Serbia: Road Map for Developing Treasury Functions and Implementing Treasury Single Accound and Finance Information Managent System

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  • 1. Jean-Marc Lepain Treasury Specialist ROADMAP FOR DEVELOPPING TREASURY FUNCTIONS AND IMPLEMENTING THE SINGLE TREASURY ACCOUNT AND THE FINANCE INFORMATION MANAGEMENT SYSTEM IN THE MINISTRY OF FINANCE OF SERBIA Jean-Marc LEPAIN TREASURY SPEACIALISTThis document is provided to the staff of the newly established treasury of the Ministryof Finance as part of the project’s capacity building programme for familiarizingthemselves with the new treasury functions and as a roadmap to understand newexpected development.1. Overview of Financial Management- Defining Financial ManagementFinancial Management in Government covers different areas such as fiscal policy,economic planning, public investment management, revenue and expendituremanagement. Expenditure Management is not limited to treasury functions but alsoincludes budgeting. In government, the activities usually associated with the treasury function, such ascash flow management, debt management, investment and corporate budgeting, areoften carried out jointly by a number of ministries and agencies.Financial management in departments and agencies is an important component ofwhat financial and programme managers do in delivering programmes within theirorganisations. Specifically, in carrying out their financial managementresponsibilities, the managers role is to:  identify and manage financial risks;  have available, on a timely basis, relevant, accurate and reliable information that allows them to understand the financial implications of decisions before making them;  report on financial and operational results; and  protect against fraud, financial negligence, violation of financial rules or principles, and losses of assets or public money.Effective financial management is therefore a critical activity that helps anorganisation assess the cost of achieving its objectives, account for the results of itsoperations and discharge its accountability obligations. 1
  • 2. Jean-Marc Lepain Treasury SpecialistA further important factor in financial management, especially in the transformationfrom Socialist to Capitalist approaches to government is the need for enhancedtransparency. Good quality financial management supplies this.1.1. LegislationFinancial Management can only be effective if it operates within a sound transparentlegislative framework.This legislative framework must be in place at four levels:  Constitution;  Public Finance Legislation;  Financial Regulations; and  Accounting Instructions.Once, a sound legislative framework exists, the organisation must ensure that itoperates within that framework. This requires not only sound financial managementsystems but also an effective internal audit service (see below) to ensure compliance.In Serbia, the legislative framework remains weak and undelopped. The PublicFinance Law that has been recently approved has been prepared in a context wherethe devolution of authority between federal and national authorities remain unclearand where many Serbian institutions, like the Ministry of Finance and Economy arestill in the embriyonic stage of their development.1.2. BudgetingThe starting point for sound financial management is the budget which itself is basedon economic planning. The present budget department, with a staff of three people,including the US Treasury Adviser and her assistant, is also at an embriyonic stageand its main achievement has been to put in place the budget classification.Traditional input-orientated annual budgeting has significant drawbacks and theGovernment should be aiming to develop a multi-year, programme based budgetingsystem.1.3. Budget ExecutionOnce there is a sound budget in place, there must be a mechanism for releasing it tothe spending units. In developed countries, the norm would be to authorise spendingof the entire budgeted amount at the start of the financial year. Spending could bereserved later in the year if need be.In Serbia, the best option would be to release money on a, say, monthly basis based onthe revenue inflows.The Treasury Specialist is an expert in this area and can advise the Treasury on thebest methods to implement (see below). 2
  • 3. Jean-Marc Lepain Treasury Specialist1.4. AccountingFinancial management requires a sound General Ledger based system, in accordancewith international standards, where all receipts and payments pass through theGeneral Ledger and through a Single Treasury Consolidated Bank Account.In addition, Serbia will have its unique Treasury Agency to be incorporated into theoverall process.1.5. Financial ControlEnsuring that budget allocations are not overspent, nor spent on the wrong thing,requires an effective, commitment-based, financial control system. Over time,detailed expenditure and revenue profiles should be prepared to enable good qualityfinancial control to operate from early in the financial year. The sooner an adverse, orfavourable, variance is detected the easier it is to take remedial action.1.6. Financial ReportingEnsuring that reports are made to the right level of management as soon after theperiod to which they relate as is practicable. These reports should not only containsummaries of basic financial data for the sector as a whole and for each institution butother key ratios and unit costs. The latter will be especially useful for comparing thedifferent organisations across the country. The Treasurer should take regular,monthly, reports to the Minister detailing the current financial position and analysingwhat the figures mean. If this report can be published it will go a long way tomeeting the transparency requirements.1.7. AuditingAs indicated above a vital element in securing effective financial management ineffective auditing. Ideally, this should be good quality audit service both by anInternal Audit Service and by the External Auditor.The Internal Audit Service should be ensuring that the systems in place, both financialand non-financial, are currently soundly based and remain so in future. They shouldalso be ensuring that the systems are actually being followed.The External Auditor‟s traditional role is to provide an audit certificate on the annualaccounts and make a report to Parliament.2. Budget Execution 3
  • 4. Jean-Marc Lepain Treasury Specialist2.1. General PrinciplesThe principles of Budget Execution rest on three main functions:  The authorizing function  The payment function  The accounting functionIn line with the Budget System Law, the division of tasks between, on one side, allauthorizing functions within the respective limits of appropriations, allocations andcommitments of funds of Line Ministries, their spending units and all budget users ingeneral and, on the other side, all payment and accounting functions assigned to thetreasury function has to be viewed mainly under two aspects: 1) The interaction between these entities on the different levels (aggregated/national/Line Ministries/direct –indirect budget users) and the Treasury services (on different levels according to the solution on decentralization as the Treasury department MoFE, Treasury Agency and eventual decentralized treasury units). 2) The internal organization of the Treasury, and the functionality of its IT system, which play an important role in determining the way budget execution is modeled in all its different aspects, such as revenue and expenditure management and financial planning as related to all budget users. This process requires detailed data/financial plans and decision-making for cash and liquidity management, debt management, and all types of banking and payment arrangements.2.1.1. Interaction of the different processesThe Treasury should be informed first hand (Budget Information System andmonitoring of budget implementation steps) of all operations affecting allocations andin year re-allocations of budget resources for all spending units and budget line items(similarly operations affecting revenues). For that reason the Treasury needs to use thesame reports and financial planning as the Budget Department of the MoFE, for allthe spending units.The Treasury should share responsibility for the approval of commitments and beresponsible for the real money flows, either concerning inflows to the State (TSA orother constructs for receipts) or outflows from the TSA and the execution of paymentrequests at the various stages and steps of payment preparation and paymentexecution.In line with the regulatory provisions under preparation for the allocation process, thecommitment process and the operation of spending limits (driven from the allocationside/authorizing officers), The Treasury should manage the cash limits to be applied 4
  • 5. Jean-Marc Lepain Treasury Specialistfor the payment requests of the spending units for the respective reference periods andexpenditure items.Needless to say, in order to avoid duplication of the IT support required for theallocation operations and planned use of allocations, the Treasury should receive therespective last situation of allocations, including re-allocations, by means of mirroringthe corresponding data (data bases), using a simple interface or any file transferdevice.The process of checking fund availability, according to specific regulation andfinancial policy, has to be distinguished from the Allocation Cycle. Briefly put:appropriations-allocations-fund reservations and commitments, respecting givenspending limits for reference periods, decided according to the rules.As regards the Allocation Cycle it is justified to speak about virtual budget money.This “budget money” is a sort of drawing right that budget users can use to draw thefunds that have been allocated and authorized for the payment of their expenditures atthe various levels, by budget authorities (Parliament, Government, Line –Ministries,MOFE in essence).Financial plans and spending limits have to be adapted by the authorizing officers/budget managers in case of strong deviation of expenditure dynamics or, in case ofanticipated, out of line, expenditure from revenue inflows and outside authorizedshort-term borrowing limits and deficit targets. These adjustments, necessary tointroduce flexibility into the management of the expenditure circle, require not only awell-defined policy, but also a set of instructions or regulations defining the differentlevels of responsibility and the process to be followed. This process needs to beachieved in complete co-operation with the Budget Department. It might require aminimum of data exchange between the two systems, which should ideally be able tocommunicate and interact. As it is understood that integration of the two systems willnot be achieved before the next two years, the Treasury Expert will have to defineother ways by which this adjustment process can be implemented.2.1.2. The three process circlesBudget Execution requires three process cycles. These cycles demonstrate theinteraction between allocation and financial planning:Cycle 1 for the allocation process of budget implementationCycle 2 for expenditure management, financial planning and management of spendinglimitsCycle 3 for the process linking financial planning to cash management steps andpayments.The following figure visualizes, in an indicative way to be adjusted in the Serb case,the main interactions to be considered in budget execution. 5
