Integrated Public Sector Financial Management: A Central Role for SAIs
The 21st century is off to an inauspicious start. In its 3 short years, we have all been affected by Y2K threats; September 11 and other terrorist events; revelations of fraud and corruption on a vast scale; and a global economic downturn. Moreover, the AIDS crisis continues unabated, and famine is taking its dreadful toll.
In response to these events, reactive and preventive measures are being adopted on a global basis in both the public and private sectors. We are starting to see fundamental underlying exposures and how they might be addressed. In addition, parties are coming together around issues in ways that would have seemed impossible previously. It is clearer in hindsight that much could have been prevented had risks been defined, loopholes identified, and exposures managed in a holistic manner.
What can the financial manager learn from this? First, almost everything has a financial dimension that requires careful management. Second, if a holistic approach is to be effective, work—including finances—must be managed in an integrated fashion. Third, the financial manager plays a key role as a facilitator in both the private and public sectors. Finally, the financial management function is not the domain of just one department, but includes all the key players, ranging from financial planning through execution to review and oversight. The supreme audit institution (SAI), as part of this oversight function, has a vital role to play.
In this article, I would like to propose that the financial management community, and SAIs in particular, take the lead in promoting an integrated, holistic approach to public sector financial management as we continue to face the challenges of the new millennium.
Integrated Financial Management in the Private Sector
In the private sector, notwithstanding recent scandals, integrated financial management is fairly well understood and practiced to an extent. Without it, corporate governance is weakened, risk exposures cannot be appropriately controlled, and controls themselves will operate in silos, creating another level of risk.
Integrated financial management is being specified in charters of internal auditing departments through to audit committees, with the express objective that both internal and external players in the area of financial management work together to ensure that it is achieved. The audit committee is expected to ascertain that there is no room for the kinds of gaps that lead to unidentified risk and consequent exposure to loss. Management and internal auditors make statements to this effect, and these matters are increasingly being reported in annual financial statements. Additionally, external auditors give the audit committee assurance that the work of others is reliable and can be taken into account for the peace of mind of stakeholders. Put differently, all parties look at the same time period from somewhat different angles but with the same objective–understanding and assurance.
Fragmentation in Public Sector Financial Management
In contrast, integrated financial management is not a hallmark of the public sector, which, by its very nature, faces complex and unique challenges. Accounting policies and practices are being rewritten but the processing technology used is outdated and often incompatible with new software and expensive to upgrade. The people working in the public sector are often underpaid, understaffed, and underappreciated, and there is an almost constant restructuring of government departments. Nevertheless, the call for improved governance, management oversight, and transparency grows louder every day. All these pressures force those who should be interested in an integrated, holistic approach to financial management in the opposite direction. The focus is inward and downward rather than across. Our pursuit of specialization has resulted in both a loss of perspective and greater fragmentation. It has become even more of a challenge to find the right area to focus on, and even then we find ourselves being pulled in different directions by competing and compounding problems. As a result, the public sector is wide open to surprises and shocks.
In November 2002, at the first summit of its kind, the International Consortium for Governmental Financial Management (ICGFM), together with the World Bank Institute (WBI), invited public sector participants from various countries to explore what integrated financial management means to them and, more importantly, how it could improve governance and accountability. The participants were drawn from Public Accounts Committees, finance ministries’ budget and expenditure departments, internal audit departments, and supreme audit institutions (SAI).
Almost from the start, it was evident that this meeting of the minds was novel for many of the countries represented. In the public sector, the concept of financial management has been very narrowly defined, causing fragmentation. Participants confirmed that the components of financial management work in isolation from each other. This problem is compounded by the fact that each component focuses on a different fiscal period, often stretching over a 4-year period: budget looks to the future, expenditure to the present, the SAI to the recent past—leaving the Public Accounts Committee to bring up the rear with a focus on the not-so-recent past.
Having these components spread their oversight and management of public financial affairs over a minimum of 4 years strikes me as being risky at best, dangerous at worst. Gaps will occur and, without careful attention by all parties, can be—and probably are—exploited.
