Malaysia is a federation of thirteen states with a two tier system of government-the federal government and the state governments. The relationship between the central government and the component states and the division of the financial burdens including provisions regulating the financial affairs at both these levels of government are set out in the Constitution of Malaysia. The distribution of the legislative powers and responsibilities are in accordance with the three lists in the ninth schedule to the Constitution-the federal, the state and the concurrent list. The federal and state lists enumerate matters which are the responsibility of the federal and state governments respectively while the concurrent list includes matters common to both administrations. Examples of matters in the federal list are education, defence, and external affairs. The state matters include items such as land, agriculture and local government. The federal and state legislatures may make laws on any subject within their respective lists and may also legislate upon any subject in the concurrent list. All matters relating to finance-such as currency, public debt, financial and accounting procedures and the audit of federal and state government accounts-are solely federal subjects. For this reason, all laws and regulations relating to finance and accounting in the states are issued by the federal administration, and the Auditor General is auditor to both the federal and state governments.
Proceeds from taxation and from other sources subject to the federal list accrue to the central government while revenues from local sources such as land and forests are assigned to the states. The states also receive a number of specific annual grants from the federal government. As regards expenditure, the respective administrations pay for commitments pertaining to subjects within their jurisdiction (state list). For commitments involving subjects in the concurrent list, expenditure is incurred by the government which desires the service. To co-ordinate important matters of federal and state finance, the Constitution provides for a National Finance Council, chaired by the Prime Minister of Malaysia, which includes the Minister of Finance and the Chief Ministers of each state of the federation. Problems of federal-state finances are often resolved in practice at official levels with a formal understanding reached between the Minister of Finance and the Chief Minister of the state concerned.
Apart from the financial provisions of the Constitution, parliament has enacted two important laws relating to accounts, finance and audit-the Financial Procedure Act 1957 and the Audit Act 1957 respectively .The Financial Procedure Act provides for the control and management of the public finances of Malaysia, and for financial and accounting procedure, including the collection, custody and payment of the public moneys of the federation and of the states, and the purchase, custody and disposal of public property (other than land) of the federation and states and for any connected matters. Financial and accounting procedures are further explained and expanded in the Treasury Instructions -a compendium of detailed rules and regulations for the guidance and compliance of all public officers. The Audit Act provides for the audit of the accounts of the federation and of the states, and of certain other public authorities and bodies.
Because of the commonality of the financial provisions in the federal and state governments, procedures and practices in budgeting and accounting are similar and only vary in detail. For simplicity, this chapter describes the situation obtaining in the federal government. In the Malaysian context, the Treasury means the Minister of Finance and includes any officer under the administrative control or direction of the Minister.
1.1 FINANCIAL PROCEDURE
The Yang di-Pertuan Agong (King), as the repository of the executive authority of the federation, is charged with the management of all public funds of the federation. In the exercise of these duties the Yang di-Pertuan Agong acts with the advice of the Cabinet and on matters of finance through the Minister of Finance (Treasury) who is statutorily conferred with such powers.
The Yang di-Pertuan Agong through the Minister of Finance makes known to parliament each year the financial needs of the government which are then granted by parliament from revenues raised from taxes and other sources. No tax or rate can be raised nor any expenditure made without the authority of parliament.
1.2 THE CONSOLIDATED FUND
The sources of revenue assigned to states are listed in a schedule to the Constitution. All other revenues raised in the federation accrues to the federal government. These federal revenues are required by law to be paid into a fund known as the federal consolidated fund (See Figure 4).
2.1 ANNUAL APPROPRIATIONS
Before the commencement of each year, the government prepares the annual estimates for laying in parliament showing the total sum charged on the consolidated fund and the sums required to meet expenditure on the various activities proposed by government. No expenditure may be incurred without parliamentary approval. Expenditure charged on the consolidated fund-such as pensions, debt charges, maintenance of the sovereign (civil list), salaries of the Auditor General and judges-are obligatory payments under the law and so do not require to be appropriated each year. AII other expenditure requirements of the government, which comprise the estimates of expenditure, are included in the supply bill submitted to parliament for approval. Once this bill is approved by parliament it becomes law and is then known as the supply act. Departments may only commence spending once the general warrant authorising them to do so is issued by the Minister of Finance. If additional funds are required for any purpose, supplementary estimates for such sums must be laid before the House of Representatives (The Malaysian parliament comprises the House of Representatives (the lower House) and the Senate.) and included in the supplementary supply bill.
