of

integrated financial management andaccountability in Latin American, andrequested the United Nations to explorethe feasibility of convening a similarlyfocused meeting on Africa involving both donors and recipient countries. Cash management

The main operational issues with cashmanagement in government start withthe making and maintenance of accurate

records of cash receipts and cash payments. Reducing the extent to whichgovernment itself handles cash is seen asa solution in some countries; sub-contracting to commercial banks as payment centres, and the use of creditand debit cards is another. Bank chequesand credit cards are methods of reducingrisks in cash management. Thesemethods are in use in Kenya, but only byfew in comparison to the overall

population. All Kenyan taxpayers onformal payrolls remit part of the taxesthrough a direct check-off and paymentsystem called PAYE (Pay As You Earn).

The responsibilities of the central bank and Treasury have to be clearly agreedupon and both parties need to becommitted to this agreement within the

context of all applicable laws. This is toensure that monetary issues whichusually befit the central bank can becombined with fiscal issues which arethe responsibility of Treasury. The

determination of public-sector borrowing requirements, and itsassociated interest cost, is crucial for government in any cash managementsystem.

The problem of cash management beginswith the preparation of the national budget. Normally, the degree of compliance with the national budget byline agency budget managers affectsoverall cash management. A cash

management system for spendingagencies that considers cash forecasts,revenue mobilization, matching of receipts and payments and investment of idle funds is important. Without it thetraditional treasury payment function,can lead to government agenciesspending on the basis of budget alone,leaving the Treasury to finance revenueshortfalls.

Other issues relevant to this discussionare the commitment of agenciescollecting money on behalf of the centralGovernment and the competence, or otherwise, of the commercial bankswhich have been selected to receivethese funds and transfer them to theconsolidated government fund. In caseswhere these banks are not paid any fees because the law prohibits commercial banks from charging for their services if they manage accounts for the centralGovernment, delays in the transfer of these funds to the central bank can arisewith correspondingly less control beingestablished over cash management.

It was noted that in Uganda all taxcollection by the Uganda RevenueAuthority, a semi-autonomous body, is


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very successfully performed throughcommercial banks and cash losses to theGovernment have been greatly reduced.The contract with these banks includes payment of a commission and

reimbursement of a premium for lossinsurance.

However, the Meeting noted that thesesub-agency agreements in no waymitigate the Governments responsibilityto account for and manage all Stateassets, including cash. The meetingnoted that basic record-keeping andeffective management of cash receiptingwas at the centre of any effort toimprove cash management.

The Meeting recommended that, where permitted by law, any choice of commercial banks should be by tender.This would introduce the many aspectsof contract letting and management.Some of the issues to be consideredduring the selection procedures shouldinclude the bankruptcy risk of commercial banks, fund-transfer speedand frequency, and the timeliness of presentation of bank statements. On thequestion of fees for these services, it wasnoted that a no-cost service may result infund-transfer delays, leaving theGovernment with no way to measure theopportunity cost of using the commercial banks.

Recommendations for improvedtransparency and accountability in cashmanagement included the following:

(a) Proper regulations on cashmanagement should be issued andenforced;

(b) Control over printing and use of official cash receipts should bemaintained;(c) Only senior and specified staff should beallowed to collect and handle cash, including the

regular banking of funds;

(d) Proper internal control over cashwith regular audits is necessary,including unannounced audits. Staff need to be trained on how to audit cash

by ensuring that all government auditmanuals contain a standard questionnaireon cash reconciliations. Also audit personnel should be regularly rotated;and(e) Those who misuse cash should be dealt withseriously, including prosecution in a court of law.

ParastatalsThe recording of loans and facilities to

capitalize parastatals and the capacity of Governments to monitor their operating performance were the two main issues toarise in this area of public financialmanagement.

Loans and other facilities were not seento be reliably recorded in some cases,leading to an undervaluation of the parastatal at time of divestiture or overstatement of operating performance.Clearly, in those countries where

parastatals need to continue to operate inshallow domestic manufacturingmarkets, there is a need to value allcapital contributions by the State toensure that operational results arerealistic. Secondly, when preparing todivest these assets, as many countries arecurrently planning, it is essential that areliable balance-sheet valuation be performed to ensure that sale valuesmirror their true cost. It was considered

that the donor community would readilyendorse major programmes withinTreasuries to re-evaluate the capitalizedvalue of parastatals in order to supportreliable valuations and performanceanalysis.

With regard to measuring operational performance, the quality of parastatal


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accounting as well as Governmentscapacity to analyse their financialstatements were issues raised. It wassuggested that improving the basicquality of parastatals accounts would

significantly assist Governments inmonitoring operational progress.Similarly, better analysis of theseaccounts would yield better decisionsregarding the future of these assets. In both cases, the need for properly trainedstaff was again highlighted as immediate

and obvious.

