ACCOUNTABILITY CAPACITY REMARKS AT ICGFM 25th ANNUAL CONFERENCE MAY 18, 2011 MIAMI Larry McDonald Deputy Assistant Secretary for Technical Assistance Policy U.S. Treasury DepartmentIt is a pleasure to be here for the ICGFM 25th Annual Conference and to reconnect with a numberof friends from the ICGFM family. The last time I was here was in May of 2006 for the 20thanniversary conference. I am glad to see that ICGFM is still going strong, and by allappearances stronger than ever. That is a credit to your leadership team, and a testament to theimportance of the issues that you deal with.The theme that you have chosen for this year’s conference: “Achieving Real Accountability” isan important and timely subject. And, as the second part of the conference theme suggests, theemergence of multiple stakeholders has generated both opportunities and challenges.There are many dimensions to this theme. Other presentations have considered, for example, theimportance of budget transparency, public outreach, and interaction with the media. In myremarks, I would like to explore the notion of “accountability capacity” in public finance, whichI would define as the ability to receive, manage, expend, and report on the use of funds withminimal losses and in accordance with an agreed, legitimate plan.The basic premise of my remarks is that capacity is one of the factors that influences whether agovernment achieves real accountability in the area of public finance. Of course, there are otherimportant elements of accountability, such as timely and equal access to information, a system ofinternal and external checks and balances, penalties for non-accountability, and building aprofessional institutional culture in which accountability becomes the norm -- almost a habit.Capacity is by no means the only thing, but it is an important thing.Capacity is important not only for public finance institutions themselves. It also influences thequality of interaction between a government and its various stakeholders – citizens, civil society,the media, donors – all of whom have a legitimate interest in public finance accountability.Making information available to the public about the government’s finances is necessary but notsufficient for real accountability. Meeting with the various groups that have equities in publicfinance is necessary but not sufficient for real accountability. The benefits of information andinteraction depend, in part, on the capacity of all stakeholders to use information and interactionwell.In my remarks I will first make a few general observations about the current internationalenvironment and how it affects expectations about accountability in public finance. Then I willfocus on one dimension of the accountability balancing act between governments andstakeholders – the relationship between governments and donors. Finally, I will briefly discussthe activities of the organization that I oversee as they relate to building accountability capacity.
General ObservationsI think it’s safe to say that accountability in public finance is always in vogue. Has there everbeen a time when the public purse was so full that people were indifferent to accountability? Butfor a number of reasons, expectations about accountability are now higher than ever. Why?First, the international financial crisis has led to tight money (both public and private), smalleraid budgets, greater scrutiny by formal and informal “watchdogs”, and a general sense thatgovernment finance managers have to make every dollar, dinar and peso count – whether themoney has been generated domestically or comes in the form of assistance from abroad.Second, the call for donors to direct more foreign assistance through country systems rather thangoing around country systems, as laid out in the Paris Declaration, has gained momentum. Thisis a very positive development. At the same time, this development has been accompanied bygreater donor expectations that aid recipient countries will build their capacity to manage suchassistance well and accountably. I will return to this topic later.Third, the emergence of new stakeholders equipped with new technologies that allow them tointeract with other networks of stakeholders, even internationally, has in some respectsfundamentally changed the landscape of expectations about public finance and indeedgovernance. It’s no longer enough to merely publish the budget and occasionally have anoutreach meeting with one group or another. Now stakeholders expect regular, meaningfulinteraction. Sometimes, as recent events in some parts of the world have shown, they even wanta change in government. Those events have to do with issues that go beyond the subject ofpublic finance accountability, but such accountability is a part of the story.The Donor – Aid Recipient Balancing ActFor countries that receive foreign assistance, one of the most important dimensions of theaccountability balancing act is the relationship between the government and donors.In recent years, discussions about aid effectiveness have devoted greater attention to the benefitsof providing assistance through the government institutions of recipient countries. By-passingthe state can weaken government capacity, effectiveness, and legitimacy, and can foster aiddependency. At the same time, donors have doubts about the accountability of counterpartgovernment institutions. Aid recipients, in turn, have challenged donors to identify the specificreforms and systems improvements that donors need to see in order to direct more assistancethrough government systems. Sometimes this becomes a bit of a dance with one side saying “tellus what you need to see” and the other side saying “we’ll know it when we see it.”A country where donors and the government are making a concerted effort to direct moreassistance through government systems is Afghanistan. At the January 2010 LondonConference, the U.S. and other conference participants indicated they would increase theproportion of development aid delivered through the Government of Afghanistan to 50% in thenext two years. However, donors noted that their support for the 50% goal was conditional onthe Afghan Government making progress in strengthening public financial management systems,improving budget execution, and reducing corruption.