The supply law only shows the total expenditure requirements of government by 'purposes' (vote heads) of expenditure as parliamentary control over sums approved is in block totals only. The details in the estimates are by 'objects' (subheads) of expenditure and control over them is by the departments themselves and by the Treasury (Figures 1 & 2-provide a sample of the operating and development estimates of a Ministry).
2.2 BRIDGING FINANCE
There are also exceptions to this normal set of procedures. For example, if the supply law cannot be passed before the beginning of the financial year, parliament has the power to authorise expenditure for part of the year known as the 'vote on account' against sums provided in the estimates. The 'vote on account' has never been used.
2.3 EMERGENCY EXPENDITURE
Parliament may also authorise a 'vote of credit' which enables the government to spend moneys on any service not provided in the estimates in times of national emergency or due to the magnitude or indefinite character of such a service. The 'vote of credit' was provided once in 1964 when the nation faced an external threat but was not used.
2.4 CONTINGENCIES FUND
If during the year, funds appropriated under the supply law are insufficient or a need has arisen for expenditure for a purpose for which no provision has been made in the supply act or have been spent in excess of sums approved, additional sums may be obtained from the contingencies fund-a trust account provided for under the constitution and the financial procedure act and which holds reserve funds for this purpose. These additional funds are approved by the Minister of Finance but must subsequently be included in supplementary estimates for presentation to parliament for approval as mentioned in paragraph 2.1.
Figure 1
OPERATING EXPENDITURE
Supply Purpose 34-Ministry of Health (1)
Controlling Officer: Secretary-General, Ministry of Health (2)
| Item | Programme/ Activity |
Code General Object (5) |
Type of Expenditure |
Estimates 1989 |
Estimates 1990 |
No of Posts | |
| 1989 | 1990 | ||||||
| 010000 | Administration | 10000 | Emoluments | $ 45,141,900 | $ 33,154,200 | 2,482 | 2,284 |
| 37,289,500 | 24,844,800 | ||||||
| 20000 etc. | Services and etc. | 6,423,100 etc. | 7,617,200 | ||||
| 020000 | General Health Services (3) | - | - | 277,446,200 | 286,975,528 | ||
| 10000 20000 etc. |
Emoluments | 199,241,300 | 213,236,000 | 23,626 | 23,615 | ||
| 50000 | Other Expenditure | 28,000 | 28,000 | ||||
| 020100- Health Education (4) |
171,981,000 | 175,128,000 | |||||
| etc. | etc. | etc. | etc. | etc. | etc. | etc. | etc. |
| Total Operating Expenditure Estimates | 1,221,630,000 | 1,278,135,500 | |||||
Figure 2
DEVELOPMENT EXPENDITURE
Development Purpose 34-Ministry of Health (1)
Controlling Officer: Secretary-General, Ministry of Health (2)
|
Item (Project) |
Title |
Total Estimates Project Cost |
Actual Expenditure 1981-1985 |
Estimates For Years 1986-1990 |
Actual Expenditure 1986-1988 |
Revised Estimates 1989 |
1990 Estimates |
|
| Direct | Loans | |||||||
| $ | $ | $ | $ | $ | $ | $ | ||
| 00107 | Training Programme | 79,376,000 | 18,558,133 | 12,780,000 | 1,574,178 | 4,490,000 | 6,653,000 | - |
| 00200 | ||||||||
| 00300 | ||||||||
| 00400 | Hospitals: (3) | |||||||
| 01 General Hospital Kuala Lumpur (4) | 66,802,000 | 10,049,960 | 13,001,000 | 8,702,379 | 2,310,000 | 1,988,000 | - | |
| etc. | etc. | etc. | etc. | etc. | etc. | etc. | etc. | etc. |
| Total Development | 3,230,613,000 | 602,553,243 | 797,970,310 | 234,576,757 | 217,153,530 | 345,716,280 | - | |
3.1 THE TREASURY (MINISTRY OF FINANCE)
The term 'treasury control' is perhaps misleading in the Malaysian context as this responsibility (subject to the consent of parliament) ultimately lies with the government as a whole. The Minister of Finance is a member of the government which takes decisions collectively and his influence over his colleagues is in regard to total government expenditure, to fiscal and financial policy and to ensuring that expenditure is prudent and effective. Control is usually exercised at three levels-at the time budget requests are made, when supervising compliance with Treasury requirements during the administration of projects, and at the stage when investigations are made into audit reports. Although the basic concept of accountability envisages parliamentary control over all expenditure, the mechanisms of this control allow the Treasury to manage appropriations and to detail some of the broad provisions made by parliament. For instance, although the estimates are approved by parliament, departments cannot commence incurring expenditure without the authority of a warrant from the Minister of Finance. In practice, the general warrant is issued to the Accountant General authorising him to make payments up to the amounts approved but the warrant lapses and ceases to have effect at the close of each financial year so that balances of funds cannot be utilised further. Spending authority for specified purposes granted by other statutes such as the Development Funds Act, however, does not lapse at the end of the year in which it was granted. It is also within the Minister's discretion to limit or suspend any expenditure authorised for the year for any 'purpose' (vote head) of expenditure.
