Similar to Francophone, but with a centralization of authority in one office of the finance ministry (either the budget or accounting office). Payroll controls (a subset of commitment control): The objective of payroll controls is to control personnel expenditures and staffing numbers. When looking to strengthen expenditure control, it is therefore important to review the whole expenditure cycle/process instead of focusing on a few stages.36 However, based on experience in different groups of countries, it is possible to identify a set of problems that characterize different expenditure control traditions: British Commonwealth. In fact, with the functionalities available from a modern IT-based FMIS, information on budget execution can be made quickly available, and it becomes straightforward for the ministry of finance/treasury to track expenditure transactions as they pass through the various stages of the expenditure cycle, even when transactions are fully administered within line agencies. Before issuing a payment order, the issuing authority will typically check that sufficient funds are available to make the payment. Commitment control is not comprehensive, i.e., it focuses only on commitments likely to materialize during the year. Advancing the procurement cycle and/or streamlining the process to reduce the time lag between reservation and commitment; reserved funds are integrated with the TSA. In countries of the British Commonwealth tradition, officials in spending agencies are charged with initiating and authorizing expenditure transactions, from commitment to payment, based on apportionments/allotments/warrants issued by the ministry of finance. Once the apportionment of expenditure authorization is made and the spending authority has been released, some countries PFM systems include a stage at which funds are reserved for a specific known expense but for which no contract has yet been issued. By managing its portfolio of debt, it can affect interest rates, and by deciding on the amount of new money injected into the economy . There is scope for disparate application of controls by line agencies, particularly when the control criteria are not well defined. This paper defines and explains key stages of the government expenditure chain and describes the controls applied at each stage, including their objectives and key features as well as centralized vs. decentralized approaches in application of those controls. No apportionment (or in-year release of spending authority) mechanism. Therefore, there would be no under-execution of the budget under these circumstances. In broad terms, Commonwealth systems28 are characterized by the devolution of the responsibility for financial control and the issue of payment orders to line ministries. Key challenges: large variations in effectiveness of controls; and reconciling accrual-based data at line agencies with cash-based data at the treasury. an emphasis on transparency and accountability to the legislature and the public for expenditure overruns. Most countries adopt annual budgets authorizing spending for one year; however, some countries authorize multi-year limits for certain types of expenditure (e.g., autorisation dengagement for multi-year investment projects in Francesee Box 3). In addition to reviewing and streamlining the formal procedures defined by the financial regulations, informal and any special procedures and practices that bypass the normal expenditure cycle should be thoroughly reviewed and (to the extent possible) eliminated.44 Business rules and processes should be established to enable faster spending execution to address priority needs rather than relying on informal/special procedures that undermine the effectiveness of the expenditure control framework. In Francophone and Lusophone systems, such wide ranging responsibilities are not provided to spending agencies and various departments of the ministry of finance play a major role at key stages of the expenditure cycle. PFM weaknesses such as lack of a comprehensive and credible budget,41 poor cash planning or shallow markets for government debt, reporting delays, and accumulation of liabilities/arrears also undermine the effectiveness of expenditure control. Ensures that expenditure is covered in the budget and the proposed amount of expenditure includes all relevant expenses. While this was a common practice in most of the Latin American countries several years ago, many countriese.g., Bolivia, Columbia, Paraguay, and Uruguayhave in recent years separated the accounting and audit functions. Allowing ministries and agencies to commit and use their resources whenever they want complicates cash management.40. For example, the British budgeting system sets appropriations for both the expenses incurred (the net resource requirement) and the cash payments to be made (the net cash requirement) by each ministry. Evidence since the second world war, says Chen of HKU, shows that "the higher the government's control of a country's economy, the lower the role for private consumption in its economic . Current spending They are for the short term and include expenditure on wages and raw materials. Budget Preparation. When several departments in the ministry of finance and other agencies are involved in the supervision of the expenditure cycle, clear business process rules delineating the respective functions of each are required. But these funds may take some time to be further transferred to subsidiary spending units under the line ministries and then be spent on the salaries or goods and services that constitute final expenditure. It is a statement of the estimated receipts and expenditure of the