The Meeting recommended that training programmes in financial managementand accounting be launched to assistcountries with parastatal managementand divestiture programmes. Donorscould be approached to assist with this,given the expected impact on overalltransparency and accountability, as wellas the materiality of the funds involvedin many cases.


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III. CONDUCTING ON-LINE OFFICIAL MEETINGS

A. Overview

A decision to hold the mandated Ad HocExpert Group Meeting on-line was madein October 1996. The principal impetus,at least initially, was financial inasmuchas the on-line medium promised, anddelivered, significant cost-savingsrelative to the face-to-face meetings thathave traditionally been held. For severalmonths, the Public Finance and BusinessDevelopment Branch reviewed the possibility of holding an interregional

meeting with participants from a rangeof geographical regions. Given the practicalities associated with workingacross time zones, a decision was madeto focus on only one region.

Africa was selected because it had previously been sidelined as a regionwhere Internet technologies cannot beused now but will only be applicable "inthe future" on a time horizon which isoften assessed at ten years hence. The

Department wanted to demonstrate thatthe "future is now" for Africa andInternet technologies.

A decision was taken to hold as simple ameeting as possible. Streaming audio,though technically feasible, was ruledout for the first on-line meeting. This proved to be a productive decision notonly because the Department was tryingto develop a basic (no-frills) workingmodel, but also because, as experiencelater proved, it was possible to leverageeach segment of time, meaning that arelatively large number of participantscould "communicate" at one timewithout "interrupting" one another. Itwas therefore possible to use a limitedamount of time more intensively and productively. For example, the

moderator would ask a question to whichall were invited to respond, and asuggested time frame was given for those wishing to make an intervention onthe designated issue. Cross-talk andfollow-up, both during the meeting and by experts seeking to return to a previous session's issue, were permittedand did not interfere with the overallflow of communication or the resolutionof issues in preparing the draft report.

While at least one expert commented

that he would have liked to have beenable to "hear" the remarks of the other participants, any decision to incorporateaudio, even if technically feasible,should be made carefully. It is by nomeans clear that the quality of theinterventions and comments would haveimproved if the facility for speaking andlistening had been added to the forum.The typed comments that weresubmitted were generally pithy andsubstantive. There was little verbosityinasmuch as participants were intent onconveying the essence of their points of view. Another significant benefit of theelectronic meeting is that typedcontributions by individual experts areautomatically and fully documented.Meeting reports providing full coverageof each day's session could be spell-checked in word processing packagesand printed within an hour of themeetings conclusion.

Video conferencing was also considered, but the idea was dropped as participantsfrom the region would have had to fly toa regional centre where high-endvideoconferencing hardware wasavailable. This would have significantlyincreased the perception that on-line


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Conducting On-Line Official Meetings 11

communication is an elite tool rather than one which can work for any civic or governmental group in virtually anycountry. With the advances in digitalsignal processing for wireless data

radios, the way will increasingly beopened for local Internet access inremote regions and become a low-costcommunication tool accessible to the poor and rural peoples of the world.

B. Internet service

The first requirement for an on-linemeeting with government officials inAfrica was to find a service provider andsoftware applications to run thediscussion forum and bulletin board. Awide range of alternatives wasconsidered. An official request for assistance and support to the United Nations Electronic Services Divisionwas turned down as too low in the thencurrent priorities. The Department thenapproached a major private sector entitywith Internet service nodes throughoutthe developing world including Africa.The approach to this firm ran agroundfor internal reasons. The Departmentfinally settled on a direct approach tolocal Internet Service Providers (ISPs) inAfrica. Some 65 ISPs were identified inAfrica and the Department contactedthem all regarding their interest insupporting the conference. Initially thequestion of who would provide Internetservice seemed linked to the question of who would provide the discussion roomand bulletin board software. Ultimately,the United Nations Electronic ServicesDivision/Information TechnologyServices Division agreed to provide andsupport the needed softwareapplications, while the Internet servicewas provided locally by the privatesector or telecommunication parastatalsin African countries.

Several months of communicationsensued between the Department andsuitable ISPs, and the Department ran aseries of exercises, including loggingresponse times, requiring ISPs to post

information to a form on thedepartmental Web site and conductinglive tests of the chat room. Theresponses from the selected African ISPsindicated that they supported a 64 KBdata transfer speed and higher personalcomputer speeds (PCS) of (128 - 2 Meg)from their internal LANs. All supported both Netscape 2.x and MicrosoftExplorer 3.x, and PCS were all 133MHz/8Mb RAM or better. The language

for the meeting was English. The timedifference issue African countries wereon average six to eight hours ahead of New York time was resolved byensuring that the Secretariat participantswould commence at 4:00 a.m. and logon from their homes.