Each department can also use an excess on one object of expenditure to meet a deficiency on another within the same 'purpose' (vote head) or to a new 'object' of expenditure provided that the total provisions under the vote head as approved under the supply act are not exceeded. The authority to 'vire' is a Treasury prerogative which has now been delegated to departmental heads. All 'virements' must be reported to the Treasury.
3.2 OTHER CENTRAL AGENCIES
Apart from the Treasury, the Prime Minister's Department plays an important role in the budget process particularly the Public Services Department (PSD), The Economic Planning Unit (EPU) and the Implementation and Co-ordination Unit (ICU). The PSD examines personnel requirements of agencies in the operating budget and the ICU monitors the performance of the development programmes. Their separate roles are discussed in greater detail in paragraph 6.4 of this chapter.
3.3 ROLE OF THE CENTRAL BANK
The central bank acts as banker, fiscal agent and financial adviser to the government. As a banker, with branches in most states, it provides government with cheque facilities, accepts funds and makes disbursements on behalf of the government and undertakes the foreign exchange business of government. In its role as fiscal agent, the bank assists the Treasury in the management of the public debt. It arranges the floating of loans at home and abroad and advises the government on loan programmes, the terms and timing of such loans and on the issue of new types of securities. All debt instruments for domestic borrowings are issued by the central bank. Detailed accounting records of such debts are kept both by the bank and the Accountant General. Subject to certain legal limitations, the bank is empowered to make temporary advances known as 'ways and means' advances to the government to cover deficits in budget revenue, but this credit facility has never been used.
The bank may also purchase government assets under certain circumstances. In 1988/89 the government sold part of its shares in the Malaysian Airlines System and in the Malaysian International Shipping Corporation to the bank. The proceeds were used to prepay the government's external debt and reduce its debt servicing.
The governor of the bank, as financial adviser to the government, maintains frequent contact with the Minister of Finance. He also serves as a member of the National Development Planning Committee (NDPC) to advise on the monetary impact of development policies and the financial implications of the development plan programmes.
3.4 PRIVATISATION
In the last few years the government has embarked on a privatisation programme of some major public sector enterprises and agencies. The Privatisation Master Plan identified 246 government companies for privatisation and included some government agencies undertaking commercial activities such as the postal, printing and civil aviation departments. The telecommunications agency was corporatised in 1987 and privatised in 1990.The building and maintenance of toll roads has also been contracted out to the private sector which recovers the cost of its investments by imposing user charges.
The rationale for the government disposing of both profitable and unprofitable agencies is to inject capital funds for development. Such disposal also reduces the government's debt and relieves the financial and administrative burdens of some of these agencies.
As has been pointed out earlier in this chapter, the constitution of Malaysia's federal system of government stipulates that the audit function is a federal matter. Consequently provision is made for the appointment of the Auditor General as the auditor not only of the federal government but also of the thirteen state governments of Malaysia. His duties require him to undertake the audit of, and express an opinion on, financial statements of government and other public entities; to conduct comprehensive reviews of the economy and efficiency of public entity programs; and to report on these audits and results of reviews to the legislature and to management.
