In 1989, the Asian Organisation of Supreme
Audit Institutions (ASOSAI) issued its first publication entitled
"Accountability and Control of Public Enterprises." Based on the
success of this publication, the Governing Board of ASOSAI in June 1989
commissioned a second research project to be undertaken on budgeting and
accounting in the public sector. Mr. L.T. Kulasingham, Deputy Auditor General
of Malaysia and Mr. A.C. Tiwari, Deputy Comptroller and Auditor General of
India were given the task of researching the subject. This publication
"Financial Accountability and Management in Government" is the
result of their efforts.
This publication covers budgeting and
accounting practices in eleven countries in the ASOSAI region and I have no
doubt that it will be particularly useful to practicioners in the public
sector, to researchers, academics and to legislators and administrators.
I would like to thank all those particular
SAIs which provided excellent country papers for this publication which made
the task of the authors relatively simple. Information pertaining to some
countries is not complete and could not be included in this edition.
Our thanks also to the authors who undertook
this assignment over and above their normal routine work and the Auditors
General of Malaysia and India for making them available for this project and
meeting the associated costs. Our grateful thanks are also due to Associate
Professor D.J. Hardman, Head, Department of Financial Accounting and Auditing,
University of Technology, Sydney who acted as adviser and technical consultant
to the authors.
I would also like to record my thanks to all
those—who are too numerous to mention by name—who assisted the authors in
one way or another.
I must in conclusion and on behalf of the
Governing Board of ASOSAI, say that we are proud that ASOSAI has once again
made a significant contribution to the literature available on public sector
financial procedures and practices and to public accountability in particular.
Lu Pei Jian
Auditor General of the Peoples Republic of China and Chairman of ASOSAI.
July 1992
The Authors express their personal
appreciation of the valuable assistance given them in their research by the
Heads of Supreme Audit Institutions who are constituent members of ASOSAI.
Without their co-operation the extensive work involved in compiling background
information and preparing the text for publication would not have been
possible.
We would like to place on record our
appreciation of the assistance rendered to us by members of our respective
staffs. Associate Professor Mr. D.J. Hardman M.Ec(Syd) B. Comm (Qld) AAVQ FCPA
ACAA ACA ACIS ACIM, Head, Department of Financial Accounting and Auditing
University of Technology, Sydney also rendered valuable advice and guidance in
completing this research study and in reviewing the text for publication.
L.T. Kulasingham B.A. (Hons) Adel., FIIAM,
JSM
Deputy Auditor General of Malaysia
A.C. Tiwari Deputy
Comptroller and Auditor General of India
The Asian Organisation of Supreme Audit
Institutions (ASOSAI) is a regional grouping of government audit institutions
comprising 23 countries. It was established in 1978 and is affiliated to the
International Organisation of Supreme Audit Institutions (INTOSAI). It is run
by a Governing Board of 7 members elected every 3 years at the Assembly.
The objectives of ASOSAI include the
following:
1. To promote understanding
and co-operation among member institutions through exchange of ideas and
experience in the field of Public Audit;
2. To provide facilities
for training and continuing education for government auditors with a view to
improving the quality of their performance;
3. To serve as a centre of
information and as a regional link with organisations and institutions in
other parts of the world in the field of Public Audit; and
4. To promote closer
collaboration and brotherhood among auditors in the service of the government
of the respective member institutions and among regional groups.
The functions of ASOSAI are:
1. To organise conferences
and seminars for the exchange of publication of research papers and
professional articles in auditing and related fields.
2. To encourage and to
promote research and to undertake publication of research papers and
professional articles in auditing and related fields.
In keeping with its goals and objectives,
ASOSAI has held four International Seminars and over 45 training courses since
1979. It also produces a Journal annually called the 'Asian Journal of
Government Audit' which contains professional articles in auditing and related
fields.