The moderator used two Internet service providers, with the second one as a backup in case of inability to connectthrough the primary local service

provider. Two of the Secretariat staff logged on via America Online which provided the Secretariat staff with thecapacity for "instant message" while theMeeting was taking place. The instantmessage facility proved helpful in providing the Secretariat with a means tosignal who would respond to thecomments of a particular participantwhen more issues than one were beingraised at the same time. It also provided

a valuable method of conferencing between Secretariat staff on questions of timing and pace.

The question of structure is an importantone to consider in this context. Unlike a"normal" face-to-face meeting, participants have few external cues onstructure. Although an agenda was sent


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to all participants, experts occasionallygot confused because they did not knowwhere the group was in relation to theagenda. Once, an expert noted that hecould "see the answers" but wanted to

know "what the question" was. Themoderator developed a process of regularly informing all participantswhere the group was and where it washeading. This took the form of a mini-agenda. The moderator would advise thegroup that a particular question, e.g.suggestions to improve governmentmanagement and control of loans to parastatals, was for a designated periodsuch as twenty minutes. In on-line

meetings, moderators should not expectthe meeting to flow seamlessly on itsown but rather should be prepared tointervene frequently and support theflow of discussion.

The moderator maintained an open pre-written word-processed document whichcontained key paragraphs such as theday's discussion questions, instructionsto participants, and final remarksindicating the next days topic. Using the

"cut and paste" technique, many shortinterventions could be sent to participants by quickly typing in thecomments as they took place. This proved a valuable meeting managementtool and on-line time saver. Windows 95was used which allowed three screens(the on-line meeting, the instantmessage, and the word processeddocument) to be open simultaneously.

C. ParticipantsParticipants were drawn principally fromthe Treasuries and auditing departmentsin the selected African countries,supplemented by an academician fromone country. Although the Departmentasked for recommendations from theGovernments, the individuals served in

their own capacity as experts rather thanas representatives of Governments or universities.

The question of participation was lessstraightforward than in a face-to-facemeeting. Participation in a face-to-facemeeting has important financial benefitsassociated with travel and dailysubsistence allowances. Participants inthe first United Nations meeting to beheld on-line were not rewardedfinancially but were given a framedcertificate at the end.

There was some hesitation on the part of prospective participants to be involvedin the on-line meeting. At least onelinked his reluctance to the prospect thaton-line meetings would reduce travelopportunities. The Secretariat pointedout that the savings, which in thisinstance accrued to the United Nations,would, in future, accrue to developingcountries. Familiarity and facility withthe Internet as a working tool will permitdeveloping countries to access expertadvice on-line at very low cost. TheDepartment is moving to set up an on-line clearing house which ultimatelyshould have an interactive componentwhere departmental advisers andexternal experts can be made available toGovernments and projects in anextremely time-efficient, low costmanner. The inclusion on an on-linediagnostic facility which goes beyondthe discussion phase to a structured problem- solving mode will offer developing countries further efficienciesand savings.

Despite the initial hesitation of some,those who participated in the on-linesessions gave very enthusiasticfeedback. A survey was conducted andthe participants wholeheartedlyembraced the idea of participating in


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regular on-line forums and indicated thatthey would fully recommend this type of activity to their colleagues. During themeeting itself, participants described theon-line communication as "exciting",

"nourishing" and "fabulous".Professional friendships were developedon-line and participants followed upafter the meeting by obtaining their owne-mail accounts and by maintainingcontact both with the United Nations andthe other experts.

Nevertheless, the question of paymentremains and deserves further consideration. One view is that expertscontribute their time and expertise for

the good of others in developingcountries and should be compensated insome appropriate way. As the medium isnew, the policies surrounding it will alsoneed to be updated. It may beappropriate to offer experts fees to prepare country papers. Those participating in the Ad Hoc Meetingwere asked to submit papers of three tofive pages in which they responded tothe issues raised in the Secretariats

paper or commented on aspects of their national financial management systemswhich required attention. The papersreceived were substantial (see AnnexIV).

D. Results

The savings resulting from the holdingof an official expert group meeting on-line instead of in the traditional face-to-face format came to more than 85% of

costs. The actual cost was less thanUS$8,000 for the six-day meeting.Additional savings might have beenachieved by using existing United Nations sites and facilities such as thoseat United Nations DevelopmentProgramme offices in the respectivecountries. The savings that were

achieved are indicative of the costs a private-sector organizer might face andrelate principally to travel and dailysubsistence allowances as there was noair or rail travel, either to set the meeting

up or for participants to attend. The costswere mainly those of communicationcharges, leasing of equipment andtechnical support for participants.Depending on policy considerations,additional savings may be possible oncommunications charges and technicalsupport but an increase in overall costmay be incurred for payment of fees toexperts for their contributed papers.

The savings are real to the extent that an

on-line meeting replaces a mandated or planned meeting. The format has somedistinct advantages over videoconferences which rely on relativelyexpensive hardware. Videoconferencesof one-hour meetings, for example, tothe extent that the speaker would nothave travelled to the selected site to givethe speech, represent an added cost, nota true cost saving.