  • 6. Jean-Marc Lepain Treasury SpecialistThe subsequent chart shows the different interactions between the three cycles. Thischart is purely indicative, and should be adapted to the local Treasury Model. One ofthe tasks of the Treasury Expert will be to review all the steps of each cycle and todefine how these circles will interact with each other. Cycle 1 Cycle 2 Cycle 3 Breakdown of annual Financial Plan II, Appropriations 1 1 appropriations, 1 Adjustment Spending quarterly,monthly Limits to cash flows =Financial Plan I Allocations, Increase, Blending /matching 2 Decrease, Regrouping 2 Cash flows with Quarterly Spending Limits, deficit targets, 2 Binding indicators borrowing limits Forecast of cash-flows, Locking of Funds/ 3 3 Preliminary Committment different sources Quarterly, monthly Financial 3 Plans (daily figures) Blending / optimising 4 forecast Commitments / 4 Release of Funds Monthly expenditure Fixing of cash limits for 4 profiles – Supply schedule 5 payment requests upper limits (Spending Units) 5 Order for services Fine –tuning cash limits Reallocations, regroupings 5 6 with forecast for cash positions (cash Release services (or goods) 6 management) Fine-tuning expected cash- 7 Validation of services / 7 balances/ financing requirements /Liquidity invoices Committee Payment generation 8 (request) 8 Execution of payments o Continuous monitoringThe IT systems controlling the three circles must be absolutely coherent with eachother. The Treasury IT system must itself focus on all the parameters that determinepayments such as the completion of the expenditure control process, validity of thepayment request, control of the cash limit based on commitments, etc. If Financialplans are binding in terms of limits to be operated, (spending limits and cash limits)the cross checking mechanisms have to be based on full integration of financial plans(a requirement needed anyhow for performance measures), to compare financial plans–daily based versions, in particular with real money flows for selected revenue orexpenditure items.According to the desired and gradually achieved extension of the Treasury GeneralLedger System to be designed and implemented and modules for cash management,the IT support of both sides –for the Allocation Cycle (budget information system)and money cycle (treasury information system), has to be brought in line with theinterim solutions envisaged.As it will not be possible to bring the desired level of integration between the twosystems before several years, it is essential to focus more on cash management. In thesituation of liquidity shortage, as it is the case in Serbia, cash management policydrives the Budget Execution process. As long as this situation lasts it will not bepossible to implement a very sophisticated Budget Execution system along the lines 6
  • 7. Jean-Marc Lepain Treasury Specialistof what exists in other European countries. This situation should be acknowledgedand the Treasury Instruction that needs to be written should take that into account. Interrelation budget implementation steps Allocation process, expenditure management Cycle 1 1 2 3 4 5 6 7 8 Cycle 2 1 2 3 4 5 Cycle 3 1 2 3 4 5 6 7 8 Legend: 1 Cycle 1 Budget Implementation Steps (allocative) … 8 …. Cycle 2 Expenditure Management/plans : 1 5 Cycle 3 Financial Planning, money flows 1 ….. 82.1.3. Accounting Treasury and legal entitiesThe requirements for Treasury accounting and the Treasury General Ledger systemhave to be based on the bank ledger(s) records according to banking arrangements andpayment systems operated (Treasury Agency, Commercial banks and National Bank(direct/indirect budget users), categories (budget classification/chart of accountsitems) tracking and reconciling all cash inflows and outflows of the TSA(s) andpreferably to be completed at the earliest possible moment through a sub ledger fordebt transactions and data capturing/centralizing accounts payable and accountsreceivable information from spending units, being understood that commitments areentered and recorded by the same system.2.2. Present Budget Execution SystemsThere are a variety of Budget Execution (BE) systems currently in place depending onwhether the budget user has its own giro account and whether or not it uses theMutual Services Administration (MSA) for its accounting and expenditure processing 7
  • 8. Jean-Marc Lepain Treasury Specialistoperations. From January 2003, the situation will change with the MSA beingabsorbed by the Treasury.These have been classified as Types I to IV by the USAID Project developing theInterim Computer System.Type Characteristics Processing CycleI  No giro account 1. Invoice sent to MSA.  Uses MSA 2. MSA process a payment request and sends it to Budget Execution (BE) (must be transferred from MSA‟s Oracle System to BE‟s Access). 3. BE approves the request in part of in full and sends approval to “Room 37”. 4. “Room 37” processes the request and sends payment order to ZOP. 5. ZOP reports back to “Room 37” when payment is made.II  No giro account 1. Invoices come directly to the budget  Does not use MSA beneficiaries which prepare payment requests. 2. Payment Requests and Invoice sent to BE. 3. BE approves the request in part of in full and sends approval to “Room 37”. 4. “Room 37” processes the request and sends payment order to ZOP. 5. ZOP reports back to “Room 37” when payment is made.III  Has own giro account 1. Budget User requests monthly allocation  Uses MSA according to the financial plan. 2. BE transfers lump sums on a monthly, weekly or daily basis, depending on funds. 3. MSA pays invoices from the Budget User‟s giro account.IV  Has own giro account 1. Budget User requests monthly allocation  Does not use MSA according to the financial plan. 2. BE transfers lump sums on a monthly, weekly or daily basis, depending on funds. 3. Budget User processes its own invoices and the requests of its organisational sub-units and indirect budget beneficiaries.Thus, it is clear that the Budget Execution Sector is responsible for preparing thepayment on invoices for budget beneficiaries of Types I and II and for ordering thebank transfers to the giro accounts of budget beneficiaries of Types III and IV. 8
  • 9. Jean-Marc Lepain Treasury SpecialistTransaction volumes vary from day to day. A normal day involving some 5,000transactions with double this on salaries payment days.BE indicates that 50% are processed initially by the MSA and transferredelectronically with the other 50% being submitted on paper directly to the BE.Each payment request is individually approved for immediate or delayed payment,based on the availability of funds. After approval, the request is processed by stafflocated in "Room 37" of the Ministry of Finance and Economy (MoFE) and theresulting payment order forwarded to the ZOP, electronically for those requestsoriginating in the MSA computer system and via standard paper payment slips for theothers.2.3. Budget Execution and the Budget Systems LawThe Budget Systems Law indicates that Budget Execution and the use of quotas tolimit expenditure must take place but is silent as to how this should happen.When the economy is fully developed, it will be possible to enable ministries andagencies to spend up to their approved budget limits without the need to control thepattern of expenditure during the year. The Cash Management system will be such asto match revenue with expenditure by short-term borrowing and lending.Until this situation prevails, however, the Treasury will have to control spending bymeans of a quota system. This involves establishing how much money is availablefor spending and authorising expenditure, in accordance with government priorities,up to this limit.It is a time-consuming process and there should be as few quotas used as possible.Ideally, quotas should be for no shorter period than one month.The actual notification of quotas can be done using either an informal or formalsystem.Under the informal system, spending units are notified of the amounts they can spendby memorandum. It is a quick, flexible system but is prone to error as total amountsapproved may not be readily available.A formal system does not have this disadvantage and is, thus, much moretransparent. The classic formal system uses a variety of “warrants” – officialdocuments signed by the Minister under powers contained in the Budget Law orRegulations made under that Law.These warrants have different purposes but have one thing in common – in theabsence of the Minister‟s signature on a warrant expenditure is illegal. With aneffective computer system it can be made impossible for spending agencies to incurcommitments in the absence of warranted approval. 9
  • 10. Jean-Marc Lepain Treasury SpecialistThe types of Fund Warrants issued by the Minister of Finance include:  Appropriation Warrant: under the annual budget law the Minister shall issue Chief Finance Officers with an Appropriation Warrant specifying the level of expenditure approved by Parliament for each spending unit or sub- unit under specific budget classifications;  Allocation Warrant: by this warrant, the Minister will authorize Chief Finance Officers to spend up to the amount detailed in the warrant. It is likely that these warrants will be issued on a monthly or quarterly basis, depending on funds available for spending.  Virement Warrant: by this warrant a Chief Finance Officer may move funds from one expenditure item to another provided the reallocation does not exceed an agreed maximum of the total of the appropriation being reduced. This Warrant shall also be used to transfer money from reserves to spending organizations;  Contingency Warrant: the Minister has the right to increase the amount available to a Chief Finance Officer by way of a Contingency Warrant. Any amounts provided by way of Contingency Warrant must be taken to the next session of Parliament by way of the Budget Law or Supplementary Budget Law.  Development Project Warrant: the Minister will issue a Development Project Warrant to Chief Finance Officers executing Donor funded projects notifying them of a project‟s approval and the total expenditure that can be made under that project, usually for the life of the project; and  Development Project Allocation Warrant: the Minister will issue a Development Project Allocation Warrant to Chief Finance Officers responsible for the progress, control and monitoring of a Donor funded project notifying them of the funds that are currently available and which can be spent up to the amount detailed in the warrant.Funds Warrants are usually issued on special stationery setting out the details andconditions of the release of funds, signed by the Minister or his delegate, and recordedin the Treasury General Ledger.They are usually copied to the Auditor-General or equivalent; again as part of theopenness of the transactions. - Action Required from TreasuryTo ensure that there is an effective system of Budget Execution – the release of fundsto spending agencies – to ensure that spending does not exceed revenue collection. - Action to be undertaken by Treasury SpecialistTo work with Treasury staff on the design and implementation of such a system. 10
