Public Financial Management and Internal Control: The Importance of Managerial Capability for Successful Reform in Developing and Transition Economies

Foreword
Preface
Contents
List of Tables
1: Changing from Financial Control to Financial Management in the Public Sector: An Introduction to the Changes That Will Be Required
	1.1	 The Aim of and Audience for This Guide
	1.2	 Why Is Management Relevant and Important?
		1.2.1	 Management
		1.2.2	 Leadership and Organisational Culture
	1.3	 Key Terms and Facets of PFM/IC Reform
		1.3.1	 The Budget
		1.3.2	 Cash Management
		1.3.3	 Management Accounting
		1.3.4	 Control
		1.3.5	 External and Internal Control
	1.4	 Implementing Reform from a Management Perspective
		1.4.1	 Longer Term Public Financial Management
		1.4.2	 Ownership of the PFM/IC Reform and Stability in the Reform Process
		1.4.3	 Corporate Governance (or ‘Good Governance’)
		1.4.4	 The Timing of the Reform
	1.5	 Applying This Reform
		1.5.1	 The Practical Consequences of the PFM/IC Reform
		1.5.2	 How Will the Existing Political and Operational Management React in Practice to Advanced Public Financial Management Reforms?
	1.6	 Individual Governments and This Reform
	1.7	 Structure of This Guide
	1.8	 Summary
	Annex 1
		Likely Consequences of the Reform
			The Managerial Consequences of the PFM/IC Reform
			The Control and Budgetary Consequences of the Reform
			The Accountability and Transparency Consequences of the Reform
2: Implementing Public Financial Management and Internal Control (PFM/IC)
	2.1	 The Context for Public Financial Management and Internal Control (PFM/IC)
	2.2	 Implementing PFM/IC Reform
	2.3	 Who Is the Manager?
	2.4	 Efficiency and Effectiveness and PFM/IC Reform—Why Countries Should Want to Introduce the Reform
		2.4.1	 Securing Efficiency and Effectiveness
		2.4.2	 The Role of the Operational Manager in Achieving Efficiency and Effectiveness
	2.5	 Defining ‘Sound Financial Management’
		2.5.1	 Sound Financial Management
		2.5.2	 Financial Control
		2.5.3	 Cost Drivers and Cost Centres
	2.6	 Appreciating the ‘Management’ in Public Financial Management
		2.6.1	 The Professionalisation of ‘Management’
		2.6.2	 Challenges to Professionalising Management
		2.6.3	 Management Structures and Delegation
	2.7	 Internal Control and Management
	2.8	 The Ministry of Finance and Its Controls
	2.9	 Second-Level Organisations
	2.10	 The Head of Finance
	2.11	 The Time Horizon for Decision Making Under PFM/IC
	2.12	 Effective Public Financial Management and the Information Requirements
	2.13	 Achieving the Benefits of PFM/IC
		2.13.1	 Management and the Benefits of the Reform
		2.13.2	 Integrating PFM/IC Reform with Managerial Reform
		2.13.3	 Promoting Financial Literacy and Awareness
		2.13.4	 Engaging a Wider Set of Actors in Financial Decision Making
	2.14	 Learning Lessons from the Experience of Countries Aiming to Introduce PFM/IC
	2.15	 PFM/IC and Delegation
	2.16	 PFM/IC and Decentralisation
	2.17	 Summary
3: The Distinction Between Public Financial Management and Internal Control (PFM/IC) and Public Financial Administration and Internal Control (PFA/IC)
	3.1	 Public Financial Administration and Internal Control (PFA/IC)
		3.1.1	 Control Prior to the Adoption of PFM/IC
		3.1.2	 The Control Environment
		3.1.3	 Limitations of PFA/IC
	3.2	 Comparing PFM/IC and PFA/IC
		3.2.1	 An Overview of the Comparison
		3.2.2	 The Objectives of Control
		3.2.3	 Budgetary Control
		3.2.4	 Development of Budgets
		3.2.5	 Parliamentary Scrutiny
		3.2.6	 Internal and External Audit
		3.2.7	 Consequential Features of PFM/IC That Do Not Exist with PFA/IC
	3.3	 Summary
	Annex: A Detailed Comparison of PFA/IC and PFM/IC
4: The Practical Steps for Initiating a Successful PFM/IC Reform
	4.1	 This Is a Management Reform!
		4.1.1	 The Managerial Impact
		4.1.2	 The Benefits of the PFM/IC Reform
		4.1.3	 Control
		4.1.4	 The Timetable for the Reform and the Role of Parliament
		4.1.5	 The Tests That Can Be Applied to Assess the Feasibility of the Reform
	4.2	 How Is the PFM/IC Reform to BeUndertaken?
		4.2.1	 Who Should Be Responsible for the Development of the PFM/IC Reform Policy, Its Application and Local Ownership of the Reform
		4.2.2	 Achieving Local Ownership
		4.2.3	 The Role of Parliament
		4.2.4	 The Basic Elements of This Reform Recognising That This Is an Ongoing Reform
	4.3	 Will Delegation of Operational Management to the Civil or Local Government Service Cause Politicians to Lose Control?