There were also considerable savings intime and personnel, such as theavoidance of travel time and stress andon secretarial assistance to document thecontributions of the participants. Allinterventions were documentedelectronically, automatically and precisely as part of the process of participating in the meeting.

Participants noted in their feedback surveys that a key benefit of the on-line

format was that they were able to attendthe meeting, make their substantivecontribution, and still take care of their other work and family obligations.

The key lesson of the experience is thatthe new Internet technologies can now be used in almost every country in theworld to discuss substantive issues and


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negotiate documents efficiently andeffectively. The technology is easy touse and requires no formal training.

Nevertheless, the substantive departmentshould ensure that technical support isavailable during the meeting; for example, to post information to theconference site as it is received, todecode e-mail attachments, and providesupport to departmental staff.

Before these technologies can be used ona broad scale, it will be useful tostrengthen a number of areas. First, thereis a large and growing demand for applications of interactivecommunications. In the first few monthsafter the on-line meeting was held, someten requests for information andassistance were received in the PublicFinance and Business DevelopmentBranch from government entities,multilateral institutions and non-governmental organizations. Technicalsupport resources may ultimately need to be increased, particularly if there is a policy decision to replace some official

meetings, preparatory meetings,evaluation and tripartite review meetingswith on-line meetings where feasible.Mirror sites for official United Nationsmeetings should be established. Better

software applications such as Windows95 (or better) and appropriate policies onthe use of United Nations or UNDP Websites and facilities, and flexitimearrangements for those involved inservicing meetings will gradually become necessary. The policy whichdiscourages the use of Web links onUnited Nations sites may need to bereviewed in order to direct participantsfrom developing countries to the truly

useful and valuable information whichcan be accessed via the Internet. Finally,training of United Nations staff, e.g. inhow to become effective in on-linemeetings, will contribute to effective useof the tools that will enable theOrganization to offer cutting-edgeservices and information on-line and toachieve the potential savings andefficiencies.


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Meeting Schedule 15

.

Annex II

MEETING SCHEDULE

23 June 1997

On-line group session: 4:00 - 6:00 a.m.A third hour is not a group on-linesession and may be taken before or after the group session depending onindividual schedules.

4:00 a.m.: Welcome participants andfamiliarize them with the bulletin-boardsite (BBS), discussion room andconference Web page. Request participants to post their country paper

and comments on the issues paper.5:00 a.m.: Discussion about weaknessesin the accounting system (recording,reporting, timeliness). Possible solutions.

Third hour: Request participants to go tothe conference Web page/BBS and readother experts' papers either on-line or bydownloading and printing.24 June 1997

On-line group session: 4:00 - 6:00 a.m.

4:00 a.m.: Aid management and legalframework. Do donors contravenenational law by making direct transfersinto commercial banking accounts or simply undermine desirable financialmanagement practices? Possiblesolutions.

5:00 a.m.: Subject to be determined based on experts discussion, interest or issues raised in papers.

Third hour: Experts invited to go to the bulletin board where issues will beshown under topic headings such as budget preparation, Ghana public

The times shown are New Yorks. For Ghana addfour hours; for Swaziland add six hours; for Ethiopia,Kenya, Tanzania and Uganda add seven hours

financial management reform programme, revenue collection,computerization experience, training,cash management, advances and loans to private sector/state-owned enterprises.Some questions for specific participantswill have already been posted and morecan be posted. Experts may comment onany topic or issue which interests themor post questions/observations for individual participants.25 June 1997


4:00 a.m. System weaknesses and practices between Government and parastatals which lend themselves tocorruption. Possible soluttions.

5:00 a.m.: Issues considered by criticalexperts based on discussion, experience,and/or experts papers.

Third hour: Experts may post issues andrecommendations for inclusion in draftreport on the bulletin-board.26 June 1997

Opportunity for participants to explorethe Internet using unstructured Web"surfing" on topics selected by theexperts or via links provided by theSecretariat in the areas of on-linetraining, international anti-corruptionefforts (outstanding Web sites),international government financialmanagement resources includingconferences, experiences, software, best

practices, downloadable files, auditexchange library which contains audit programmes, audit reports, manuals,guides, programme reviews, etc.27 June 1997

On-line group session: 4:00 - 6:00 a.m.Cash management discussion. Downloadand print draft report.


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Meeting Schedule 4

30 June 1997


Final on-line meeting to discuss draftreport.

Third hour: Fill in survey concerningthe Ad Hoc Expert Group Meeting andon-line experience. Post final commentsand answers to fellow expertsconcerning bulletin-board questions.

Annex IIIISSUES PAPER ON WEAKENED

SYSTEMS OF PUBLIC FINANCIALMANAGEMENT: SOLUTIONS FOR

ENHANCING TRANSPARENCYAND ACCOUNTABILITY

Introduction

The level of transparency andaccountability a society requires of its public financial management system isusually defined by the constitutionand/or the legislation governingmanagement of public monies.