  • 11. Jean-Marc Lepain Treasury Specialist3. Cash Management3.1. Preliminary remarksThe following remarks are based on the experience that system driven approaches (ITsupport through cash management systems) to support the core function of theTreasury as the cash management function fail, if they are not embedded in an outputoriented approach defined from the perspective of the needs to manage financialresources of the state: in particular those of decision makers and financial managerswhich carry the responsibility on the aggregated level (Government/respectivelyMinistry of Finance, its Treasury department or State treasury)3.2. Centralised cash management – basic/mandatory requirements 1. The treasury service in charge of cash management has, first of all, to rely on timely and reliable data concerning cash flows on a daily basis, regardless of the payment system and given banking arrangements. 2. On the basis of observed cash flows in the past and anticipated cash flows (forecasts) together with data from financial planning and budget execution data (allocated, committed and regular recurrent expenditures and obligatory expenditures based on legal obligations) a coherent set of operative statements has to be provided to allow for rational decision making of cash management. 3. Whilst cash management can be considered an art, the mechanisms of the payment system are of a purely conventional and technical nature reflecting the possibilities offered by the stakeholders involved and notably the banking sector and the possible quality of IT support. 4. The accounts management in terms of accounts of spending units as held by some treasuries and the management of bank accounts (TSA and /or commercial bank accounts) can only be performing, if the information on cash flows is based daily and covers at least estimated cash flows for the next 30 to 60 banking days for a sufficiently differentiated number of items (see example below). 5. Similarly, these data are required for liquidity management and short-term borrowing or for the adjustment of cash limits when required. Basically these data are needed for cash flow smoothening, i.e. adjustments of cash inflows and outflows to spending requirements and to commitments to be executed. 6. In a decentralized treasury system, the distribution of cash to spending units or field treasuries based partly on an important flow of physical cash is a subordinated task of cash management and can be considered as resultant of centralized cash management and decision-making on the basis of a constantly updated overview on the financial situation in budget execution. 11
  • 12. Jean-Marc Lepain Treasury Specialist 7. In this order of ideas one common practice of cash management in central treasury departments is to rely on centralized information of cash flows and to base decisions on an overridingly important operative statement: the “Statement on daily aggregated cash flows”, reflecting the daily position of the state. According to practice in EU Member States, and in most candidate countries, the number of items retained in such a daily statement varies generally between 20 and 50. 8. The items relate to cash inflows and outflows, generally of the previous day, for the main revenue and expenditure categories, cash balances, financing requirements, flows from and to financial markets (investment and borrowing), resulting debt stock data and financial assets. 9. In case where a performance approach is followed, the statements indicate the difference between real money flows and estimated flows for some of the items. 10. Forward estimates of the same cash flow data cover at least 22 banking days in advance for the items considered in the operative statement. 11. The statement is used for different purposes and by different users. It is available to all financial managers on the central level on a daily basis. Coherence of the data must be ensured through cross-checking different sources of data (TSA, payment system, other data bases recording real cash flows).3.3. Application of requirements and criteria to the Serb situation 1. Whether interim or final solutions for business processes and budget execution, limited or high tech integrated IT support systems, differentiated payment systems for indirect budget users or direct budget users, many sub- accounts of different “Single Accounts”, whether the TSA is located in the National Bank or a virtual one of several commercial bank main accounts or in case of Serbia part of payments are processes/managed through the “Treasury Agency” (adapted ex ZOP): the task of financial managers in the cash management department/division on the central level and in view of the necessary centralized cash management function - being a standard feature today - definitely requires information on cash flows as outlined before. 2. The constraints of information and information flows on money flows, must be overcome as a first priority: if cash flow data are available in different forms, cash management modules must provide for solutions to integrate this information through a “component management solution” up to the moment the components are part of a generalized treasury information system or budget management system or Financial Management Information System, perfectly linked to the payment system, the TSA and banking arrangements supporting integrated systems. 12
  • 13. Jean-Marc Lepain Treasury Specialist 3. Even more the requirement postulated or better observed in today‟s practice for centralized cash management has to be seen independently from the treasury model as a “must condition” and supported by an appropriate TSA solution. In the case of Serbia and according to actual orientations and decisions, it means that:  A virtual TSA structure must be operated in the Central Treasury (or the Treasury Agency if outsourced) combining the cash flow data from the operations recorded by the Treasury Agency (using its own “TSA” data) and the cash flow data as recorded on the TSA of the National Bank, in order to have a complete daily picture of cash flows for all items considered (20-50) and their estimates for the same structure  Given the impact of structural changes- economy, new taxes/tax system, changing expenditure patterns and priorities, inflation, changes in deficit financing- only to mention a few - cash management to be performing on the central level cannot rely only on observed cash flows in the past (time series and their extrapolation), but must rely heavily on the information obtained on financial plans of spending units and their continuous update, spending and cash limits operated in line with commitments approved in the past and becoming effective spending.  Accordingly application rules for budget execution referring to these issues must be prepared and decided on in a binding form and cannot be of an indicative nature only. (In line with the organic budget law and subsequent rules)  Furthermore it is essential to centralize information on all accounts receivable and all accounts payable of spending units  Regarding IT support, priority efforts should be directed to a cash management module for the Central treasury (Treasury department of the MoFE taking into account the criteria described)  Once the Treasury General Ledger System has been designed and implemented, at least its main components, coherence and to some extent integration with the cash management module can be achieved  Serb decision makers and financial managers are in urgent need for such a cash management module if decisions shouldn‟t be taken “blindly” Items to be retained (summary) on the daily operative statement (daily aggregated cash flows/daily financial position of the State (indicative only): 13
  • 14. Jean-Marc Lepain Treasury Specialist (Please note: statement reflects aggregated real money flows as daily recorded in the payment systems/TSA or other main accounts) Taxes . . Other revenues . . Surplus of State enterprises Difference to estimate Cash revenue total Tax refunds Wages Pensions Other current expenditures Transfers/subsidies Municipalities Households Industry Financial investments Other expenditures Difference to estimate Total cash expenditures Cash surplus I Payments from the National Bank Interests on state debt . Dinar .Currency Interest on money market investment Cash surplus II Items issues on securities Bonds T bills Others Repayment of State debt total Gross financing requirement Treasury bills 14
  • 15. Jean-Marc Lepain Treasury Specialist Others Growth of State debt total Cash surplus III Variation(growth) of money market investments Redemption of investments “ Change in money market investments Transfers National Bank Change in cash Beginning cash End cash (Cash on main revenue account, commercial banks, others/0 balancing) Deviation Interest rate% Internal interest Accumulated interest Cash End cash total Money market investments Total liquid assets Debt of central government Needless to say, the output of the cash management module to be built is demand driven and will stay the same regardless of the IT solutions chosen in the future, or the treasury model followed.4. Treasury Accounting4.1. IntroductionAn effective accounting system (1) collects, processes, maintains, transmits, andreports data about financial events, (2) supports financial planning or budgetingactivities, (3) accumulates and reports cost information, or (4) supports thepreparation of financial statements.The system must exhibit effective internal control to ensure it cannot be abused in anyway. The accounting system should include all or most of the following principles: 15
  • 16. Jean-Marc Lepain Treasury Specialist Segregation of Duties: No one person should be responsible for the recording and processing of a complete transaction; Organisation: Treasury should have a plan which defines and allocates responsibilities; identifies lines of reporting; and clearly specifies the delegation of authority; Authorisation and Approval: All transactions should require authorisation or approval by an appropriate responsible official; Physical: Access to physical assets should be limited to authorised personnel only; Supervision: All actions by all levels of staff should be supervised; Personnel: There should be procedures to ensure that people are competent to carry out the jobs assigned to them; Arithmetic and Accounting: These are the controls within the recording function which check that the transactions to be recorded and processed: have been authorised; are all included; are correctly recorded; and are accurately processed. Such controls include: checking the arithmetical accuracy of the records; maintaining and checking of totals, reconciliation, control accounts and trial balances; and accounting for documents; and Management: These are the controls exercised by management outside the day- to-day routine of the system. They include: overall supervisory controls; the review of management accounts; comparisons with budgets; internal audit; and any other special review procedures.The areas to be addressed in this section are:  Treasury Single Account and General Ledger ; and  Treasury Agency.4.2. General Ledger AccountingGeneral Ledger Accounting in Government is designed to produce accurate andtimely information on the amount and type of expenditure incurred and revenuecollected, measurement of this against that authorised and budgeted and the recordingand control of the financial assets and liabilities generated in the course of operations.There are two main reasons behind government accounting: 16
