Financial management is recognisedly the most important segment of public administration which is concerned with accomplishing the functions of a State. The concept of 'State' has changed and is still changing. It has evolved from an entity which was merely attending to law and order, and certain regulatory functions in medieval times to one which is now engaged in a comprehensive socio-economic development of its people assuring the protection of the global environment. The member-States of ASOSAI are no exception to the worldwide phenomenon. This transformation has brought about its own challenges, especially in the field of financial management which is becoming increasingly complex every day. Originally financial management was a relatively simple matter as set out in the Twelfth Article of the Magna Carta in 1217:
"No scutage or aid shall be imposed in the Kingdom unless by common council of the realm, except for the purpose of ransoming the King's person, making his first-born son a Knight, and marrying his eldest daughter once, and the aids for this purpose shall be reasonable in amount." (Quoted from pages 2-3 of 'Govt. Budgeting' by Jesse Burkhead. Published New York John Willy & Sons Inc. London-Chapman & Hall Ltd.)
However more sophisticated government financial management is now crucial for promoting socio-economic development. Modern financial management skills are indispensable for mobilising, allocating and utilising resources in a manner capable of attaining development objectives. These skills signal the future impact of current management actions and provide appropriate information for decision-making. The financial systems-in conjunction with budgeting, accounting, auditing and other accountability arrangements need to keep pace with the changing times and rapid transformation of the governmental environment.
As brought out in the World Development Report of 1988, many of today's public finance issues have troubled policy makers for centuries-how to raise and allocate public funds effectively while limiting budget deficits and how to delegate authority while ensuring financial discipline and accurate accounting. These issues are of even greater relevance now because of the expansion of governmental functions.
The broad scheme of financial management and control is generally spelt out in the respective Constitution and Acts of Parliament. It envisages, among other things, Parliament's approval of taxation and expenditure proposals of government and submission to Parliament of the annual accounts of government along with the audit report of the SAI. Generally, Select Committees of Parliament undertake a detailed examination of the budget estimates, accounts and audit reports and make recommendations for appropriate action by the executive. Thus, although the executive takes the policy implementation initiatives on financial matters, it is accountable to the Parliament.
Borrowing as a source of financing and the public debt have assumed such proportions that these cause concern in several countries. Although there is generally strict parliamentary control overtaxation and spending, only in a few countries are borrowings controlled by setting statutory limits or otherwise by specific authorisation of Parliament.
Some of the ASOSAI countries-such as India, Malaysia and Pakistan- have a federal framework. The federal financial relations are regulated by their respective constitutions. A national perspective in financial management and accountability emerges through mandatory uniform standards of accounting and audit by the SAI of the accounts of both the Federal and the State or Provincial governments. However, this is not the case in Australia where the various State governments have their own accounting and auditing systems.
The two primary methods generally used in controlling and allocating public spending are the medium-term plan and the annual budget. The medium-term plan promotes careful consideration of spending alternatives, facilitates phasing of lump sum investments over several years, and provides some indication of the sustainability of the proposed revenue and expenditure pattern over the medium term. The annual budget is the authorised legal document for raising and allocating resources.
Planning
Comprehensive central planning for the economy as a whole has lost favour in both government and academic circles in recent years. Many countries, the most notable being the Republics forming the former Soviet Union, and including even China, have put growing emphasis on market forces and individual initiatives. In part this follows a change in the emphasis of development theory. Previous theories called for direct government intervention in resource allocation, while the later view stresses the primary importance of efficient markets and the correct price mechanism. However, the move away from comprehensive economic planning does not signal the demise of all planning.
Generally all Asian countries of ASOSAI have adopted some form of development planning to determine the priorities to be assigned to various public investments for optimal resource distribution to the various sectors of the economy in order to achieve development goals. By and large, public investments go much beyond the mere provisioning of infrastructure and other physical facilities and include agricultural, industrial and human resource development, and social security support.
Budgeting : Budgeting and accounting are two crucial parts of public finance. Over the years both budgeting and accounting, which are closely interlinked, have acquired comprehensive dimensions. The primary object of budgeting has changed from providing for basic government services to achieving a wide range of socio-economic goals. Thus Gladstone considered that expenditure beyond " legitimate wants of the country is not only a pecuniary waste, but a great political and, above all, a great moral evil."(Quoted from "Public Aspects of Finance" by D.H. Macgregor Reference- "Govt. Budgeting" by Jesse Burkhead-page 6.)
However, modern States now budget for all those resources needed for a given time period and the allocation of these resources on a prioritised basis to fulfill a wide range of social and economic functions. But meeting this basic objective has become infinitely more complex. It involves a close interaction between the political leadership and the executive which formulates its proposals, the legislature which scrutinises and gives its approval, the implementing agencies which are to fulfill physical tasks, an appropriately structured accounting system to record these transactions correctly, and an independent as well as objective evaluation of the actual performance through the statutory audit function to ensure accountability.