ASOSAI as has been clearly stated in the
Tokyo Declaration of Guidelines on Public Accountability, has been concerned
with the need for proper accounting, budgeting and disclosure; the need for
proper mandates, systems, controls, checks and balances in the discharge of
functions in planning, programming, implementation and delivery processes in
addition to the traditional forms of audit, and the need for ensuring value
for money in the management of public resources. In line with these concerns a
team was appointed by an ASOSAI Governing Board which researched public
enterprises in the Asian region and published its findings in 1989. Based on
the success of this research program, the ASOSAI Governing Board undertook to
carry out a second research project - this time on budgeting and accounting.
This subject is considered important background material for training of
auditors and also serves as source material for academics, legislators and
government administrators. The Deputy Auditors General of Malaysia and India
were commissioned to carry out this project.
Initial research work was conducted by the
authors and a model chapter was prepared. Supreme Audit Institutions (SAI's)
provided all the information required relating to their respective countries.
All information received was documented and reported without comment and in no
way is this publication intended to be critical of systems and practices in
the individual countries.
It would not have been possible to complete
this project without the understanding and co-opration of member SAI'S of
ASOSAI who have been most helpful in providing information.
PUBLIC FINANCE AND DEVELOPMENT
Financial management is recognisedly the most
important segment of public administration which is concerned with
accomplishing the functions of a State. The concept of 'State' has changed and
is still changing. It has evolved from an entity which was merely attending to
law and order, and certain regulatory functions in medieval times to one which
is now engaged in a comprehensive socio-economic development of its people
assuring the protection of the global environment. The member-States of ASOSAI
are no exception to the worldwide phenomenon. This transformation has brought
about its own challenges, especially in the field of financial management
which is becoming increasingly complex every day. Originally financial
management was a relatively simple matter as set out in the Twelfth Article of
the Magna Carta in 1217:
"No scutage or aid shall be imposed in
the Kingdom unless by common council of the realm, except for the purpose of
ransoming the King's person, making his first-born son a Knight, and marrying
his eldest daughter once, and the aids for this purpose shall be reasonable in
amount."* [ * Quoted from pages 2-3 of 'Govt.Budgeting' by Jesse Burkhead
Published New York John Willy & Sons Inc London - Chapman & Hall Ltd.]
However more sophisticated government
financial management is now crucial for promoting socio-economic development.
Modern financial management skills are indispensable for mobilising,
allocating and utilising resources in a manner capable of attaining
development objectives. These skills signal the future impact of current
management actions and provide appropriate information for decision-making.
The financial systems-in conjunction with budgeting, accounting, auditing and
other accountability arrangements need to keep pace with the changing times
and rapid transformation of the governmental environment.
As brought out in the World Development
Report of 1988, many of today's public finance issues have troubled policy
makers for centuries—how to raise and allocate public funds effectively
while limiting budget deficits and how to delegate authority while ensuring
financial discipline and accurate accounting. These issues are of even greater
relevance now because of the expansion of governmental functions.
PARLIAMENTARY FINANCIAL CONTROL
The broad scheme of financial management and
control is generally spelt out in the respective Constitution and Acts of
Parliament. It envisages, among other things, Parliament's approval of
taxation and expenditure proposals of government and submission to Parliament
of the annual accounts of government along with the audit report of the SAI.
Generally, Select Committees of Parliament undertake a detailed examination of
the budget estimates, accounts and audit reports and make recommendations for
appropriate action by the executive. Thus, although the executive takes the
policy implementation initiatives on financial matters, it is accountable to
the Parliament.
Borrowing as a source of financing and the
public debt have assumed such proportions that these cause concern in several
countries. Although there is generally strict parliamentary control over
taxation and spending, only in a few countries are borrowings controlled by
setting statutory limits or otherwise by specific authorisation of Parliament.
Some of the ASOSAI countries—such as India,
Malaysia and Pakistan— have a federal framework. The federal financial
relations are regulated by their respective constitutions. A national
perspective in financial management and accountability emerges through
mandatory uniform standards of accounting and audit by the SAI of the accounts
of both the Federal and the State or Provincial governments. However, this is
not the case in Australia where the various State governments have their own
accounting and auditing systems.