  • 17. Jean-Marc Lepain Treasury Specialist Stewardship: Relates to supplying evidence that the assets, under one‟s control, have not been misappropriated. It focuses on the security of resources and not their use; and Accountability: Financial accountability refers to the responsibility for actions undertaken which utilise the resources under one‟s control. It is usually associated with measures of success.Stakeholders include: Legislative Bodies; Oversight Bodies; Management; Donors; Investors; Taxpayers; Vendors; Employees; and Voters.There are both External and Internal requirements associated with governmentaccounting:  External Requirements: - Statutory requirements; - Evaluate spending policy; and - Evaluate performance.  Internal Requirements: - Know where the money was spent; - Show financial position; - Monitor against budget; - Information for planning and budgeting; - Information to analyse projects; and - Performance measurement.4.2.1. Background to General Ledger Accounting 17
  • 18. Jean-Marc Lepain Treasury SpecialistReceipts and payments charged against appropriations given by legislature are knownas above-the-line.Those which are made under some other authority of the legislature are below-the-line (anything not covered by voted income and expenditure or money received onbehalf of third parties which do not belong to Government).There is a responsibility on Government to produce annual accounts which reflect thefinancial position of Government and which show both actual and authorisedexpenditure.A typical set of Government Accounts will include the following records: Cash Books; Budget Books; General Ledger; and Journal.The Basic Rules for General Ledger Accounting are:• All transactions (except Journal entries) recorded in the cash book. Each entry supported by the appropriate voucher.• Vote Controller provided with details of income and expenditure recorded. These are reconciled with the Votes Register.• Below-the-line transactions can only be with a third party. No suspense accounts or account containing expenditure which should be charged above the line should be opened.4.2.2. General Ledger DetailAs indicated above, there must be an “appropriate voucher” for every entry (incomeand expenditure) which passes through the Cash Book to enter the General Ledger.There must also be a “journal voucher” for making entries and adjustments to theGeneral Ledger which do not pass through the Cash Book. These are discussed inthe paragraphs below.ReceiptsThe first appropriate voucher should be a receipt for money handed paid toGovernment. If there is not a specific licence issued, which performs the function ofa receipt, what can be termed a General Treasury Receipt (GTR) must be issued.As policy matters come under the purview of the Treasury (see below), it will be up tothe Treasurer to determine the format of the GTR. 18
  • 19. Jean-Marc Lepain Treasury SpecialistFinancial Regulations must state that a revenue collector must immediately issue anOfficial Receipt, in the prescribed form, for each sum of money paid to him for theaccount of Government.In order to properly control revenue collectors must maintain a Cash Book in theform prescribed by the Treasurer, in which all receipts shall be entered daily and inwhich all payovers to the Public Revenue Authority (PRA) or other prescribed officeshall be entered immediately any such pay-over occurs.All receipt entries in the revenue collectors cash book shall include the followingdetails: Date of the receipt; Number of the receipt; Name of the payer; Amount collected on the receipt; and Revenue code to be credited.The pay over of collected revenue to the PRA or other prescribed office shall be inaccordance with directions issued by the Treasurer from time to time.However, such directions shall not prevent more frequent pay-ins or paying in at anytime where the level of cash held poses a security problem. Where a handing over isscheduled to take place, it shall be the responsibility of the handing over officer toattempt to pay to the PRA or other prescribed office, all revenue in his possessionimmediately prior to the hand over.The pay over of collected revenue to the PRA or other prescribed office shall besupported by a Pay Over Slip and a Schedule of Receipts, both in the formprescribed by the Treasurer and with the totals agreed to each other, together with theduplicate copies of General Treasury Receipts and Licences.The Pay Over Slip shall include the following details: The Total Revenue being paid over; Details of the numbers of General Treasury Receipts and Licences issued; and Suitable analysis of the total revenue collected into the revenue codes to which the collections should be credited. The total of the sums allocated between codes should equal the Total Revenue being paid over.The Pay Over Slip shall be signed and dated by the revenue collector responsible formaking the pay over.The Schedule of Receipts shall be a detailed daily analysis of all GTRs and Licencesissued. Each schedule shall be added and cross balanced and the total of all schedulessupporting a pay over to the PRA or other prescribed office shall agree with the totalcollected revenue shown on the pay over slip. The Schedule of Receipts shall be 19
  • 20. Jean-Marc Lepain Treasury Specialistcertified, in the format specified by the Treasurer, by the revenue collector responsiblefor the pay over.At the time of paying over collected revenue to the PRA or other prescribed office,each revenue collector shall Balance his cash book by adding up the amounts recordedin his cash book as revenue receipts, ruling off the cash book and showing the totalrevenue collected and no hand since the last pay over.He shall ensure that the cash on hand agrees with the cash book balance and shall payover this sum in full.Under no circumstances whatsoever shall a revenue collector retain any part ofrevenue that has been collected, receipted and brought to account in his cash book.When paying over the cash collected, the revenue collector‟s cash book will bechecked by the person receiving the payment.A revenue collector shall, when paying over collected revenue to the PRA or anyother prescribed office, present his cash book duly balanced and ruled off, togetherwith his current unused (or partly used) GTR and Licence books to the collectingofficer.The cash book and the used/partly used GTR and Licence books shall be presentedupon the schedule days for the pay over of collected revenue even if no revenue hasbeen collected since the previous pay over.It shall be the responsibility of the collecting officer at the PRA or other prescribedoffice to contact any revenue collector who fails to report on the scheduled day.When a revenue collector pays over collected revenue and presents his cash book andother documents, the collecting officer at the PRA or other prescribed office shallmake the following checks: That all General Treasury Receipts and Licences have been accounted for since the last pay over and that there are no breaks in sequence; That all GTR and Licences issued since the last pay over have been entered correctly in the cash book and on the Schedule of Receipts; and That the cash book has been added and balanced correctly, that the particulars entered on the pay over slip are correct and agree with the cash book and that the total cash, or its equivalent, being paid over agrees with the cash book and the pay over slip.The collecting officer shall initial and date the pay over entry in the cash book andimmediately issue a GTR for the total collected revenue paid over.The revenue collector shall be responsible for ensuring that he obtains an originalGTR for all collected revenue paid over and he shall immediately attach the GTR to 20
  • 21. Jean-Marc Lepain Treasury Specialisthis cash book as evidence that the collected revenue has been duly paid over.The Treasurer shall keep, or have cause to be kept, revenue charts or collectionstatistics for each collector and point of revenue collection. As a minimum theseshould record the monthly takings by each collector and at each point.The Treasury shall, if he considers it to be necessary, authorise a revenue collector inwriting to pay his collected revenue direct to a bank or bank agency for credit of aprescribe government bank account.Where such written authority is issued, the collecting officer at the PRA or otherprescribe office to whom pay over of the revenue is normally made, shall accept thecopy of the bank deposit slip, duly receipted by the bank or bank agency, in lieu of theactual cash collected for the purposes of recording of the collected revenue.Where written authority has been issued to a revenue collector to pay his collectedrevenue direct to a bank or bank agency, he shall prepare a bank deposit slip intriplicate. The original copy shall be retained by the bank or bank agency, theduplicate and triplicate copies being returned to the revenue collector at the time orpaying in, duly receipted by the bank or bank agency.The revenue collector shall present the duplicate copy of the bank paying in slip, inlieu of cash, to the PRA or other prescribed office when presenting his cash book, payover slip, schedule of receipts and used or partly used GTR and Licence books.The revenue collector shall attach the triplicate copy of the paying in slip securely tohis cash book as evidence of having paid over the collected revenue to the bank orbank agency unless the triplicate is part of a bound paying in book, in which case itmust stay in the book.Bank Deposit slips prepared by revenue collectors shall show the serials numbers,amounts and drawers of cheques and bank drafts paid in and the serial numbers,amounts drawers and offices of issue of money orders, etc., together with any detailsrequired by the bank or bank agency,If the above system for receipting funds is scrupulously followed then all revenuecollected on behalf of government will be banked. The Double Entry principle behindthe General Ledger will be followed with the amount of cash appearing on one side ofthe ledger being balances by the total of the various revenue sources appearing on theother.4.3. ExpenditureThis basically involves two systems:General Payment System: this is for all payments other than those made through thepayroll system; and 21