In an effort to accelerate this process, the Afghan authorities proposed the creation of astandardized methodology for assessing and certifying the financial management capacity ofAfghan ministries. The Afghan proposal foresaw that donors and Afghans would jointly assessand certify ministries. Ministries certified through this process would need to demonstrate theirability to meet robust financial management and accountability standards. Under the Afghanproposal, where Ministries did not achieve the standards necessary for certification, technicalassistance would be provided to build capacity.What has come of this effort? Broadly, the share of donor assistance through Afghangovernment systems has increased, but the proposal to jointly assess and certify ministries hasencountered a number of issues. Three issues stand out.First, there is not a shared understanding of what is meant by providing assistance “throughthe government.” Donors and counterparts use a range of terms loosely and interchangeably,such as “assistance through government institutions,” “assistance reflected in the budget,” and“direct budget support.” Each of these terms has different nuances and possible interpretations.Moreover, these terms cover a broad spectrum of assistance interventions that can entail eithervery little or a great deal of interaction with government systems. At one end of the spectrum, adonor may simply reimburse a counterpart government for the government’s purchase of goodsfor a project that was designed by the donor and implemented by an NGO. That scenario entailsminimal interaction with government systems. At the other end of the spectrum is cash budgetsupport to be used entirely as the authorities see fit. In the middle would be, for example, ninetydays forward funding for a project that is mutually developed by the donor and counterpart, inwhich the government procures project-related goods and services using the government’s ownprocurement systems.Should all of these examples count equally towards the goal of increasing donor assistancethrough the government?Second, there is not a shared understanding of which aspects of a government’s financialmanagement and accountability system are most relevant to providing assistance through thegovernment. As you know, government financial management covers a broad range of systemsand processes for generating revenue, receiving external assistance (whether financial or in-kind), framing and executing the national budget and ministry expenditure plans, procuringgoods and services, monitoring the outcome and effectiveness of government expenditures, andso on.All of these systems and processes are important, but are they equally important for assuringdonors that they can safely provide assistance through a government’s systems? In my view, andin the experience of Treasury’s technical assistance program, the most important aspects of agovernment’s financial management system for achieving accountability in the eyes of the donor
community are those that come under the rubric of internal controls. Such controls consist of anumber of management principles – for example, segregation of duties, policies and procedures;authorization and approval; review and monitoring -- that are applied across a range of financialmanagement areas, such as payment of salaries and procurement.Taken together, these controls constitute the “center of gravity” for a government’s financialaccountability system. They should be the focus of ministry assessments to determine strengths,weaknesses, degree of risk (material or immaterial) in the system, and to inform donor judgmentsabout whether and in what way to deliver assistance “through the government.”Third, the notions of “joint donor/recipient assessments” and “certification” are fraught withdifficulties. It has proven impractical to set up assessment teams comprised of experts from avariety of bilateral donors as each donor has its own set of stakeholders back home with its ownexpectations and comfort level about direct assistance. Including officials from the aid recipientgovernment in assessment teams poses problems. To state the obvious, they have a vestedinterest in the outcome.The notion of “certification” is also problematic. It implies an “all or nothing” determination. Inmy view, it would be more useful to adopt a risk-based approach, such as that used byprofessional auditors whose findings focus on identifying strengths and weaknesses in a system,and distinguishing between acceptable and material risk. There will always be some risk.Rather than presenting a finding of “certified” or “not certified,” assessments should inform thejudgment of donors about how to structure their engagements with a particular government orministry. In addition, risk-based evaluations would help donors and counterparts plan andprioritize capacity building efforts.To summarize, in circumstances where an aid recipient government chooses to proactivelyundergo a process of assessing the capacity of its public financial management systems in orderto encourage donors to direct more assistance through the government, the followingconsiderations suggest themselves:(1) ministry assessments should take the form of audits focused on internal controls;(2) audits should be conducted by a reputable third party specialized in audits, for example aprivate firm, international organization, or professional peer group; and(3) audits should not produce “certifications” but rather risk-based analyses of ministry systemsthat would inform donor decisions about whether and how to provide assistance through thegovernment.An example of a basic, notional template that could be used for an audit of internal controls isattached to my remarks.Building Accountability Capacity