	4.4	 How Should the Reform Be Applied Across the Public Sector?
	4.5	 Establishing a ‘Driving Force for Change’ Within a Ministry of Finance
	4.6	 Summary
5: The Responsibilities of the Minister of Finance, the State Secretary, and the Ministry in the Development of a PFM/IC Policy
	5.1	 The Responsibilities of a Minister of Finance and Senior Officials
		5.1.1	 The Minister of Finance and PFM/IC
	5.2	 Before the Reform!
		5.2.1	 The Initial Assessment
		5.2.2	 The Appropriateness of the Decision to Introduce PFM/IC
		5.2.3	 A Critical Issue for a Minister of Finance
		5.2.4	 The Benefits and Costs of the Reform
		5.2.5	 The Ministry of Finance and the Finance Function Within Line Ministries and Local Governments
		5.2.6	 How the Minister of Finance Should Regard PFM/IC
		5.2.7	 Coordination with the Different Ministry of Finance Technical Departments
		5.2.8	 The Minister of Finance and Other Ministers
		5.2.9	 The Minister of Finance and Parliament
	5.3	 During the Reform!
		5.3.1	 Establishing the Appropriate Organisational Structures to Apply the Reform
		5.3.2	 Cooperation with the Ministry or Department Responsible for Public Administration or Civil Service Reform
		5.3.3	 The Use of Performance Information
		5.3.4	 The Organisation of Financial Information for Management Purposes
		5.3.5	 Internal Control Arrangements Within Line Ministries and Local Governments
		5.3.6	 PFM/IC and Budgetary Control
		5.3.7	 PFM/IC and the Quality of Public Expenditure
		5.3.8	 The Impact of PFM/IC on the Control of Second-Level Bodies Such as Agencies and State-Owned Enterprises
		5.3.9	 PFM/IC: Securing the Managerial and Technical Capacity: Advice and Training
		5.3.10	 Encouraging Managerial Initiative: A Need to Review Penalty and Inspection Arrangements
		5.3.11	 Financial Regulations and Other Advice to Be Issued by the Minister of Finance
	5.4	 Sustaining the Reform
		5.4.1	 The Minister of Finance and the Timescale for Application
		5.4.2	 The Need for a Consistency of Approach over Time and for Consensus Between Different Strands of Political Opinion
		5.4.3	 The Ministry of Finance and Annual Arrangements for the Review of the Impact of PFM/IC
	5.5	 Summary
	Annex
6: Risks and Unintended Consequences of the Reform
	6.1	 The Background to Risk and Unintended Consequences
		6.1.1	 Definitions
		6.1.2	 Causes of Unintended Consequences
		6.1.3	 Reducing the Potential for Risks and Unintended Consequences
		6.1.4	 Protecting Against Risks and Unintended Consequences, Including a Role for Internal and External Audit
	6.2	 Examples of Unintended Consequences
	6.3	 Performance Information and Using ‘Bureaucracy’ as an Indicator of Performance
	6.4	 Managing Relations with Aid Agencies with the Aim of Avoiding Risks and Unintended Consequences Arising from Aid Support
	6.5	 The Factors Which May Be a Cause of Risks and Unintended Consequences
	6.6	 The Warning Signs Leading to Potential Unintended Consequences
	6.7	 Arrangements for the Monitoring and Evaluation of the Reform
	6.8	 Summary
7: The Responsibilities of the Top Operational Management Official in Public Organisations for the Implementation and Quality Control of PFM/IC
	7.1	 Nominal and Real Responsibility for the Application and Quality Control of PFM/IC
		7.1.1	 The PFM/IC Leadership Application Arrangements
		7.1.2	 The Responsibilities of a State Secretary or Equivalent Before the Application of the PFM/IC Policy
		7.1.3	 The Role and Responsibilities of a State Secretary (or Equivalent) Operating in a Managerial Environment
		7.1.4	 The Specific Financial Responsibilities of a State Secretary with the Implementation of PFM/IC
		7.1.5	 Where No State Secretary Post Exists But Each Department Within a Ministry Is Headed by a ‘Director’ Who Reports Directly to a Minister
		7.1.6	 The Importance of Good Corporate Governance Arrangements
		7.1.7	 The Relationship Between Line Ministry State Secretaries and the Ministry of Finance State Secretary with the Application of PFM/IC
		7.1.8	 The State Secretary, Internal Audit and Inspection
	7.2	 Summary
8: The Role of the Head of Finance and the Finance Department in Line Ministries and Other Public Organisations with the Application of PFM/IC