PLANNING AND BUDGETING
The two primary methods generally used in
controlling and allocating public spending are the medium-term plan and the
annual budget. The medium-term plan promotes careful consideration of spending
alternatives, facilitates phasing of lump sum investments over several years,
and provides some indication of the sustainability of the proposed revenue and
expenditure pattern over the medium term. The annual budget is the authorised
legal document for raising and allocating resources.
Planning
Comprehensive central planning for the
economy as a whole has lost favour in both government and academic circles in
recent years. Many countries, the most notable being the Republics forming the
former Soviet Union, and including even China, have put growing emphasis on
market forces and individual initiatives. In part this follows a change in the
emphasis of development theory. Previous theories called for direct government
intervention in resource allocation, while the later view stresses the primary
importance of efficient markets and the correct price mechanism. However, the
move away from comprehensive economic planning does not signal the demise of
all planning.
Generally all Asian countries of ASOSAI have
adopted some form of development planning to determine the priorities to be
assigned to various public investments for optimal resource distribution to
the various sectors of the economy in order to achieve development goals. By
and large, public investments go much beyond the mere provisioning of
infrastructure and other physical facilities and include agricultural,
industrial and human resource development, and social security support.
Budgeting
Budgeting and accounting are two crucial
parts of public finance. Over the years both budgeting and accounting, which
are closely interlinked, have acquired comprehensive dimensions. The primary
object of budgeting has changed from providing for basic government services
to achieving a wide range of socio-economic goals. Thus Gladstone considered
that expenditure beyond "..... legitimate wants of the country is not
only a pecuniary waste, but a great political and, above all, a great moral
evil."* [ * Quoted from "Public Aspects of Finance" by D.H.
Macgregor Reference- "Govt. Budgeting" by Jesse Burkhead—page 6]
However, modern States now budget for all
those resources needed for a given time period and the allocation of these
resources on a prioritised basis to fulfill a wide range of social and
economic functions. But meeting this basic objective has become infinitely
more complex. It involves a close interaction between the political leadership
and the executive which formulates its proposals, the legislature which
scrutinises and gives its approval, the implementing agencies which are to
fulfill physical tasks, an appropriately structured accounting system to
record these transactions correctly, and an independent as well as objective
evaluation of the actual performance through the statutory audit function to
ensure accountability.
Some countries have reformed their budgeting
procedures in the direction of 'Program' and/or 'Performance' budgeting. Such
reform not only reclassifies the budget to reflect objectives and programs,
but also attempts to monitor government performance by relating inputs to
outputs. For instance a sustained effort to introduce performance budgeting
has produced a working system in both India and Malaysia.
While the quest for raising additional
resources from tax and non-tax sources continues, an important new dimension
of the budgetary process is the growing recourse by governments to domestic
and external borrowings. It has generally been accepted that domestic savings
for productive purposes as well as external loan assistance for meeting
essential foreign exchange requirements are not only desirable but inevitable
in the present state of close interaction between comity of nations. But the
more urgent questions are:
(i) What are the safe
limits of such borrowings? and
(ii) How it is to be
ensured that such resources will be used for productive purposes only?
Opinions among informed economists and public
finance experts will always differ. But it can hardly be disputed that, beyond
a certain stage and without a fail-safe method of expenditure control, any
large-scale induction of domestic and external borrowings can create not only
internal economic disorder but also place severe strain on the value of
domestic currency.
INTERNAL FINANCIAL CONTROL
Government is typically organised so that, at
the apex, is the policy formulation, direction and control machinery for the
government as a whole as well as for each separate functional entity.
Furtherdown the pyramid are the implementing units with well-defined
responsibilities and appropriate delegation of powers, as laid down in the
relevant legislation and executive regulations. Internal controls are built
into the various operations and activities to facilitate the ultimate
accountability of the executive.