  • 22. Jean-Marc Lepain Treasury SpecialistPayroll System: payment of salaries, wages and associated payments. All payments of public moneys through the General Payments System must involvethe use of a General Payment Voucher which shall be in such form as the Treasurershall prescribe from time to timeGeneral Payment Vouchers shall be made out in favour of the person, persons ororganisation to whom the money, detailed in the voucher, is due.General Payment Vouchers may only be certified and signed for payment by anAccounting Officer, or an officer authorised to sign on his behalf.Any General Payment Voucher not so signed must not be paid.Any officer signing and certifying a General Payment Voucher without due authorityis personally and financially responsible, together with any checking officer, cashieror sub-accountant responsible for the checking or disbursement of public moneysagainst the voucher, in the event that an irregular payment of public moneys shall bemade following unauthorised issue.The certifying and signing of a General Payment Voucher by an Accounting Officer,or his authorised signatory, shall be taken as evidence that the signatory confirms theaccuracy, validity and content of the Voucher.Under no circumstances whatsoever may an Accounting Officer, or authorisedsignatory, certify or sign any blank or incomplete General Payment Voucher.In certifying and signing a General Payment Voucher the Accounting Officer, orauthorised signatory, is responsible for ensuring: that uncommitted funds for the expenditure are available from the code number stated on the voucher; that the authority and warrant quoted on the voucher are current and valid and have not been cancelled or withdrawn; that all prices and rates charged for goods delivered or services rendered are fair and reasonable and are in accordance with any contract, agreement or other terms that have been arranged between the payee and the Government; that all goods supplied or services rendered are correct and the person, persons or organisation legally entitled to receive payment, or shall be an authorised third party entitled to receive payment; that all arithmetic additions, extensions and other calculations have been verified and are correct; that any deduction that the Government is entitled to by way of discount, rebate or counter claim, etc. has been made and a suitable note has been made on the Voucher regarding such deduction; and 22
  • 23. Jean-Marc Lepain Treasury Specialist that the relevant Purchase Order or Indent (the procurement system to be used is outside the scope of this section of the report; however, the need for endorsement, etc… is the same regardless of the procurement system in place) has been endorsed with the Payment Voucher number, date and amount; he shall countersign the Order or indent as proof of his check.The original top copy of a General Payment Voucher will be typed or completed witha ball point pen and carbon paper shall be used to reproduce all copies. Officerscompleting General Payment Vouchers must ensure that every copy is legible andcomplete. If any copy is found to be illegible or incomplete, all copies must bedestroyed and a new set issued.Entries on a General Payment Voucher must not be erased or altered in any way by theuse of correcting fluid or any other substance. Any minor incorrect entry shall be ruledthrough neatly, so that the original entry can still be read, and the correct entry insertedneatly above and the correction initialled by the Accounting Officer or an authorisedsignatory. If an extensive alteration to a voucher is necessary it should be destroyed anda new set issued.The Accounting Officer, or authorised signatory, shall sign the original of the GeneralPayment Voucher in ink or with a ball point pen. Facsimile signature stamps must notbe used on the original of the voucher but may be used on all other copies if preferred.Alternatively, all copies may be signed or initialled by the officer.The Accounting Officer, or authorised signatory, shall add, immediately below hissignature on the original of the General Payment Voucher and immediately beneath thesignature, facsimile signature or initials on all other copies of the voucher his name andtitle in block capitals or by means of a rubber stamp impression.The General Payment Voucher shall show the authority for the expenditure incurred byquoting the reference of the appropriate Accounting or other Warrant; or in the case of are-imbursement, the original receipt number. Where possible the original receipt shouldbe stapled to the payment voucher.The General Payment Voucher shall show clearly the code number to which the paymentwill be charged.As far as is convenient, a separate General Payment Voucher will be prepared for eachitem of expenditure allocated to a single code number at a time. Where, however, suchan action will create unnecessary and excessive documentation, particularly in the caseof payment to one supplier covering a series of invoices or claims and where suchinvoices or claims are to be allocated to a number of different code numbers, it shall bein order to issue one General Payment Voucher only.Where the allocation of one General Payment Voucher is to more than one code number,the analysis of such allocation shall clearly be shown on the face of the voucher or, ifnecessary, on a supplementary sheet which will be firmly stapled to, and be consideredpart of, the General Payment Voucher. 23
  • 24. Jean-Marc Lepain Treasury SpecialistAll General Payment Vouchers will be completed in such a manner that full particularsof the goods supplied, services rendered or other types of expenditure incurred can befully ascertained from the voucher without unnecessary reference to any other separatefile, contract or similar document.The full particulars will include all details of numbers, weights, volumes or otherquantities, identifying marks, rates or other information relating to the goods supplied,services rendered, etc that can be checked against any invoice, claim delivery note orother documentation rendered by the payee or supplier. Originals of all availabledocuments will be firmly stapled to the original copy of the General Payment Voucher insupport of the payment.Full details of the General Payment Voucher will be entered on the relevant Order orIndent.Journal VouchersAdjustments to Government accounts not involving the actual transfer of cash shall bemade using Journal Vouchers.Loose leaf journals in a form prescribed by the Treasurer or a bound Journal Book in thesame format may be used.Examples of transactions requiring the use of Journal Vouchers include: the correction of previous posting errors; transfers of deposits to revenue heads; allocation of charges in respect of services rendered by one Government Department for another and the consequent revenue item; and allocation of any rents, dues or fees payable by one Government department to another and the consequent revenue item.Journal Voucher entries will be used to effect any adjustment or amendment to anyGovernment account which is required prior to the closing of the accounts at the end ofthe financial year.Journal Vouchers will normally be completed in triplicate. The original and one copy ofthe Journal Voucher, together with any additional copies required, will be forwarded tothe Treasury and the second copy filed by the Accounting Officer responsible for theissue of the voucher after entering it in his Vote Book or Register of Revenue.Where any entry on a Journal Voucher affects an accounting code controlled by anotherAccounting Officer, sufficient additional copies of the Journal Voucher will be preparedto allow the distribution of a copy to each affected Accounting Officer. 24
  • 25. Jean-Marc Lepain Treasury SpecialistWhere a Journal Voucher is prepared by the Treasury, sufficient copies will be preparedto allow for distribution of a copy to each affected Accounting Officer.Journal Vouchers will be completed legibly in ink and in such detail as to easily identifythe reasons for the adjustment or transfer and the code numbers affected by suchadjustments or transfers.The allocation of each debit and each credit entry shall be shown clearly and separatelyline by line on the Journal Voucher.The narrative to the Journal Voucher shall give a full and detailed reason for each entryon the voucher and shall, where necessary, refer to any previous vouchers, journal entriesor accounts affected by the adjustment or transfers within the current Journal Vouchers.All such previous vouchers, etc affected by the journal entry shall have a note put onthem, cross-referencing them to the Journal and noting its effect.Journal Vouchers shall be signed by the Accounting Officer who is responsible forensuring that the contents of all Journal Vouchers are correct and necessary and that theJournal Voucher is numbered and dated.All Journal Vouchers will be checked within the Treasury for accuracy, relevance andnecessity. In particular, the checking officer must ensure that no previous JournalVoucher issued by another Department or Ministry has the effect of duplicating theproposed present adjustment or transfer.The checking officer shall inspect any previous voucher, journal or account referred to inthe Journal Voucher and shall, where the current transfer or adjustment is valid, endorsesuch documents so as to cross-reference the new entries in the accounts.In particular the checking officer must ensure that the proposed debits and credits equalone another. Only the Treasurer may put through an unbalanced Journal Voucher.When the checking officer is satisfied as to the content of the Journal Voucher, he shallplace a Treasury reference number on all copies of the voucher, together with the monthof the account in which the alteration will be effected.The Journal Voucher will be approved and counter-signed by the officer prescribed bythe Treasurer and entered in the Journal Register.The original Journal Voucher will be retained within the Treasury and will be part of theaccounting documentation for the month in which it was issued. Any copies will bedistributed as required, including returning a copy to the issuing officer.Upon receipt of a copy of a Journal Voucher from the Treasury, Accounting Officerswill make any necessary entries to their Vote Ledgers or Registers of Revenue. Theissuing officers shall check that the entries made by him have not been changed by anyadjustments made to the voucher by the Treasury. 25
  • 26. Jean-Marc Lepain Treasury SpecialistSummaryThe above “appropriate vouchers” should be used for making entries andadjustments to the General Ledger which pass through the Cash Book and the“journal voucher” should be used for making entries and adjustments to the GeneralLedger which do not pass through the Cash Book. This will ensure an effectiveGeneral Ledger Operation.5. Reporting5.1. General PrinciplesThe data produced by sound budgeting and good accounting and financial controlsystems is only of value if reports are produced for action to be taken by seniorTreasury management, the Minister or the Government, as appropriate.In the private sector, management spends money in order to generate money. Themeasures used to monitor money spent versus money generated, such as net profit,return on investment and increased share values, are key performance indicators formanagers that are closely monitored by them on an ongoing basis.However, in the public sector, money is raised through taxes so that it can be spent toachieve the objectives of the government. For the public sector manager, money isone of several resources that are blended and brought to bear on programmeobjectives. Traditionally, such financial information has been used much like a fuelgauge - something to be consulted occasionally, and more often near the end of thetrip to be sure that there will be enough fuel left to make it to the petrol station.This attitude of a bottomless pot of money to provide for the planned spending has tochange. It is the function of the Treasury to ensure that it does and to introduce muchtighter financial discipline on public spending.5.2. Levels of ReportingThere are basically three levels of reporting: High Level: this provides summary data for use by the Minister and Government. Typically, it will provide summaries of the main sources of revenue and expenditure on a ministry or agency basis. Such a report would normally be available monthly; Medium Level: this provides summary data for finance managers at a ministry or agency level and would also be used for budgetary control purposes within the Treasury. Such a report would show the expenditure and revenue on a code by code basis for each accounting code and would be produced weekly; and 26