	8.1	 The Significance of Financial Management
		8.1.1	 Financial Management in Public Organisations
		8.1.2	 Financial Management, Decision Making and the Role of the Head of Finance
	8.2	 Functions of the Head of Finance Prior to the Application of PFM/IC
		8.2.1	 The Background
		8.2.2	 A Summary of the Responsibilities of the Head of Finance Before the Introduction of PFM/IC
	8.3	 The Responsibilities of a Head of Finance with the Introduction of PFM/IC
		8.3.1	 The Changed Background
		8.3.2	 The Key Changes That the Head of Finance Should be Prepared for, Including Support to Managers
		8.3.3	 The Head of Finance and the Development of Policy, Including Securing Short- and Long-Run Financial Resilience
		8.3.4	 Accountability and Transparency
		8.3.5	 Managing Costs
		8.3.6	 The Role of the Head of Finance as a ‘Check’ on Managerial Aspirations and as a Reviewer of the Utilisation of Assets
		8.3.7	 A Summary of the Role of the Head of Finance with the Introduction of PFM/IC
	8.4	 The Head of Finance Role in Developing a Financially Aware Operational Management
		8.4.1	 The Centrality of the Role of Head of Finance
	8.5	 The Training of Heads of Finance
	8.6	 Accrual Accounting and Its Impact upon Financial Management and Financial Reporting
	8.7	 The Organisation of the Finance Function
	8.8	 Costing
	8.9	 The Head of Finance and Strategic and Business Planning and Strategic Financial Planning
	8.10	 Summary
	Annex 1: The Responsibilities of a Head of Finance in Supporting the Development of a Financially Aware Management
	Annex 2: Financial Resilience
9: The Role of the Department Responsible for Advising on and Securing the Application of PFM/IC
	9.1	 Introduction
	9.2	 Before a Decision Is Made to Introduce the Reform!
		9.2.1	 The Strategic Analytical and Planning Report
		9.2.2	 The Risks with Implementing This Reform
	9.3	 Implementing the Reform
		9.3.1	 Learning from Others
		9.3.2	 The Preparation of an Operational Implementation Policy Paper
		9.3.3	 Actions of the Head of the PFM/IC Department Following the Approval of the Operational Implementation Policy Paper
	9.4	 The Ministry of Finance State Secretary Relations with Individual Ministries
	9.5	 The Experience, Skills and Attributes Required to Build a Successful PFM/IC Application Team Supporting the State Secretary
	9.6	 Achieving Local Ownership of the Reform
	9.7	 The Practical Issues the Head of the PFM/IC ‘Driver’ Department Should Address
	9.8	 Summary
10: Achieving the Benefits That Introducing PFM/IC Can Generate and Accounting for the Costs
	10.1 Management and Policy—The Core Factor in Achieving the Benefits of PFM/IC
	10.2 The Benefits of the Reform
		10.2.1 Budgetary Stability
		10.2.2 The Sources of Benefit Derived from Better Quality Management
	10.3 Summary on Benefits
	10.4 The Main Areas of Cost
	10.5 Summary on Costs
11: International Standards of Internal Control Relevant to the Application of PFM/IC
	11.1 The Implicit Assumptions Contained Within the International Standards of Best Practice (COSO)
	11.2 Appreciating the Impact of COSO
		11.2.1 The Standards of COSO
		11.2.2 COSO and Management
	11.3 The Five Standards of COSO
		11.3.1 An Overview
		11.3.2 The Individual Standards
			11.3.2.1 The Control Environment Standard
			11.3.2.2 The Information and Communication Standard
			11.3.2.3 The Control Activities Standard
			11.3.2.4 The Risk Management Standard
				An Overview
				Managers and Risk
				The Practicalities of Introducing Risk Management
				The Responsibilities of the Top and Senior Operational Management
				Risk Appetite Impact and Likelihood
				Publication
				A European Commission Overview About Risk Management and COSO
			11.3.2.5 The Monitoring Activities Standard
	11.4 Summary
	Annex 1
		Examples of Risk Management Statements
			Risk Management Example Statement
				Overview
			Risk Appetite Statement
				Clinical Effectiveness
				Patient Safety
				Finance
				Patient and Service User Experience
				Workforce
				Infrastructure
			Risk Tolerance
			The Risk Management Objectives
			Framework
			Roles and Responsibilities