Typically, the audit and public financeacts and their associated regulations willset out the frequency, timing, level of detail and responsibility for statutoryreporting. More detailed statements of management reporting responsibilitiesand systems monitoring standards mayalso be documented in circulars andguidelines issued by heads of responsible departments. Together, this body of documentation establishes ananalysis and reporting framework whose

purpose is to assist government todetermine whether the level of transparency and accountability legallyrequired is being realized in practice.

Formal third party review, in effect a"second opinion" on the levels of transparency and accountability beingachieved, is provided by ombudsmen,auditors-general and parliamentary public accounts committees with theauthority to further evaluate andcomment on the efficacy and outcomesof the systems of public financialmanagement. Informally, non-government entities or the media canalso analyse and comment on theworkings of these systems, and bringinto wider fora any issues or individualtransactions of public interest.

However, the reporting framework andofficial and unofficial review bodies rely

on the GOOD functioning of thefinancial management systems for basicinformation. Questions such as whether the legislative basis is adequate andwhether the financial managementsystems provide the required informationin an accurate and timely manner should be considered. Where financialmanagement systems do not function properly, there are severe implicationsfor Governments and any third-party

observers.Most notable, and the topic of this AdHoc Expert Group Meeting, is theimplication that malfunctioning financialmanagement systems not only frustrateGovernments' efforts to manage theresources at their disposal effectively, but also offer opportunists a conducive

One view of weakenedsystems of public financialmanagement is that they can be exploited, becoming avehicle for corrupt activity.The purpose of this meeting isto identify the elements of systems that can bemanipulated and to proposeremedies to strengthen them.The Grou s ex erience will


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Issues Paper on Weakened Systems of Public Financial Management 17

environment, or "mask", behind whichcorruptive practice can evolveundetected. This secondary effect mayhave profoundly negative outcomes for government. It is necessary then to

consider how financial managers canassess the level of exposure within their own systems and what decisive remedialaction could be taken at the systemslevel to restore confidence in publicfinancial management and reassure civilsociety that appropriate levels of transparency and accountability are being achieved.

The de facto loss of transparency andaccountability as systems weaken

Any system of public financialmanagement will tend to yield less thanthe legislated levels of transparency andaccountability when its responsivenessweakens. Non-compliance with, or deferral of, reporting under the standardsset for the system have the practicaleffect of delaying or limiting disclosure.Reservations concerning the timelinessor the basic completeness, accuracy andvalidity of the information presented will

lead to the perception that overall levelsof transparency and accountability arediminished.

Where deferral or non-reporting involvessuch key references as audit assessmentsof internal control measures,management statements of theappropriateness and proper functioningof systems and reports required bystatute, the process which seeks tomonitor whether the transparency andaccountability requirements are beingsatisfied will at best yield inconclusiveresults. In such circumstances,Governments would need to remove theuncertainty regarding systemsfunctionality in order to satisfythemselves and civil society thatmandated levels of transparency and

accountability are being met. Thenecessary impetus can only come fromclear policy and an institutionalcommitment to this objective, which is amajor task in itself. The "value system"

established by top government officialsincluding a widely communicated "codeof ethics" and the certain knowledge thatviolations will be promptly followed upand condemned is a key determinant of whether inappropriate activities will betolerated.

It should be noted that whereadministrative and judicial systemsresponses to illicit or illegal behaviour are consistently weak, this obvious

incapacity may represent a significantcontributing factor in the long term cycleduring which the requirements of transparency and accountability weaken.Ultimately, corrupt practices may thriveundetected by the systems of financialmanagement, and further, go unpunishedif detected.

Meeting outcomes

This meeting seeks to explore, and

propose practical remedies to, the process whereby weakened systems of public financial management signal their potential to serve as a vehicle for corruptactivity. We acknowledge that theethical and motivational dimensions thatmay exist as the backdrop to a decline instandards of public financialmanagement are vitally important issuesin the study of fraud and corruption ingovernment. Nevertheless, we have

observed that many meetings, such asRESPONDACON teleconferences and previous United Nations meetings 2 haveexamined this aspect of the problem.Moreover, considerable work is being

2 See Corruption in Government (TCD/SEM/90/2,INT-89-R56.


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done 3 to establish internationalcountermeasures to individual actionssuch as bribery. While not diminishingthe importance of exploring the perpetrators "motivations", we have

observed that not enough attention has been paid to the way in which systemscan be exploited by those so motivated.The gradual, pervasive weakening of financial management systemsrepresents a widespread loss of capacityto safeguard financial assets, and it isthis shortcoming which internal andexternal observers have come to regardas opening the way for corruptive behaviour.