  • 27. Jean-Marc Lepain Treasury Specialist Low Level: this provides a full item by item history for each code number. It is used primarily by the Vote Controllers at ministry and agency level to compare the Treasury accounting records with their own vote books. It is there job to reconcile these on a weekly basis and this report will be a weekly one.In addition to those three reports, there will be reports is specialist areas. Forexample, areas such as Cash Management must have daily reports produced asovernight lending or borrowing decisions must be made every afternoon.When the Permanent Computer System is introduced, all these reports will begenerated automatically. There should also exist the facility to generate any ad hocreport required by management.In the interim, the Treasury Specialist will be working with Treasury staff to providean effective reporting system (see below). - High LevelAs indicated above, this is very much a Financial Summary Report. The Minister,Cabinet and other elements of government are not normally interested in the detail ofindividual revenue or expenditure items. Of course, these can be supplied if required. - Medium LevelThe key report here could be called the Available Funds Report. It shows howmuch was budgeted (profiled); how much has been released; how much committed;how much spent and, thus, the available funds for every code number.This report will be used by Treasury staff in its overall monitoring operations. It willlet them know of potential problems (under-collection or over-spending) at an earlydate when corrective action is easier.The computer system should “flag” items of revenue and expenditure where thevariance between what was expected and what has occurred exceeds a pre-determined amount or percentage.As well as recording the raw data in its reports, the Treasury must undertake an in-depth variance analysis to determine the causes of the variance.From this analysis, the Treasury must then determine what action, if any, is requiredto correct the situation. It might be that the variance is merely caused by timingdifferences and that it will correct itself in subsequent periods. However, if it isregarded as a fundamental variance alternative courses of corrective action must bedevised and implemented as soon as possible. 27
  • 28. Jean-Marc Lepain Treasury SpecialistThe earlier that a major variance is identified and the sooner corrective action is taken,the less traumatic the effect to the government‟s spending plans and policyimplementation.Apart from Treasury staff, this will be the most important report for senior managersin each ministry or agency. Of course, they will only be interested in their ownsection of the data, not the whole report as will be the case with Treasury.They can use the data to manage their own operation. If they can see potentialproblems before the Treasury, they should advise the Treasury. Or it could be thatthey wish to vire money from one area of activity to another as a result of changedpriorities or timing differences for service provision.Appendix B illustrates the general format which could be used. - Low Level ReportsThis term is not meant in a pejorative sense. Such a report could be called the LedgerDetail Report. These are the reports which contain the full detail of movement in theperiod for every code number. By examining this report one can see exactly everypayment which has been made to build up to the total expenditure on each and everycode number.This report is normally used by the accounts staff at ministry or agency level. Theyshould have the responsibility of reconciling the Treasury records with their own votebooks. This ensures that posting errors, mis-codings etc. are picked up and corrected.The vote controllers should provide Treasury with a weekly certificate confirming thatthey have completed the reconciliation and providing a list of any code numbers andamounts which need correcting. - Special ReportsThe above three reports provide the back-bone of financial control under any Treasurybased system. In addition, there will be other reports for use by specialist staff. Therewill also be ad hoc reports extracted for a specific, one-off, purpose.One example will be in the area of cash management. The officer responsible for thiswill require daily reports of the cash balances shown in the accounts so that these canbe reconciled to the daily bank statements obtained from the banks.This data will also be used as the basis of overnight banking or borrowing decisions.The officer responsible for debt management will also have a specific regular reporttailored to his individual needs. 28
  • 29. Jean-Marc Lepain Treasury Specialist -Reporting Requirements/List of ReportsWe put in the annexes a table detailing the reporting requirements and a list ofstandard reports. It is not possible to implement all the reports within the projecttimeframe. The list is intended to be a basis for discussion in order to select thestandard and non-standard reports that can be implemented during the project. - Action Required from TreasuryBased on the above recommendations, a detailed schedule be prepared and agreed ofall reports required from all systems.The period, detail, circulation, person responsible for report production, etc. must allbe specified.There must be a mechanism in place for ensuring that the non-production of anyreport is immediately known and action taken to ensure that it is prepared.The Treasury staff responsible for the monitoring process must be trained in theinterpretation of the reports as should ministry personnel. - Action to be undertaken by Treasury SpecialistBased on the models proposed, the Treasury Specialist will work with Treasury staffin determining what reports are required, their format, what they should be used forand how they should be interpreted.A list of all necessary reports will be agreed with all stakeholders.Similarly, all stakeholders will be consulted on what data they need from each reportwhich will then be designed to ensure that this data is available in the format neededby the report users.For each report, the structure will be determined and the mechanisms for inputting thenecessary data agreed. Draft reports will be tested on the intended recipients andamended as required.The Treasury Specialist will help produce the first reports and, by on-the-job training,ensure that Treasury staff can continue the process.He will also ensure that staff know how to interpret and use the data contained in thevarious reports.6. Auditing 29
  • 30. Jean-Marc Lepain Treasury SpecialistAs indicated above, effective auditing is a cornerstone of sound financialmanagement.However, in the case of Serbia, internal auditing is being developed under a separateproject rather than as part of the mainstream financial management activity.Nonetheless, it is essential that there be close co-operation on systems developmentboth with the internal auditors and with the external auditors.Internal Audit should be undertaking the following activities: - Financial ControlsThese are: Budgetary Control: internal audit will be looking for the existence of a long term Vision of where the State expects to be in five to ten years time; a medium term Strategic Financial Plan and short term Tactical Financial Plans for achieving that vision. If the State does not know where it is going how can it possibly get there cost-effectively? Legitimacy of Income and Expenditure: a more straight forward area. Internal audit must ensure the existence of adequate financial legislation and that all income and expenditure is in accordance with that legislation; Security of Assets: again fairly straight forward. Internal audit will ensure the existence and accuracy of asset registers and that management exercises proper control over portable and desirable items such as laptop computers, mobile „phones, etc.; and Accounting Controls: again, a “traditional” area of internal audit concern. As part of its review of systems, internal audit will test check that transactions are correctly recorded, accurately processed and that effective control accounts are maintained. - Other ControlsThese are: Objectives: it is not the role of the auditor to be involved in the setting of policy objectives. However, it is a legitimate concern of auditors to ensure that no only do managers have all the necessary information on which to base their decisions but, also that these decisions were correctly made on the basis of the then known information. However, the auditor must avoid criticising decisions based in data obtained subsequent to the event which could not have been known when the decision was made; 30
  • 31. Jean-Marc Lepain Treasury Specialist Procedures: as part of the audit process, internal audit will ensure that the “vision” and plans have been communicated to all staff and that they have detailed written instructions on how to carry out their duties to achieve the objectives; Organisation: internal audit must also comment where the structure of a ministry or department seems confused and where staff do not seem to know what they should be doing or why; Management Information: this is a key role for internal audit. Unless management has relevant and up-to-date data it cannot manage its function properly. It would be expected that management would itself know of the shortcoming and welcome internal audit‟s assistance in trying to rectify the problem; Supervision: the systems of supervision and internal check lie at the heart of systems auditing. Any sound system must provide adequate divisions of duties so that no one person can, for example, make an illegal payment without colluding with someone else. The system must provide for the independent checking of work as part of the system, not as a separate, stand alone, function. The system must provide for some feedback as to the quality of service provided. All of these must be checked as part of the internal audit process; and Review of Operational Effectiveness: management should regularly review the effectiveness and efficiency of operations under its control and consider their continued relevance in the light of changing circumstances. It is for internal audit to ensure that it does so. This is the area of value-for-money or performance auditing where the auditor will looking to see whether or not the service should still be provided and, if it should be, what alternatives are there, if any, to the present method of service provision. - SummaryThe overall objective of the internal auditor‟s examination of the system is to arrive atan opinion which can provide the basis of a comprehensive report to management.Thus, Internal Audit is no longer, if it ever were, an integral part of the internal checkprocess. It should not be part of any routine payment, collection or recording process.Its job is two-fold: Sound systems: to ensure that every system is soundly based, properly documented and appropriate for its purposes; and Systems followed: that the systems as laid down are actually followed by everyone – politician or public servant.The main difference between Internal and External Audit is the mandate underwhich they operate. 31
