2. AjointinitiativeoftheOECDandtheEuropeanUnion,
principallyfinancedbytheEU
Content presentation
1. Context of the analysis;
2. Coverage of the gap analysis;
3. Financial management and control;
What is wrong with the present system
What are the main weaknesses of the present arrangements
The main problems that have to be addressed
4. The responsibilities of the manager
5. The responsibilities of the head of finance/economics
department
6. Conditions that should exist prior to financial
management and control (FMC)
7. Implementing FMC
8. The benefits of FMC
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3. AjointinitiativeoftheOECDandtheEuropeanUnion,
principallyfinancedbytheEU
1. Context of the analysis
Association Agreement conditions affecting PIFC requires:
1. Development of a PIFC system based on the principle of
managerial accountability;
2. Foster the development of good governance;
3. Support the Central Harmonisation Unit (CHU) for PIFC
and strengthen its competences.
Direct Budgetary Support (DBS) conditions:
1. CHU develops rules and procedures for FMC;
2. FMC is established and functioning, initially in ministries.
(Failure to meet these conditions could lead to loss of DBS
funding.)
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4. AjointinitiativeoftheOECDandtheEuropeanUnion,
principallyfinancedbytheEU
1.1 Coverage of the Gap Analysis
• The gap analysis SIGMA undertook, covered both
financial management and control and internal audit.
• In Georgia, good progress has been made on developing
internal audit but little progress made on developing
financial management and control. Therefore this
presentation focuses on introducing FMC.
• Until recently, the problems with achieving progress have
been complicated by weaknesses in the arrangements for
the development of the Central Harmonisation Unit of
the Ministry of Finance. We welcome the recent
changes.
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5. AjointinitiativeoftheOECDandtheEuropeanUnion,
principallyfinancedbytheEU
2. Financial management and control
FMC is an advanced system which covers:
• Financial control;
• Managerial control
• Financial management.
All three elements depend for their implementation upon
the existence of managers (such as programme and sub-
programme managers) who have a specific responsibility
for an activity or service or programme and are responsible
(accountable) for the delivery of the objectives of the
activity, service or programme within budget, to time and
to standard and in a manner which gives value for money.
The principal benefit from introducing FMC is improved
value for money in the use of public funds as well as a
better quality of financial control.
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6. AjointinitiativeoftheOECDandtheEuropeanUnion,
principallyfinancedbytheEU
2.1. What is wrong with the present traditional
financial control system?
The aims of the present financial control system are to ensure that
budgetary control is maintained. This is essential but is not enough,
because:
The focus is solely on control to ensure expenditures are in accordance
with the budget, rules and regulations (compliance);
The assumption is that the budget represents an exact statement of
what should be spent on a detailed item, when at best a budget is only
a forecast based upon historical spending, not any sort of value for
money analysis;
No financial analysis is undertaken to link a budget with any objectives
or with expected performance;
Value for money is not tested or systematically challenged.
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7. AjointinitiativeoftheOECDandtheEuropeanUnion,
principallyfinancedbytheEU
2.2. What is the main problem with the present
arrangements?
The main problem at present is the weakness of organisational
management and hence lack of managerial accountability.
The benefits of effective management are:
• Higher organisational performance - which depends upon
higher performing line managers;
• Top management has a greater capacity to focus on policy
and strategy;
• Improved capability to identify and respond to changing
circumstances;
• Better quality governance and improved accountability –
often with traditional systems there is no accountability
within organisations for service delivery and quality.
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8. AjointinitiativeoftheOECDandtheEuropeanUnion,
principallyfinancedbytheEU
2.3. The main problems that have to be addressed
to improve management
The problems include:
• How to persuade top management to delegate (they
often fear they will lose control);
• An unwillingness of officials (such as departmental heads)
to accept managerial responsibility;
• A lack of coordination of public administration reform
with financial reforms;
• A lack of understanding of what financial management
requires and the skills needed to develop financial
management:
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9. AjointinitiativeoftheOECDandtheEuropeanUnion,
principallyfinancedbytheEU
2.4 The responsibilities of the manager
The manager should be responsible for:
• Budget preparation, linking objectives & performance
• Performance management - to meet objectives & performance
requirements;
• Financial control – including compliance with the financial regulations
and with the budget;
• Financial and performance forecasting – to ensure that within the
year overspending/underperformance either will not occur or its
occurrence is envisaged with reasons and is forecast in advance;
• Strategic financial planning – to provide a forward look (say up to 5
years) of where present policies/decisions will lead financially;
• Achieving improved performance (i.e. value for money).
The role of the head of finance/economics department is to support the
manager NOT to substitute for the manager.
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10. AjointinitiativeoftheOECDandtheEuropeanUnion,
principallyfinancedbytheEU
2.4.1 The responsibilities of the manager
Second level organisations
• Managers within first level organisations should have a responsibility
for ensuring that second level organisations are well run, achieve
their objectives and performance standards and also do so in a
manner that achieves value for money.