Quite naturally, the chances of finding and preventing exploitation and abuse fade rapidly if no concerted effort is made to do so. All those involved in public financial management bring to the table unique skills sets, perspectives, and experience. Risk should be identified around these sets of skills and knowledge, and proper management of the exposure agreed upon. But this is not really happening. Can it be said that risk has been comprehensively assessed–even at the highest levels—if the components critical to the process do not come together around this topic? As a result, the public sector faces undue and unnecessary exposure to the ineffective, inefficient, and uneconomic use of public funds. Recent work by the WBI and some African countries confirms that dialogue in this area, which might lead to change, is only beginning for those countries. It is an encouraging start to a very long journey.
A History Lesson in Integrated Public Sector Financial Management
Although an integrated approach to public sector financial management may be new to many of us, history tells us that this concept is not new. The Old Testament story of Joseph in ancient Egypt offers us a case in point. He identified a long-term national challenge—that the country would face 7 years of plenty followed by 7 years of famine—and the Pharaoh authorized him to do something about it. The country successfully hoarded grain in a time of plenty and rationed it in a time of want, thus demonstrating that Joseph and his managers looked carefully at what was needed, devised a strategy, did a risk assessment, put controls in place, worked according to the plan, and provided oversight throughout.
We can presume that he used incentives–financial and otherwise—to encourage farmers to plant now with a view to the future shortage. He must have found resources needed to pay the farmers for their efforts or build up credit. None of this could have been achieved without a host of financial and other systems. All this activity, over a decade and a half at least, could not have been successfully undertaken without an integrated approach to the challenge and full involvement of all.
Interestingly, there were no ‘safety nets’ at the time like those that operate today—no IMF, World Bank, World Food Program, or bilateral aid. The country and its citizenry had to find within themselves the ability to address long-term challenges that were not even evident when the first major tasks were begun.
Facing the Challenge of Integrated Public Sector Financial Management
Could something of this scale be pulled off today given the way we organize ourselves in the public sector? Although countries today have national goals, a host of systems and controls, and human and financial resources to undertake an effort of this kind, we usually lack a comprehensive view of the challenges that we are facing.
Why is this so? The development community is now aware of the importance of public sector financial management and the role of the SAI in particular. But more must be done to convince them that the way to have the most effective financial management is to use an integrated approach. While the World Bank and its partners in the development business have a role to play, the real solutions lie within the countries themselves. The participants at the ICGFM/WBI Summit in November 2002 found the discussions on these issues encouraging, but they pointed out that they were not taking place in country, where they are most needed. In addition, international professional bodies can do much more to encourage and even enforce better professional practice.
Bringing all this together is not easy. Leadership is needed from the broad spectrum of the financial management community. But more and more, SAIs are taking the initiative and achieving good results. The approach of the U.S. General Accounting Office (GAO) is a case in point. GAO has done a holistic and comprehensive federal risk assessment, has noted trends over time, and published its results in its High-Risk Series. The most recently identified high-risk area is long-term pension plan vulnerabilities. GAO’s analysis of this area gives a broad overview of the issues, looks far into the future, and translates what it sees into language that is understood by senior government officials as well as the ordinary citizen (see GAO-03-1050sp on GAO’s Web site: www.gao.gov). It remains to be seen whether and to what extent the government will move to correct the situation, but the SAI cannot be faulted for failing to assume a key leadership role.
Should this be the exception rather than the rule? I believe that SAIs are uniquely positioned to champion the challenge of promoting the usefulness and appropriateness of integrated financial management in the public sector today. The SAI alone straddles–or should straddle–the whole public financial sector, if not more. Its mandate allows it to see further, look deeper, and cover more ground than any other component of public sector financial management. It alone stands in the gap between parliament and the public sector. With its peculiar perspective and authority, it has the power to convene, convince, and communicate. If its rights of access are not fully exercised, the public could accuse the SAI of dereliction of duties. Given the dearth of credible public leaders, a passive though clearly qualified SAI could be perceived as complicit in the mismanagement of public funds.
Generally speaking, the public sector financial management community, including the SAI, is not well known for making a stand. Sadly, in too many instances, this same community has been compromised. However, with all the focus on improved public sector financial management, there is room for new leadership to emerge and for credibility to be reestablished. Nothing will really happen unless and until this community–including the SAIs–takes the lead and shows what can be achieved with an integrated approach and what is lost without it.
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