  • 32. Jean-Marc Lepain Treasury SpecialistThe External Auditor usually has a mandate which is enshrined in the Constitution.No one can direct him in his work and he reports to Parliament so no one can hide hisreports.Another key difference is that the External Auditor will undertake the audit of theAnnual Accounts and produce a report and certificate thereon.In the areas of Compliance Audit and Value-for-Money (or Performance Audit) theroles of the Internal and External Auditor are similar and it is essential that they co-operate and co-ordinate their activities to avoid wasting scarce audit resources.The External Auditor will examine the effectiveness of the Internal Auditor as part ofhis audit process. The better the Internal Audit is, the more the External Auditor willrely upon it and the less direct checking he will need to do himself. - Action Required from TreasuryThe Treasury must develop a good working relationship with both the Internal AuditService and the External Auditor-General.Initially, this should be through involvement in the development of the variousfinancial systems. The advice of both, but especially, the External Auditor should beheeded as he will be reporting to Parliament on the government‟s overall financialmanagement performance not just on the annual accounts. - Action to be undertaken by Treasury SpecialistThe involvement of the Treasury Specialist will be similar to that of the Treasury. Ashe develops systems they will be discussed, or even developed jointly, with theauditors to ensure that they meet the required standards. 32
  • 33. Jean-Marc Lepain Treasury Specialist7. Summary of Action Required by the Treasury and of the Treasury Specialist’sProposed Activities7.1. Action Plan (high level)The table below summarises the points raised in the main sections above andrepresents an action plan for the duration of the project:Section Treasury Action Treasury Specialist ActionLegislation  Adopt Accounting  Work with Legislation Instructions/Operational Specialist on any proposed Manuals as developed; changes to Constitution, Budget  Ensure that all relevant Systems Law or Financial staff are aware of and Regulations; and trained using the  Work with treasury staff to manuals. produce Accounting Instructions/Operational ManualsBudget To ensure that there is an To work with Treasury staff on theExecution effective system of Budget design and implementation of such Execution – the release of a system. funds to spending agencies – to ensure that spending does not exceed revenue collection.Treasury Complete any outstanding  Work with treasury on anyAccounting work in establishing the TSA outstanding aspects of the ITSA; and  Develop the Interim General LedgerReporting  Develop schedule of Work with Treasury staff in required reports; and developing the Reporting System by  Monitor output contained determining what reports are in reports. required, what they should be used for and how they should be interpreted.Auditing Develop good working Similar to the Treasury. As systems relationships with both the are worked on by the Treasury Internal Audit Service and Specialist, he will discuss them with the External Auditors. both internal and external audit. 33
  • 34. Jean-Marc Lepain Treasury Specialist7.2. Immediate ActionThe key areas on which the Treasury Specialist will work for the first six months ofthe project include:  Legislation: work with the Legislation Specialist by commenting on the proposed changes to the Budget Systems Law; indicating what is required to be included in Financial Regulations to be made under the Budget Systems Law; assist with the Accounting Instructions;  Interim Computer System: to work with the USAID and Treasury staff on the implementation of the ICS, especially from the aspect of data produced for reporting purposes (see below). To assist in trouble-shooting problems as they arise with the operation of the system;  Interim Single Treasury Account: to work with the Treasury on any remaining steps required to implement the physical aspect of the ISTA including bank accounts, money transfer systems, office routines, etc. To assist in trouble-shooting problems as they arise with the operation of the system;  Budget Execution: to work with the Treasury in developing an effect method of Budget Execution;  Interim General Ledger/Reporting: I think that this is my key role. To ensure that there is an adequate mechanism (probably spreadsheet-based) for capturing all actual revenue and expenditure data. This will come in part from the ICS (see above) for the Direct Budget Beneficiaries and in part from the Treasury Agency offices for Indirect Budget Users and Municipalities. Initially, I would expect to be involved in ensuring that a sound system exists for the later areas. Once captured the data must be compared to the budgeted data. It is likely that this will involve the development of a simple spread-sheet based financial control system for use for 2003 and 2004. Ideally, some for of profiling should be developed for both income and expenditure.7.3. Summary of Key DeliverablesThe Key Deliverables in respect of Treasury Operations are: 34
  • 35. Jean-Marc Lepain Treasury Specialist  Accounting Instructions: to produce detailed Accounting Instructions (Operating Manuals) for key financial systems;  Budget Execution: to prepare an effective system for Budget Execution;  Interim General Ledger: to detail the system required for an effective Interim General Ledger;  Interim Reporting System: to detail the system required for an effective Interim Reporting System;  Permanent Computer System: develop specifications for the main computer system; and  Integrated Financial Management System: develop the reporting requirements of the IFMS.7.4. Detailed Timetable and Content of DeliverableAccounting Instructions/Operating Manuals: to produce detailed AccountingInstructions (Operating Manuals) for key financial systems.The first stage is to agree the Framework for each system. A possibility is:  Title: the system under review;  Objective: what is the overall purpose of the system (this, of course, should be congruent with the overall Ministry aims and objectives and, ultimately, with the Government‟s Vision);  Legal Performance Targets: where the headline law, regulations made under that law or other government regulations apply, the system must comply with that law;  Occupational Performance Targets: these are non-legal, administrative targets set by management in order that the system can achieve its objective;  Strategies and Actions: this section will contain the detailed operational manual. It must be in the form of a basic, step-by-step illustrated guide to enable new staff to perform their duties as soon as possible. Yet, it must contained sufficient detail to ensure that senior managers can use it to produce the level of reporting required for future decisions and action to be taken. It will also aid auditors, both internal and external in their systems assessment work; and 35
  • 36. Jean-Marc Lepain Treasury Specialist  Performance Indicators: this sections will detail the measures to be used to determine whether of not the systems are performing properly. They are a vital part of the overall process. Where a Performance Indicator is not met, an investigation is required to find out why. This may reveal system defects, staff defects or, rarely, that the target was impossible to meet with given systems and resources.The second stage will be to Identify the Key Systems and then Determine Prioritieswithin those systems.The Treasury Specialist has identified nine key areas for which detailed systemsspecifications must be prepared:  Budgeting and Budgetary Control;  Accounts and Reports;  Cash and Bank Management;  Expenditure Control;  Grants;  Procurement and Stores;  Asset Management;  Revenue Enhancement; and  Departmental Human Resource Management.The third stage will be to undertake the actual system specification work. It is likelythat the Treasury Expert will oversee the operation of this activity by the short termexperts, as well as undertaking some work himself.Progress will be measured by the production of draft systems specification inaccordance with the agreed timetable (see overall summary timetable below).Success will be measured by the adoption and successful use of the OperatingManuals.Budget Execution: to prepare an effective system for Budget Execution.The Law requires the use of a quota system but does not indicate how the actualnotification of quotas should be done. It can, in fact, be done using either an informalor formal system.Under the informal system, spending units are notified of the amounts they can spendby memorandum. It is a quick, flexible system but is prone to error as total amountsapproved may not be readily available.A formal system does not have this disadvantage and is, thus, much moretransparent. The classic formal system uses a variety of “warrants” – official 36
  • 37. Jean-Marc Lepain Treasury Specialistdocuments signed by the Minister under powers contained in the Budget Law orRegulations made under that Law.Thus, the first action is to prepare a paper on the pros and cons of each method and toobtain a decision as to which should be used.If the warrants system is selected, the second stage will be to design the variouswarrants required. These are:  Appropriation Warrant: under the annual budget law the Minister shall issue Chief Finance Officers with an Appropriation Warrant specifying the level of expenditure approved by Parliament for each spending unit or sub- unit under specific budget classifications;  Allocation Warrant: by this warrant, the Minister will authorize Chief Finance Officers to spend up to the amount detailed in the warrant. It is likely that these warrants will be issued on a monthly or quarterly basis, depending on funds available for spending.  Virement Warrant: by this warrant a Chief Finance Officer may move funds from one expenditure item to another provided the reallocation does not exceed an agreed maximum of the total of the appropriation being reduced. This Warrant shall also be used to transfer money from reserves to spending organizations;  Contingency Warrant: the Minister has the right to increase the amount available to a Chief Finance Officer by way of a Contingency Warrant. Any amounts provided by way of Contingency Warrant must be taken to the next session of Parliament by way of the Budget Law or Supplementary Budget Law.  Development Project Warrant: the Minister will issue a Development Project Warrant to Chief Finance Officers executing Donor funded projects notifying them of a project‟s approval and the total expenditure that can be made under that project, usually for the life of the project; and  Development Project Allocation Warrant: the Minister will issue a Development Project Allocation Warrant to Chief Finance Officers responsible for the progress, control and monitoring of a Donor funded project notifying them of the funds that are currentlyProgress will be measured by the production of a report and, if required, warrantforms (see overall summary timetable below).Success will be measured by the adoption and successful use of a sound and effectivemethod of quota release.Interim General Ledger: to detail the system required for an effective InterimGeneral Ledger. 37