Do some systems have greater potentialto be abused by opportunists thanothers? If so, what are the systemiccharacteristics that lead to thisconclusion? Once it is perceived that aweakened system is a vehicle for corrupt practice, what steps will reverse this perception? A number of case studieswhich highlight a particular aspect of thefinancial system in question are presented in the body of this paper. It is

hoped that the papers prepared by eachexpert and the on-line discussion willamplify the substantive issues and propose potential remedies.

System weakness in the following areaswill be discussed briefly:

(a) Foreign exchange allocations;

(b) Aid management;

3 Recent activity in this field includes action taken in

April 1996 whereby Organization for EconomicCooperation and Development (OECD) agreed to endthe tax deductibility of bribes. This is a politicalcommitment which will be monitored collectively byGovernments through the OECD Committee on FiscalAffairs, the Inter-American Convention AgainstCorruption adopted (29 March 1996) by Member States of the Organization of American States, and theUnited Nations Declaration on Corruption and Briberyin Transnational Commercial Activities.

(c) Accounts payable;

(d) Payroll;

(e) Procurement; and

(f) Loans to parastatals.

The detrimental impact that weak performance in these processes can haveon a Government's relationships with its partners and with the civil society isconsiderable. All Member States will benefit from the guidance that this AdHoc Expert Group Meeting can offer.

Experts are therefore invited to prepare brief papers to describe or discusssystem problems and/or solutions.

Participants are not restricted to theissues which have been identified by theSecretariat. It is anticipated that a three-to five-page paper will be preparedoutlining each experts opinions or experiences with respect to weaknessesin financial management systems whichcould enable corruptive behaviour totake place. Clearly, the revenue functionof government, involving for examplecollection of taxes and excise duties, is a

public financial management systemwhich could also be reviewed. In thisinitial paper we have chosen not todescribe weaknesses in this system because it seems to have alreadyreceived considerable attention. 4

However, if experts wish to discuss thisaspect in their papers, time will beallocated to it in the on-line discussionsessions as well.

A. Advance foreign-exchangeallocations lead to hidden paymentsThe facts

The reserve bank of a least developedcountry sought to ensure continuity of 4 Inter-American Centre of Tax Administration:Venice technical conference, 1-5 November 1993, andLima Conference, 27-31 March 1995.


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inputs to its manufacturing parastatals byassigning foreign exchange budgets toeach one at the beginning of the fiscalyear.

National auditing systems did notanalyse these manufacturers' operatingcosts against regional or global normsand the full utilization of foreignexchange allocations was not correlatedwith overly priced raw material imports.A portion of the inflated value of theseinputs was transferred by offshorevendors as illicit payments into hardcurrency bank accounts controlled by parastatal managers.

Budgeting of foreign exchangeallocations was performed by theTreasury on an annual incremental basis,not on a zero-based one linked to costestimates of goods sold. The reserve bank did not query up-to-budgetconsumption of foreign exchange in theform of current account payments. Thenational audit office was not able toundertake performance audits, or toengage external audit practitioners to doso.Conclusion

The ready availability of a knownvolume of hard currency, complicitvendors and weak systems of accountability "drove" corruptive behaviour on the part of parastatalmanagers. In effect, what was intendedto be an enabling environment for state-owned manufacturers became thevehicle for illicit foreign-exchange

transfers that were not readily detectablewithin the prevailing regulatoryframework.The cost

Weak budgeting and oversight systemswere unable to support macroeconomicmanagement measures. Domestic

consumers pay higher prices for domestically manufactured goods, and private sector importers are displacedfrom the foreign-exchange management programme.

B. Some aid is not public monies andmisuse cannot be penalized

The facts

Many donors in a least developedcountry find that programme delivery isconstrained by the nationalGovernments inadequateimplementation mechanisms. Donorsredirect their efforts and mobilize manyindependent implementation units and

non-governmental organizations (NGOs)as implementors. Donor financing for them is provided through direct transfersof funds into the commercial bankingaccounts the implementors operate.These transfers are not incorporated intothe national budget appropriation process. Further, major donors convincethe Government to make its counterpart payments in support of "core" projects inthe form of monthly direct transfers to

these commercial banking accounts.The definition of "public monies" in the public finance legislation of the hostcountry is limited to those fundsappropriated by the budget. Civil servicelegislation that requires civil servants to be prosecuted for misappropriation or abuse of public monies adopts this samedefinition. Civil servants are fully awareof this limitation to public prosecution, particularly as it applies to the donor

funds held in the commercial bankingaccounts of project implementation unitsand NGOs.

Civil servants who are assigned as directcounterparts to project implementationunits and NGOs, and whomisappropriate funds, know that public


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prosecution is unlikely. Strongcircumstantial evidence suggests thatthey, and others in the executingagencies, do divert funds. Fungibilitymakes the analysis of whose funds are

misused, the donor's or theGovernment's, impossible.