				Role of the Court
				Role of the University Executive (UE)
				Roles of Heads of Colleges, Schools and Professional Services
				Role of the Risk Management Committee
				The University Risk Manager
				Role of Internal Audit
				Role of the Audit & Risk Committee
				Role of All Faculty and Staff
			Risk Appetite
12: Managing and Controlling Second-Level Organisations: The Responsibilities of the First-Level Organisation
	12.1	 An Overview of the Control of Second-Level Organisations with the Development of PFM/IC
		12.1.1 The Context for Establishing Second-Level Organisations
		12.1.2 The Criteria for Establishing Second-Level Organisations
		12.1.3 Purpose of Establishing Second-Level Organisations and the Problems That Exist
		12.1.4 The Responsibilities of Controlling Organisation
		12.1.5 The Information That a Controlling Organisation Should Have
		12.1.6 Oversight Arrangements by Controlling Organisations: Service-Level Agreements—Examples of Arrangements in Ireland and the Netherlands
		12.1.7 Arrangements for the Systematic Review of Existence of a Second-Level Organisation: A Netherlands Example
		12.1.8 Questions to Be Asked About Second-Level Organisations When PFM/IC Is Introduced
		12.1.9 Questions to Be Asked Where Private Sector Organisations Are Asked to Deliver Public Services
		12.1.10 An Example of the Risks That Can Exist with Second-Level Organisations
			12.1.10.1 Introduction
			12.1.10.2 The example:
		12.1.11 Controlling Ministries and Boards for Second-Level Organisations
		12.1.12 Audit and Second-Level Organisations
		12.1.13 Using ‘Performance’ as a Basis for Control
	12.2	 Summary of Issues Concerning Second-Level Organisations and PFI-Type Schemes
	Annex
		Irish Government Agency Report Requirements
			Chairperson’s Comprehensive Report to the Minister
			Statement on System of Internal Controls in a State Body
		Irish Government: Model Shareholder Expectation Letter
			Dividends
			Return on Capital
			Sectoral Policy Objectives
			Governance Arrangements
				Corporate Plan
				Reporting
				Board Evaluation
				Engagement
		Financial Performance Measures
13: Monitoring the Change from Administration to Management: Demonstrating This Through the Utilisation of a Statement of Internal Control
	13.1	 Reporting on the Quality of Internal Control
		13.1.1	 Management and the Statement of Internal Control
		13.1.2	 The Responsibilities of the Official Preparing This Statement
		13.1.3	 The Benefits of This Statement
		13.1.4	 The Issues That Should Be Covered in the Statement
		13.1.5	 The Role of Audit and This Statement and the Publicity Which Should Be Given
		13.1.6	 Consequential Changes to Facilitate the Development of a Statement of Internal Control
		13.1.7	 Signs of Weaknesses in the Internal Control Arrangements
		13.1.8	 Examples of Statements of Internal Control
	13.2	 Summary
	Annex: Example Statements of Internal Control
		Example 1: United Kingdom
			A Central Government Ministry
			A Local Government
		Example 2: Croatia
14: Public Sector Reform, Delegation, and PFM/IC
	14.1	 Public Sector, Including Civil Service Reform, and PFM/IC
		14.1.1	 Introduction
		14.1.2	 The Main Features of Public Management-Oriented Organisations
		14.1.3	 Managing Complex Public Sector Organisations: Whether Delegation Is Appropriate or Not
	14.2	 The Effect of Introducing the Concept of Efficiency and Effectiveness into Public Service Administration
		14.2.1	 The Impact of Introducing Efficiency and Effectiveness into the Managerial Arrangements
		14.2.2	 Achieving Delegation and Managerial Accountability in Practice: The Importance of ‘Trust’ and Other Factors
		14.2.3	 Delegation and Questions About the Activities of the Organisation
		14.2.4	 Professional Experts and Delegation
	14.3	 The SIGMA ‘Principles of Public Administration’
		14.3.1	 The SIGMA Principles and Management
	14.4	 Personnel Management (Human Relations—HR)
		14.4.1	 The Significance of Personnel Management in the PFM/IC Reform
	14.5	 Summary
	Annex: SIGMA Principles of Public Administration of Relevance to the Introduction of PFM/IC (An Early Draft of the 2023 Version Which May Be Subject to Change)
Index