  • 38. Jean-Marc Lepain Treasury SpecialistReceipts and payments charged against appropriations given by legislature are knownas above-the-line.Those which are made under some other authority of the legislature are below-the-line (anything not covered by voted income and expenditure or money received onbehalf of third parties which do not belong to Government).The Basic Rules for General Ledger Accounting are:• All transactions (except Journal entries) recorded in the cash book. Each entry supported by the appropriate voucher.• Vote Controller provided with details of income and expenditure recorded. These are reconciled with the Votes Register.• Below-the-line transactions can only be with a third party. No suspense accounts or account containing expenditure which should be charged above the line should be opened.There must be an “appropriate voucher” for every entry (income and expenditure)which passes through the Cash Book to enter the General Ledger. There must also bea “journal voucher” for making entries and adjustments to the General Ledger whichdo not pass through the Cash Book. These are discussed in the paragraphs below. - ReceiptsThe first appropriate voucher should be a receipt for money handed paid toGovernment. If there is not a specific licence issued, which performs the function ofa receipt, what can be termed a General Treasury Receipt (GTR) must be issued.As policy matters come under the purview of the Treasury (see below), it will be up tothe Treasurer to determine the format of the GTR. - ExpenditureThis basically involves two systems:General Payment System: this is for all payments other than those made through thepayroll system; andPayroll System: payment of salaries, wages and associated payments. All payments of public moneys through the General Payments System must involvethe use of a General Payment Voucher which shall be in such form as the Treasurershall prescribe from time to time - Journal Voucher 38
  • 39. Jean-Marc Lepain Treasury SpecialistAdjustments to Government accounts not involving the actual transfer of cash shall bemade using Journal Vouchers.Progress will be measured by the production of a effective GL with all requiredvouchers and systems in operation (see overall summary timetable below).Success will be measured by an effective general ledger proving data for reportingand control purposes.Interim Reporting System: to detail the system required for an effective InterimReporting System.As indicated above and detailed in Appendices A to C, there are basically three maintypes of report; High Level: this provides summary data for use by the Minister and Government. Typically, it will provide summaries of the main sources of revenue and expenditure on a ministry or agency basis. Such a report would normally be available monthly; Medium Level: this provides summary data for finance managers at a ministry or agency level and would also be used for budgetary control purposes within the Treasury. Such a report would show the expenditure and revenue on a code by code basis for each accounting code and would be produced weekly; and Low Level: this provides a full item by item history for each code number. It is used primarily by the Vote Controllers at ministry and agency level to compare the Treasury accounting records with their own vote books. It is there job to reconcile these on a weekly basis and this report will be a weekly one.The first phase is to prepare and agree all reports required from all systems.The second phase is to determine the period, detail, circulation, person responsible forreport production, etc. must all be specified. There must be a mechanism in place forensuring that the non-production of any report is immediately known and action takento ensure that it is prepared.The third phase is training the Treasury staff responsible for the monitoring process inthe interpretation of the reports as should ministry personnel.Progress will be measured by the production of regular, timely reports which meetstakeholder needs. (see overall summary timetable below).Success will be measured by effective financial control with no over-spending orunder-collection without management being aware that it was coming and being giventhe chance to take corrective action..Permanent Computer System: develop specifications for the main computer system. 39
  • 40. Jean-Marc Lepain Treasury Specialist Before the Permanent Computer system can be put out to tender it is necessary to provide specifications of the volumes of data it will be expected to handle, the reports to be generated and so on. The first stage of this process will be for the Treasury Specialist to draw up a schedule of items on which data should be provided. This has not been done at this stage as this work will not take place until the end of 2003 (see summary timetable). Once this has been agreed with government, the data itself will be gathered. This is a vital part of the process for acquiring the permanent system as, if the data handling requirements are misstated the whole system could fail. Progress will be measured by the production of a detailed specification which can be used in the procurement process for the Permanent Computer System (see overall summary timetable below). Success will be measured by the new computer system performing to specification and delivering stakeholder requirements. Integrated Financial Management System: develop the reporting requirements of the IFMS. This is related to the previous point and concerns what reports the new system is required to produce. These will be developed from those produced by the Interim System. Progress will be measured by the production of regular, timely reports which meet stakeholder needs. (see overall summary timetable below). Success will be measured by effective financial control with no over-spending or under-collection without management being aware that it was coming and being given the chance to take corrective action.. 8. Logframe Matrix LOGFRAME MATRIX FOR THE FMIS PROJECT PROJECT INDICATORS MEANS OF ASSUMPTIONS DESCRIPTION VERIFICATION1. GoalCreate a sound and EU and other Internal and external Continued politicalviable basis for the international Institutions audit support is provided to 40
  • 41. Jean-Marc Lepain Treasury Specialist LOGFRAME MATRIX FOR THE FMIS PROJECT PROJECT INDICATORS MEANS OF ASSUMPTIONS DESCRIPTION VERIFICATIONfinancial operations of agree that Treasury the MoFEthe public Process meet best Reports of IMFadministration of the practice missions Ongoing re-organisationRepublic of Serbia of the MoFE is Effective Treasury completed Management in place2. PurposeAchieve better Accurate and timely Reports delivered on Appropriatetransparency and greater accounting data time to the Minister of experienced staff areaccountability whilst produced Finance, Government, available within thepromoting efficiency Parliament and to MoFEand effectiveness in the Cash Management international financialuse of public funds, function is operational institutionreduce the potential forfraud, corruption and Financial Planningmisappropriation ReportsDevelop Accounting,financial control, andcash managementcapabilities3. ComponentObjectives Treasury Single Reports from the NBY The TSA arrangementAccount is made and from the Treasury Defined during theoperational Agency Inception phase is implemented before the 1st of January 2003 The Treasury Agency become operational Cash Management Formal plans developed Reports and ratios of Interface with thefunction is operational and accepted by the cash efficiency RTGS and the TA‟s government system is possible Increase of the liquidity Consensus on the Budget Execution Reduced delay in Reports Treasury Modelprocess is improved government payments Better integration of Budget Planning and Budget Execution Better integration of Budget Execution and 41
  • 42. Jean-Marc Lepain Treasury Specialist LOGFRAME MATRIX FOR THE FMIS PROJECT PROJECT INDICATORS MEANS OF ASSUMPTIONS DESCRIPTION VERIFICATION Cash ManagementDevelopment of Timely information on Manual of proceduresAccounting procedures the State positionLegal Framework in See Logframe Matrix See Logframe Matrixplace for Legal component for Legal component4. OutputsStructure of Treasury All staff recruited Qualified staff can beAgreed identifiedBusiness Process Procedure Manuals Qualified staff can beClearly defined recruitedProcedure Manual are Financial/Accounting Procedure Manualsproduced instructions are approved by theAccounting regulation Minister within the The IT System isis implemented Internal and external project schedule compliant with the audits Accounting RegulationCash Management Letter of Instructionpolicy is defined from the Assistant Minister to the Head of the Cash Management DepartmentReporting structured is Production of a numberagreed of standard and non standard reportsFinancial Control Reportsfunctionality is Internal and externalimproved audits 42
  • 43. Jean-Marc Lepain Treasury Specialist LOGFRAME MATRIX FOR THE FMIS PROJECT PROJECT INDICATORS MEANS OF ASSUMPTIONS DESCRIPTION VERIFICATION5. Activities 6. AssumptionsFollow-up of the action Operations of the TSA Internal reports and Means of verifying thatplan for establishing the project notes all budget users‟ bankTSA accounts have closed existDefining Cash System RequirementsManagement System Documentobjective andrequirements  Tests on Budget, Financial planning,Functional modelling of Functional Model Cash management, Debt The Cash Management management andfunction Reporting sub-systems have yielded positiveDefining Cash Internal reports, project resultsManagement Policy notes, and letters of  Management of instruction from the change has been Assistant Minister adequately conductedDeveloping and Functional Model,enhancing the Budget Procedure ManualExecution FunctionProducing Procedure Procedure Manual Procedure ManualManual for BudgetExecutionProducing Accounting Accounting RegulationRegulation Manual and draft lawProducing a Treasury Treasury InstructionInstruction Manual ManualDeveloping effective Internal auditsystems of financial Project planscontrol, especially when System specificationFMIS is available Description of functionalityEnsure smooth Data successfully Testing of the systemtransition from the transferred to newInterim System to the systemnew FMIS 43
  • 44. Jean-Marc Lepain Treasury Specialist 44