The Auditor-General's office is legally bound to audit government counterpartcontributions, but it is understaffed andcompetes for qualified national professionals with a growing number of donor-financed project implementationunits. Salary differentials can be as highas 20 to 1 in favour of those units.Further, the Auditor-General's staff rely

on financial statements and access torecords that can only be provided bynon-government staff outside their jurisdiction, or counterpart civil servantswho may have little motivation tocooperate.Conclusion

The donors' decisions to transfer fundsdirectly into what are essentially private banking accounts place acute limitations

on the Auditor-General's ability to auditgovernment counterpart funds and denya legal basis to the public prosecution of civil servants who misappropriate donor funds.

Delivery of donor programmes mayappear higher in empirical terms, but thedevelopmental outcomes achieved may be significantly impaired by thediversion of funds. Access to essentialaccounting records which would help to

monitor outcomes achieved vis--visinputs can be impeded by jurisdictionallimitations, or frustrated by outright non-compliance.The cost

Donor development programmes clearlyexceed the absorptive capacity of weak

governmental institutions. Resourcesintended to support nationaldevelopment objectives are diverted by public servants and the civil society doesnot benefit to the extent intended. Future

development programmes could be jeopardized where misappropriation becomes evident to taxpayers in donor countries, potentially denying the civilsociety access to these low-costdevelopment resources in the future.

C. Accounts payable systems arestrong and malfeasance is detected,but political will fails

The facts

Officials in a developing countrysgovernment procurement agencyidentify duplicate, and sometimestriplicate, payment of one vendor'sinvoices for deliveries to regionalcentres. An internal investigation todocument the overpayment fully leads tothe finding that the phenomenon isconfined to invoices presented by onemajor supplier, and that a materialamount of the annual procurement

budget is involved in the total value of overpayment. The supplier is the business arm of one of the major political parties. A general election isscheduled in that year.

A file is prepared by the senior procurement officers for further administrative action. All documentationdetailing the procurement proceduresinvolved and the corroborating reports of the public financial management system

is presented. This file is referred to thecompetent authority for administrativereviews. No further action is taken.Conclusion

Public officials were vigilant,monitoring systems were strong and aduplicate payments scheme was


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detected; however, the presence of amajor political party's business arm inthe matter acted as disincentive to anyfurther review or action in a generalelection year.

Clearly, public servants did not feel thatthe existing institutional mechanismscould defend their role in any follow-upactions and prudence dictated that theyshould not proceed. For lack of politicalwill, a well-documented example of corrupt activity will never be consideredat the national level.The cost

Resources intended to support national

development objectives are diverted for political purposes. The opportuniity costof not proceeding is the politicization of the public service which compromisesits effectiveness.

D. Management by exception inoutdated payroll system does notdetect fraud

The facts

Payroll officials in a developing

countrys Government ran one-time testson the total payroll of 60,000 publicservants to disclose duplicate nameentries. A small group of civil servantsappeared under more than one agency payroll. An in-house analysis determinedthat the "exceptions only" method of payroll management can lead to multiple payroll entries for a single individual.

The key actions required to initiate aduplicate payroll entry are: (1) tosuppress the payroll variation advice thatdeletes a transferring employee from thesource agency payroll; and (2) to ensure processing of the payroll variationnotification issued by the agency withwhich the staff member started work.Under these circumstances the centrallymanaged payroll, controlled by the

Ministry of Finance, will continue to prepare a salary cheque under the sourceagency payroll while initiating a chequedraw from the receiving agency's payroll. There are no follow-up controls

in the source agency to verify deletion of the employee. For security reasons, the payroll tapes are not made available tothese offices.

An internal review found that groups of family members represented the majorityof payroll duplication cases. It wasfurther determined that these familygroups were associated with payroll processing staff in the Ministry of Finance and with personnel officers in

some agencies.The automated payroll system isantiquated and new systems would helpto prevent similar duplications fromarising in the future, but the Governmentis reluctant to engage in a major reviewof computer systems and even more soto take any steps that could disrupt thecivil service payroll. The payroll systemremains unchanged and the potential for this fraud remains present. Few officialsare capable of running the tests to check for duplications. Those officials who areskilled and knowledgeable about suchmatters frequently leave governmentservice to become private sector employees.Conclusion

Computerized payroll systems areoutdated and expose the Government tofraudulent payroll actions by

knowledgeable civil servants. Ex postfacto payroll review procedures in theline agencies are weak.

The possible disruption caused byrevising computerized payroll systemsrepresents an even greater exposure for the Government, while trained staff who


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could assist in monitoring the payroll asa stop-gap measure are continuouslyseparating from the public service.Confidentiality requirements preventfarming out of this function. No further

remedial action is taken.Payroll fraud can resume, with feweffective controls in place to prevent it.Government's technical capacity to periodically investigate the payrollsystem for duplications is by no meanscertain. Payroll control cannot beverified.The cost

Payroll makes up 60 per cent of the

public expenditure; rigorouslycontaining this budget item is anessential component of fiscal deficitmanagement. Short-term policydecisions to retain outdated systems can

reduce the effectiveness of overall payroll management and facilitate low-level corrupt activity.