• This means that the first level organisation should set managerial
objectives and should systematically monitor the performance of
second level organisations.
• Accountability should therefore exist between the management of the
second level organisation and that of the first level organisation. (This
may require some reorganisation where managers of first level
organisations are also directly responsible for the management of
second level organisations to avoid conflict of interest.)
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11. AjointinitiativeoftheOECDandtheEuropeanUnion,
principallyfinancedbytheEU
2.5 The responsibilities of the head of
finance/economics department
The head of the finance/economics department is to support the
manager:
• With financial analyses and advice generally:
• In the preparation of the budget;
• To secure ongoing compliance with the budget and with the law and
financial regulations;
• In preparing re-forecasts for the current year;
• With advice and technical analyses to enable the manager to prepare
strategic financial plans;
• In monitoring second level organisations;
• By undertaking the financial analyses required to link financial and
performance information, as far as possible and to identify for the
manager where improvements might be made; (this will involve the
development of cost accounting).
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2.5.1 The position of the head of finance/economics
department
With FMC finance has a much more central role in the management of
the delivery of public services than under traditional systems.
Bookkeeping (one element only of accounting) has only a minor role:
what are far more important are:
• A financial analytical capability, including development of costing;
• An understanding of forward financial planning, policy and investment
analysis;
• A capability to develop and manage new financial systems;
• A capability to work with and advise managers as all levels, not least
top management;
• A capacity to work with top management to develop financial policy.
This head should be well trained and be a very senior official.
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2.6. The conditions that should exist before
the full implementation of FMC
1. Clear objectives for both the organisation as a whole and
each main part (e.g. at least each programme and sub
programme area)
2. A specific manager is made responsible for achieving the
objectives of each main part (e.g. a programme manager)
3. Each such manager is given the authority to take actions to
ensure that objectives are delivered to time, to performance
specification and within budget, efficiently and effectively;
4. Information and support systems and arrangements exist to
allow the manager to achieve 3.
5. An accountability process exists that ensures that the
manager is made responsible for what has occurred or not
occurred.
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14. AjointinitiativeoftheOECDandtheEuropeanUnion,
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2.7. Implementing FMC
Implementing FMC is a significant reform taking some years to become
fully established.
We propose a 3 stage approach with each stage preceded by pilot
experiments before a full ‘roll-out’ of each stage.
The 3 stages are develop:
1. Financial control involving the managers (this should improve the
quality of financial control and should reduce corruption risks and
may result in some improvements in value for money because
managers will become more financially aware);
2. Managerial control (this will include risk management which
should also improve value for money and add to financial
awareness);
3. Financial management in all its aspects in order to start the full
process of improving value for money when the manager has to
become fully financially aware.
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2.8 The main benefits of FMC
Primary benefit of FMC is to improve the quality of public
service management; as a result:
• Delegation and accountability exists throughout public
organisations;
• Greater overall financial awareness;
• Control focuses on risk and therefore more likelihood of
objectives being achieved;
• Tighter control occurs of second level organisations;
• Overall improved value for money.
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2.9 The benefits to heads of organisations (1)
• More effective managerial control can be achieved than
by the head making all decisions and authorising all
documents;
• Focus of the head’s activity shifts to policy and strategy
and away from detail;
• More time is available for supervision and the exercise of
leadership;
• Routine signing of orders and invoices is delegated;
• Effective risk management becomes possible;
• The development of financial management allows the
head of the organisation to develop more robust budgets
and better quality forward forecasts.
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17. AjointinitiativeoftheOECDandtheEuropeanUnion,
principallyfinancedbytheEU
2.9 The benefits to heads of organisations (2)
• A better quality of financial information is available to support
decision making through the development of financial analytical
expertise using cost analysis;
• Information becomes available to help the head establish a ‘cost
conscious’ culture in the organisation and in turn develop a focus
on improving value for money;
• More effective budgetary management can be undertaken
focussing on both expenditure and service performance, instead of
a single focus on expenditure with traditional control arrangements;
• Even though the head of an organisation retains overall
responsibility, the authority and responsibility of civil servants is
made much sharper through the establishment of clear lines of
accountability.
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18. AjointinitiativeoftheOECDandtheEuropeanUnion,
principallyfinancedbytheEU
Summary
• Ensure that financial reforms and public administration
reforms are integrated;
• Introduce FMC in stages – we advocate 3;
• Use pilot organisations to test out each stage;
• Ensure that a management process is developed supported
by clear objectives and performance standards;
• Ensure that accountability arrangements exist including for
second level organisations;
• Develop the financial/economics competence and status to
provide the financial advice and analyses the manager
requires;
• Look for the benefits – do not regard this simply as a
development of a financial control activity.
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