Government in a financial year (which begins on 01 April of the current year and ends on 31 March of the following year). Payment orders are issued after documentary proof of verification. Table 4 lists suggested indicators that could be used to assess progress at different stages of the expenditure cycle. Although sequestering may sometimes be necessary, it diminishes the predictability of budgeted/authorized expenditure and undermines the credibility of the budget, and therefore should be used only in exceptional circumstances. In the third phase, a risk-based approach to control (control modul de la dpense) could be introduced, which in essence comprises the replacement of systematic ex ante control at the line item/transaction level by ex post audit and strengthened oversight. Other Controls Specific to Particular Types of Transactions. Payroll audits should also be undertaken regularly to identify weaknesses in the control system. Overly rigid and controlled spending procedures in several Francophone African countries have resulted in the proliferation and misuse of exceptional spending procedures, e.g., the issuance by the minister of finance to the treasury (bypassing the normal chain of expenditure) of an immediate payment order subject to regularization later. For further background information and discussion on specific features of commitment control, see D. Radev and P. Khemani (2009). Finally, it discusses typical weaknesses/problems associated with different traditions of expenditure control and suggests specific measures for strengthening the control framework. Cash plans in these countries are used as tools for rationing expenditure authority but themselves tend to be unrealistically optimistic, as they do not reflect expected cash outflows based on commitments. In some countries, the ministry of finance uses sequestering to prevent such risks. The role of an expenditure control system is to ensure that the level and allocation of government expenditure reflect the will of the legislature as voted for in the budget.3 Expenditure controls should also reflect sound financial management principles, ensuring that public resources are utilized efficiently, incurred obligations are cleared in a timely manner, abuse/ misappropriation of public money is prevented, and private actors compete on a level playing field for government contracts. At this stage, there is no commitment, but it is known that the expense will be incurred during the budget year and, therefore, the reserved funds should not be used for other activities. Key strengths: separation of responsibility for key control tasks; tracking key stages of expenditure cycle; and centralized repository of expenditure data; Key challenges: frequent and redundant controls make the expenditure process slow (and encourage proliferation of special procedures); interference by central agencies may undermine responsibilities of line managers; and possible manipulation of the complementary period. Monetary policy. If accounting is on cash-basis, there is regular reporting and monitoring of overdue payables. Once the specific problems and weaknesses in expenditure control have been identified, the government needs to develop tools and measures to address them. To reduce the deficit or the gap between the expenditures and income, the government may cut back on certain expenditures and also . would still require manual intervention. France, following the introduction of a new organic budget law in 2001, overhauled the budget execution system by decentralizing it somewhat toward line ministries. A Government Deficit is the amount of money in the set budget by which the government expenditure exceeds the government income amount. Show answer For other expenditure items, the devolution is based on the assessed effectiveness (through formal capacity audits) of the internal control system of the line agency and its risk management capacity. Warrants/allotments are not used as a cash rationing tool. bank accounts (as reflected in bank statements). The main objective of the government as a purchaser is to obtain high-quality goods and services at a competitive price. This paper will help public financial management practitioners to evaluate budget execution systems and identify priorities for strengthening expenditure controls. Payments authorized in annual budget do not fully reflect commitments carried forward from previous years (e.g., investment projects contracts). Table 1 below summarizes the types of control applied during various stages of the expenditure cycle, their key features and objectives. government budget, forecast by a government of its expenditures and revenues for a specific period of time. The issuance of payment orders and checks may be decentralizedwith spending ministries carrying out these tasks and reporting back to the centeror centralized in a treasury department, typically called the accountant general's department within the ministry of finance, which acts both as paymaster and prepares the final accounts of the government. Some of the countries have internal audit agencies under the ministry of finance, but they have no financial control role. The key difference is in the degree of centralization between countries that follow the British Commonwealth, German-Austrian, and Scandinavian traditions of PFM and those that follow the Napoleonic traditions of PFM (France, Portugal, and Spain). They are at least issued on a quarterly basis or, preferably, for the full year divided into quarterly tranches. That leaves just 20 to 30 percent of expenditures that are discretionary and can be changed in the government's annual budget. This model assigns