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Public financial management and corruption
November 2007
Lubin Doe
International Monetary Fund (IMF)
Public Financial Management (PFM) ordinarily covers the management of government revenue, expenditure and cash. Corruption defined as the diversion of public resources for private use can affect any of these operations, at the level of the national and sub-national administrations. This paper focuses on circumstances that are prone to corruptive practices in managing expenditure and cash at the national level. It does not discuss revenue.
The outline of the paper is as follows: Sections I and II provide an overview of PFM and corruption, respectively. They are followed in Section III by a brief analysis of the relationship between corruption and the budget process and the requirements for reducing this malfeasance.
An overview of PFM
What is PFM?
PFM can be defined as framework of laws, regulations, traditions and practices for managing government finances in order to achieve macro-fiscal stability (real growth with low inflation, no payment arrears, sustainable debt, etc.), an optimal allocation of resources (increased social welfare), efficiency of public spending (more public goods and services at lowest market prices), and good governance (transparency and accountability). PFM regulates procedures that apply in four broad areas: budget, treasury, accounting, and control.
The budget is prepared by the executive branch which, in turn, sends it to the legislature for debate and adoption. A good budget is timely, comprehensive and presented using a simple and easily understandable terminology. After approval, it is implemented by the government which is responsible for providing timely budget execution reports. The budget is executed at four key stages: commitment, verification, payment order, and payment.
Treasury procedures and operations involve the management of government cash to meet its payment needs. The conduct of treasury operations can be facilitated by the existence of a TSA, a framework for managing the government financial assets in order to minimize borrowing requirements and interest charges, the regular reconciliation of government accounts, and the existence of transparent disbursement rules and procedures of money to enable the tracking, compilation and analysis of the government financial transactions.
The accounting system is organized to store and compile transactions information for the purpose of producing accounting documents, notably annual and semi-annual ledgers that are needed to report on the execution of government financial operations. Modern accounting uses double as opposed to single entry accounting rules. While most countries operate on a cash accounting basis, some are adopting accrual accounting that better reflects the government’s assets and liabilities, and financial position.
Two types of control are exercised in connection with the budget and more generally government financial operations: an internal and an external control. The internal control office, tasked mainly with management control and audit reports to the executive branch whereas the external control office (audit and oversight) reports to parliament. Management control (the first and main line of preventive abuse of public trust) is in effect, a set of ex ante verifications undertaken during budget execution to ensure that: (i) public resources are committed and expended in accordance with the budget law, other financial laws and regulations, and government priorities; and (ii) the principles of fair market pricing of government purchases and uniform application of rules are observed in the use of public resources. The external oversight is an ex post control.
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