In the final analysis, effective financial
management depends upon the efficiency of internal control, including internal
and statutory audit arrangements. Efficient internal financial control is even
more necessary in the context of vast increases in revenue raising, borrowing
and expenditure, and also in the proliferation of points at which financial
transactions occur in modern public sector management. The INTOSAI Internal
Control Standards Committee has recently issued the exposure draft of the
"Proposed Internal Control Guidelines and Standards" (January 1991)
detailing the objectives and standards of internal control as well as the
manner of their implementation and monitoring. The work of this INTOSAI
committee has made a significant contribution to strengthening the control
systems in member States.
ACCOUNTING AND FINANCIAL REPORTING
As highlighted in the Seoul Recommendations
(1982) and the Tokyo Declaration (1985) of ASOSAI, development of adequate
information, control, evaluation and reporting systems within government will
facilitate the accountability process. The Tokyo Declaration also urged that
the appropriate authorities in government should ensure the promulgation and
enforcement of generally accepted accounting standards for financial reporting
and disclosure relevant to the needs of the public sector.
Traditionally annual accounts are maintained
for the government as a whole in order to help monitor budgeted revenues and
expenditure, and to depict the overall financial position of the government.
In addition, performance indices and financial reports relating to different
segments of governmental functions have been developed gradually. However,
government financial reporting has been devised largely to meet the needs of
parliamentary financial control and of financial management in government; it
seldom addressed itself to the needs of other users. With the expanded role of
modern government and the increasing impact of public finance on the economy
and society, many others may be interested in using the financial reports of
the government for a variety of purposes. It is in this context that the work
of the INTOSAI Standing Committee on Accounting Standards, in articulating the
objectives of government financial reporting and the results of the survey on
user needs, assumes significance.
The public financial needs, constraints and
challenges faced by nation States are dissimilar at any given point of time,
and also change over time. Therefore accounting and financial reporting
standards should be oriented to the needs of individual countries and
continually reviewed in accordance with the changing needs of each one.
ROLE OF SUPREME AUDIT INSTITUTIONS
The Supreme Audit Institutions of ASOSAI have
a unity of aim, namely of making the administration to be accountable to
itself first, and finally to the public through the Parliament. In this they
function essentially as an aid to administration in the overall public
interest. Each country has assigned the position, duties and powers to the SAI
in the light of its own ethos and environment. However, it is necessary to
assess periodically the changes needed in the legal framework to facilitate
the more effective discharge of the duties and responsibilities accruing to
the public sector auditing function in member States of ASOSAI.
The nature of public financial management
requires full public accountability which can be guaranteed only through audit
by SAIs. The scope of government audit has been widening. It now encompasses
not only regularity checks and certification of accounts, but also the
examination of the economy, efficiency and effectiveness of the administration
in order to achieve accountability and suggest improvements where necessary.
Provided that there is adequate recognition of its role, the public sector
audit function has the potential to contribute substantially to financial
management in government.
Auditing Standards
With the issue of the final draft of the
INTOSAI Auditing Standards (June 1991), an international perspective on
auditing standards for the government sector has clearly emerged for the first
time. However, barring a few exceptions, SAIs have not published their own
auditing standards. The need for adoption of auditing standards to assure
quality and consistency in audit and to help strengthen the credibility of the
audit institution cannot be over emphasised. However, the auditing standards
adopted by an SAI depend, in the main, on the concept of accountability, scope
of audit and degree of independence characterising the public sector auditing
function in the country concerned. These standards are also influenced by the
level of sophistication in government financial management and the auditing
techniques employed.
DIRECTION OF FUTURE REFORMS
There is a general appreciation of the need
to strenthen and upgrade financial management in government. The need is more
in regard to strengthening internal control systems. There is also a move
towards decentralisation of financial control usually vested in the Ministry
of Finance. Further, there is progressive use of information technology for
timely preparation of accounts and to provide the variety of data and
information needed for effective financial management and control.
There is a recent trend towards
corporatisation and privatisation of government functions on account of a
combination of economic, financial and administrative considerations. In this
context, the financial management and accountability systems need to be
oriented to suit the changing situation.
Hopefully the pesent research publication
will develop and enhance financial accountability and management in
government, not only in ASOSAI member countries, but also in other regions of
INTOSAI.