E. ProcurementProcurement is a government businesssystem which is concerned with preparing specifications, requesting,receiving and evaluating bids, andawarding a contract. The fulfilment of the contract, through provision of goodsor services and subsequent payment bythe government accounts payable unit,completes the system (Figure 1). Thestages in the procurement system whichtake place prior to the awarding of thecontract include preparation of specifications, the bidding process, bid preparation by outside suppliers, andevaluation of bids. There are potential problem areas in each of the stages.


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Figure 1

PROCUREMENT

Potential problem areas

Special qualities, unique features designated asessential

TimingBreaking the contract into smaller pieces

Preparation of short listPre-qualification of bidders

Release of listOpening of bids

Price riggingMarket agreements

Evaluation of non-financial factors

General accounts payable system

Prepare

Bidding process

Preparationof bids

Evaluationof bids

Reconciliatio


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Initialtransac

First partycompliance

(vendor supplies

Second party


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Preparation of specifications

In most countries the tendering processis the subject of clear procedures. For example, bids should remain sealed untilall envelopes are opened (and amountsrecorded) at the appointed time in fullview of a number of persons. In contrastto the well-defined tendering procedures,the specification process may be highlyvulnerable to corruptive influence because it takes place in a less openenvironment. When a departmentdetermines that a major contract for supply of goods and services is needed,it prepares specifications. In general,there are guidelines concerning theamount of the proposed contract whichnecessitates going to an outside body.

It is possible to circumvent theguidelines for submission to tender boards, in some cases, by artificially breaking the contract into smaller parts.The purpose of the tender board is to provide an independent check ondepartmental management and to ensure

that major contracts are subject to proper evaluation and cost-benefit analysis. Tothe extent that a department can break down a proposed purchase into smaller pieces which fall below the minimumline, it can escape outside scrutiny of its purchase decisions.

Opportunities for influence and rewardmay also take place in the interaction between potential suppliers and theofficial who is responsible for preparingspecifications for goods or services.Thus, the specifications may be writtenso as to favour a particular supplier bymaking an unimportant or evenunnecessary feature appear to beessential; timing may also be used as aninconspicuous means of favouring a particular supplier.

Bidding process

The establishment of an intermediary between the contracting department andthe proposed supplier is intended to preserve the integrity of the bidding process. In some cases, however, thethird party (in this case the tender board)may simply shift the locus of the corruptactivity away from the department to itsown members. At the United Nations,for example, such concerns resulted in a body being established to effectivelyoversee the tender board.

There are various steps during the

bidding process wherein the system isvulnerable to corrupt activity. The pressure points include preparation of ashort list of bidders, pre-qualification of bidders, release of the list of invited bidders to one of the prospective bidders, and opening the bids privatelyor prior to the official closing date andreleasing information to one of the prospective suppliers.

Preparation of bids

In the procurement process, the locus of activity and decision-making occurs principally within the government arena.In respect to the preparation of bids,however, illegal activity may occur withor without the involvement of government officials. Thus, price-rigging and market sharing agreementscould in theory take place without their knowledge. In practice, however, it

seems that government officials may besignificantly involved even in this area.

A German corruption case study presented by Transparency Internationalhighlighted other actions within thecorrupt system i.e. those of the suppliersthemselves. A private company receivedthe bidders list and would then either


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make its own lowest bid, or, morecommonly, organize a bidder'sconference and coordinate subsequent bids with the other companies, whowould be forced to participate in the bid-

rigging or risk losing out on all futurecontracts. As a compensation for playingalong, other companies were given a freehand in other municipalities. 5

Evaluation of bids

The probability of integrity is enhancedwhere discretionary decision-makingauthority is exercised under the aegis of an oversight body. In principle, that isthe intended role of a tender board toact as an independent decision-makingarbiter between supplier and purchaser. Nevertheless, the combination of discretion and lack of oversight opensthe tender board itself to opportunitiesfor corruption during the evaluationstage.

When the proposed contract is for aquantity of goods which have a known,standard price (e.g. price per ton of riceor butter) or common items with specific

dimensions or comparable qualities (e.g.400 60 x 120 cm desks or 100 PCs with32 Mb RAM and 1 Gigabyte CPU),there is less scope for, and probabilityof, corruption. When the goods are non-standard, however, the importance of "unique" features may be overstated or stated as part of a technical requirementwhich persons outside the substantivefield may have difficulty verifying. Evengeneralist engineering or computer

specialists on a tender board may beunable fully to evaluate highly

5 Transparency International, in December 1995, presented a case study prepared by Dr. Rgemer, oncorruption in waste water treatment in Germany whicheventuall

Documents

Transparency and accountability in Government Financial Management