Building capacity to achieve real accountability in public financial management is a challengeeven when the focus is entirely on governments. The challenge is greater when the effort isbroadened to include multiple stakeholders.The U.S. Treasury Department program that I oversee provides technical assistance to publicfinancial institutions in developing and transition countries around the world. Our main partnersare finance ministries and central banks. We provide assistance in a number of areas directlyrelated to public financial management, such as budget formulation and execution, taxadministration, debt management, cash management, internal controls and internal audit. In ourengagements we attempt to go beyond knowledge transfer and systems upgrades. Part of ourgoal is to help our counterparts develop professional, institutional cultures in whichaccountability is the norm. We do this through multi-year engagements in which we work side-by-side with our counterparts.We very much recognize the importance of other stakeholders in sound public finance –parliaments, citizens, civil society groups, the media, academia -- and encourage meaningfulinteraction between them and the government. Not infrequently, we provide technical assistanceto parliamentary committees that are responsible for budget and finance. We strongly believethat a well-informed interaction between the executive and parliamentary branches ofgovernment is in everyone’s interest. We support projects to make the budget more transparentand understandable to the public. In our work with central banks and specialized institutionssuch as financial intelligence units we support projects that strengthen the capacity of privatefinancial institutions to play their role in strengthening the financial sector.In my travels, in addition to meeting with the Treasury Department’s finance ministry andcentral bank collaborators, I typically meet with private sector groups, think tanks, the media,parliament and academia. It is instructive and sometimes quite eye-opening to hear the differentperspectives on how public finance is managed. The most common theme, no matter whichgroup I’m talking to, is “They don’t get it.” The finance ministry’s description of the relevantcommittees in parliament is “They don’t get it.” The private sector’s description of the publicsector: “They don’t get it.” The perspective that civil society groups have of both the public andprivate sector: “They don’t get.”Sometimes the phrase “They don’t get it” really means “They don’t agree with me.” To anextent, that is normal when you are dealing with difficult, complex issues on which people canreasonably disagree. But I also believe that the potential for un-reasoned disagreement is greaterwhen the capacity among various stakeholders is very different. As our conference materials putit: “Governments must strive to listen to the voices of the various stakeholders of public finance,even when the messages are not consistent, and achieving real accountability is a balancing actamong stakeholders.” Performing that balancing act well is made easier when there is areasonably level playing field of information and understanding among the stakeholder groups.There will still be disagreements, but they will be more about the substance of real issues andtrade-offs, and less about false assumptions or incomplete understandings.Conclusion
In concluding, I would like to pose a few questions about which I would welcome your views.First, do you agree that capacity is an important dimension of accountability? Is there anythingto the concept of “accountability capacity”?Second, do you think that the goal of directing more assistance through government systemswould be advanced by aid-recipient governments pro-actively participating in third-partyassessments of their public financial management systems? Should such assessments focusprimarily on internal controls, as I have suggested, or on other things? How could the results ofsuch assessments best be used?Third, what role might ICGFM play in such a process?
Notional Template for Audit of Internal Controls Principles of Control MonitoringReview and ApprovalAuthorization and Segregation of Duties ControlSupervision and Physical Safeguards Management Areas: Accounting system Budget system Fixed assets Stores Salaries Procurement Cashiers and income Information technologyFor each management area, there are a number of specific principles that the audit would consider. 1Some examples of these principles include the following:Accounting and Budgetary Systems • Accounting staff should not be involved in other finance-related operational tasks • Balances and reconciliation procedures are carried out to ensure that transactions are correctly recorded and processed; and that there is agreement between the general ledger and subsidiary recordsFixed Assets • Records of fixed assets should contain an identifying description, responsible budget-holder, value, date of purchase and expected life. • Periodic physical checks against records should be carried out.Stores • Full stores records should be maintained of: orders, receipts, issues, returns, and write-offs. • Periodic checks of physical stores against stores records should be made by persons other than the storekeeper.Salaries • Control should be exercised by designated persons on the number of employees, their gradings, their duties, hours worked etc. • Independent verification of the existence of payees should be obtained from time to time.1 These principles are consistent with international audit guidance established by organizations such as the CharteredInstitute of Public Finance and Accountancy (CIPFA) and the International Organization of Supreme AuditInstitutions (INTOSAI),
Procurement (Ordering Goods and Payment of Invoices) • Only authorized officers may order goods and ordering stationery must be controlled. • Payment procedures must provide for checks on: quantities delivered, quality, delivery of services, part orders, duplicate payments, and taking of discounts.Cashiers and Income • Two persons must be present when the post is opened and cash received and recorded. • All cash paid out must be authorized by someone other than the cashier and must be signed for.Information Technology (use of computers in accounting and budgeting) • Systems of physical security should cover secure accommodation for computers; separate storage of back-up files; and staff training. • Operating systems must log all transactions by user and terminal and prevent malicious or accidental destruction / misuse of data.