Some countries have reformed their budgeting procedures in the direction of 'Program' and/or 'Performance' budgeting. Such reform not only reclassifies the budget to reflect objectives and programs, but also attempts to monitor government performance by relating inputs to outputs. For instance a sustained effort to introduce performance budgeting has produced a working system in both India and Malaysia.
While the quest for raising additional resources from tax and non-tax sources continues, an important new dimension of the budgetary process is the growing recourse by governments to domestic and external borrowings. It has generally been accepted that domestic savings for productive purposes as well as external loan assistance for meeting essential foreign exchange requirements are not only desirable but inevitable in the present state of close interaction between comity of nations. But the more urgent questions are:
Opinions among informed economists and public finance experts will always differ. But it can hardly be disputed that, beyond a certain stage and without a fail-safe method of expenditure control, any large-scale induction of domestic and external borrowings can create not only internal economic disorder but also place severe strain on the value of domestic currency.
Government is typically organised so that, at the apex, is the policy formulation, direction and control machinery for the government as a whole as well as for each separate functional entity. Further down the pyramid are the implementing units with well-defined responsibilities and appropriate delegation of powers, as laid down in the relevant legislation and executive regulations. Internal controls are built into the various operations and activities to facilitate the ultimate accountability of the executive.
In the final analysis, effective financial management depends upon the efficiency of internal control, including internal and statutory audit arrangements. Efficient internal financial control is even more necessary in the context of vast increases in revenue raising, borrowing and expenditure, and also in the proliferation of points at which financial transactions occur in modern public sector management. The INTOSAI Internal Control Standards Committee has recently issued the exposure draft of the "Proposed Internal Control Guidelines and Standards" (January 1991) detailing the objectives and standards of internal control as well as the manner of their implementation and monitoring. The work of this INTOSAI committee has made a significant contribution to strengthening the control systems in member States.
As highlighted in the Seoul Recommendations (1982) and the Tokyo Declaration (1985) of ASOSAI, development of adequate information, control, evaluation and reporting systems within government will facilitate the accountability process. The Tokyo Declaration also urged that the appropriate authorities in government should ensure the promulgation and enforcement of generally accepted accounting standards for financial reporting and disclosure relevant to the needs of the public sector.
Traditionally annual accounts are maintained for the government as a whole in order to help monitor budgeted revenues and expenditure, and to depict the overall financial position of the government. In addition, performance indices and financial reports relating to different segments of governmental functions have been developed gradually. However, government financial reporting has been devised largely to meet the needs of parliamentary financial control and of financial management in government; it seldom addressed itself to the needs of other users. With the expanded role of modern government and the increasing impact of public finance on the economy and society, many others may be interested in using the financial reports of the government for a variety of purposes. It is in this context that the work of the INTOSAI Standing Committee on Accounting Standards, in articulating the objectives of government financial reporting and the results of the survey on user needs, assumes significance.
The public financial needs, constraints and challenges faced by nation States are dissimilar at any given point of time, and also change over time. Therefore accounting and financial reporting standards should be oriented to the needs of individual countries and continually reviewed in accordance with the changing needs of each one.
The Supreme Audit Institutions of ASOSAI have a unity of aim, namely of making the administration to be accountable to itself first, and finally to the public through the Parliament. In this they function essentially as an aid to administration in the overall public interest. Each country has assigned the position, duties and powers to the SAI in the light of its own ethos and environment. However, it is necessary to assess periodically the changes needed in the legal framework to facilitate the more effective discharge of the duties and responsibilities accruing to the public sector auditing function in member States of ASOSAI.
The nature of public financial management requires full public accountability which can be guaranteed only through audit by SAIs. The scope of government audit has been widening. It now encompasses not only regularity checks and certification of accounts, but also the examination of the economy, efficiency and effectiveness of the administration in order to achieve accountability and suggest improvements where necessary. Provided that there is adequate recognition of its role, the public sector audit function has the potential to contribute substantially to financial management in government.
Auditing Standards : With the issue of the final draft of the INTOSAI Auditing Standards (June 1991), an international perspective on auditing standards for the government sector has clearly emerged for the first time. However, barring a few exceptions, SAIs have not published their own auditing standards. The need for adoption of auditing standards to assure quality and consistency in audit and to help strengthen the credibility of the audit institution cannot be over emphasised. However, the auditing standards adopted by an SAI depend, in the main, on the concept of accountability, scope of audit and degree of independence characterising the public sector auditing function in the country concerned. These standards are also influenced by the level of sophistication in government financial management and the auditing techniques employed.
There is a general appreciation of the need to strenthen and upgrade financial management in government. The need is more in regard to strengthening internal control systems. There is also a move towards decentralisation of financial control usually vested in the Ministry of Finance. Further, there is progressive use of information technology for timely preparation of accounts and to provide the variety of data and information needed for effective financial management and control.
There is a recent trend towards corporatisation and privatisation of government functions on account of a combination of economic, financial and administrative considerations. In this context, the financial management and accountability systems need to be oriented to suit the changing situation.
Hopefully the pesent research publication will develop and enhance financial accountability and management in government, not only in ASOSAI member countries, but also in other regions of INTOSAI.