both the authority to spend and the responsibility to ensure the regularity of each transaction to the same agency. The amount of interest depends on the total federal debt and interest rates. Reports from the central bank, based on bank payments data classified by bank code (a compressed form of the budget/accounts classification) provided the only basis for in-year control of budget implementation. Box 2 describes the other specific controls that can supplement these general controls. Next. Authorized purpose of the expenditure. The reforms should focus on streamlining the procurement process to reduce the time of withholding the reserved funds before they are committed, and ensuring that these reserved funds are in the TSA. International Organization of Supreme Audit Institutions (INTOSAI), Guidelines for Internal Control in the Public Sector, (http://www.issai.org/media/13329/intosai_gov_9100_e.pdf). Authorized purpose of the expenditure. Line ministries and agencies initiate the commitment, verify the delivery of goods and services, and issue the payment order (. Officials of the finance ministry and the public accounting directorate play an important role during the apportionment, commitment and payment stages. Public Expenditure and Financial Accountability Assessment: Federal Democratic Republic of Ethiopia (Somali Regional State Government), Public Expenditure and Financial Accountability Assessment: Federal Democratic Republic of Ethiopia (Southern Nations, Nationalities and Peoples Region), Timor-Leste Public Expenditure and Financial Accountability Assessment 2018: Public Financial Management Performance Report, https://doi.org/10.5089/9781513574639.005. In both centralized and decentralized systems, there should be regular bank reconciliation of transactions27 and reporting of expenditure against authorized allocations by spending agencies. A payment order is an authorization for payment (usually against a bill or invoice) made by officials of line ministries, other spending agencies, or the ministry of finance. Once checks are made to ensure that all previously stipulated controls have been performed and documented, a payment order is issued. Bank-Qualified Municipal Bonds Marketplace Fairness and RTPA State and Local Tax Deduction (SALT) PolicyStatements Accounting, Auditing and Financial Reporting Budgeting and Financial Management Intergovernmental Relations and Federal Fiscal Policy Public Employee Pension and Benefits Administration Also called "social capital," they include spending on physical assets like roads, bridges, hospital buildings, and equipment. A lack of effective expenditure controls not only threatens macroeconomic stability and fiscal discipline, but can also call into question the integrity of the public financial management system and undermine trust in a governments stewardship of public resources. It also proposes some indicatorsmainly based on the PEFA frameworkthat could be used to assess reform progress. At the same time, centralization has the disadvantage of: (i) undermining spending responsibilities of managers in line agencies in the day-to-day management of line ministries/agencies budgets; (iii) inefficient decision-making (including superimposed prioritization) and rigid controls by the ministry of finance when it lacks the detailed information on the spending requirements of agencies;26 and (iv) presenting opportunities for rent seeking by officials implementing multiple and cumbersome controls. Finance ministry does not carry out any form of detailed commitment or payment control. Expenditure committed but respective reservation/ encumbrance not annulled. Inordinate delay in issuance of spending authority to line agencies. In case of relatively simple requirements, a spreadsheet-based application may suffice. Section 3. Government cash manager and issuer of checks and/or electronic transfer instructions work in coordination to ensure funds are available for payments. To provide accountability, the budget proposals should be sub-divided by entity/purpose. If an FMIS is planned or under implementation, some measures towards revamping the expenditure control framework will have to be implemented in tandem with the FMIS. However, the complexity of the expenditure chain, the precise nature of the controls exercised at each stage, and the degree of centralization varies considerably across countries and is heavily influenced by their respective administrative traditions. Government expenditure is vital in influencing the economy. This information is then used for preparing the baseline estimates of the detailed medium-term budget forecast. Once a payment order has been issued, payments are made through various instruments including checks, electronic fund transfer (EFT), and sometimes cash, in favor of a supplier or other recipient to discharge the liability. the use of taxes, government spending, and government transfers to stabilize an economy; the word . Limit on time horizon of expenditure. There has been a proliferation of special procedures in a number of countries (particularly in Africa) that are designed for the benefit of powerful vested interests (who want a faster spending process for specific transactions, closer tracking of certain resources, and/or the accommodation of special institutional interests/arrangements). Types of Controls and Institutional Actors, Controls applied at different stages of the expenditure cycle, Authority and responsibility of various institutional actors, IV. Stage of the Expenditure Cycle, Controls, and Actors. Types of Spending 1. Payment order. Total revenue including grants .
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