The financial statements of government must be submitted for audit within a period of seven months after the close of the year. If they are not received by this date, the Auditor General must make a report to His Majesty the King who will cause such a report to be laid before the legislature. No statutory date is imposed for examining and auditing the statements except that it is required to be done 'forthwith'. In practice, the statements are audited within 3 months. In his audit, the Auditor General is required to ascertain whether:
4.1 RELATIONSHIP WITH THE PUBLIC ACCOUNTS COMMITTEE OF PARLIAMENT
The Public Accounts Committee (PAC) is a select committee of the House of Representatives appointed under standing orders to examine the government's accounts and the Auditor General's reports laid before Parliament. In practice the PAC concentrates largely on those matters included in the Auditor General's reports, but seldom examines the details of the accounts themselves. The Auditor General, is at least by convention, an advisor to the PAC. In his dealings with the PAC, the Auditor General normally offers guidance in three distinct areas. First, before sessions commence, the Auditor General consults informally with the PAC. He may assist in formulating a provisional working plan by advising on the extent and nature of the items to be selected for investigation and by making recommendations concerning the agenda and procedural matters. He may also discuss the contents of his audit report in detail, suggesting the departments which need to appear before the committee, lines of enquiry, pointing out related issues which may arise and verifying the governments written reports on audit findings. Second, the Auditor General attends PAC meetings at which evidence is taken. His usual role is to clarify or substantiate issues or give an opinion on testimony by other witnesses, as requested. Third, the Auditor General normally participates in the preparation of the draft report of the PAC either by providing assistance in formulating it or by commenting on its contents. The SAI may also often provide assistance in following up the PAC report by checking on implementation of recommendations by departments and drawing attention to cases of inadequate action taken.
4.2 AUDITING STANDARDS
By virtue of his position the Auditor General is the standard-setting body in the public sector. Some of the general standards applicable to the SAI derive from the legal mandate of the Auditor General but generally accepted auditing standards of the national standard-setting body applicable to the public sector relating to the auditor (general standards), the examination (planning, internal control and evidence), and the report (reporting standards) are adapted for application in financial audits. More recently the INTOSAI auditing standards issued in March 1989 are being used as a basis. For value-for-money auditing, the standards and guidelines developed by the United States General Accounting Office and the Office of the Auditor General of Canada are used for guidance.
5.1 THE TRADITIONAL BUDGET
Under the traditional budgeting system prior to 1969, the primary concern was with annual recurrent expenditure-such as salaries, transport and travel costs-and non-recurrent expenditure incurred on capital items and equipment. As the emphasis was more on aspects of mobilization and allocation of resources, financial controls were aimed at minimising excessive and unauthorised expenditures. The former line item budget provided allocations to agencies by objects of expenditure without regard to the objectives, policies and priorities of government. Performance of departments was judged on how well they managed within their budgets, and shortfalls in expenditure were attributed to poor budgeting. It was not unusual for departments to embark on "Christmas shopping", a term used to describe feverish spending before the close of the year to avoid surrendering unused balances to the Treasury.
5.2 PROGRAMME AND PERFORMANCE BUDGETING
In 1969 the Programme and Performance Budgeting System (PPBS), which emphasised output-oriented budgeting was introduced. Allocations were given on the basis of programmes and activities designed to achieve the objectives of the agency. Performance indicators were to be developed to evaluate financial and physical performance, and programmes and activities evaluated to assess their relevance, results and impact. Although the objectives of the various government agencies, and the programmes and activities to achieve them, were identified and developed, little progress has been made in developing performance indicators.
An important aspect of the PPBS was the introduction of the Program and Performance Budget. This budget document is tabled together with the Annual Estimates for the year and is intended to provide legislators, administrators and the public with simplified information about each ministry and department, its programmes and activities and the funds allocated to it for the purposes involved. Each agency explains the objectives of its various programmes and expenditure strategies giving an overview of individual activities, their nature, scope and functions, and the output or achievement for the previous three years. The significant contribution of the program and performance budget is that it has given legislators a better insight into government programmes and activities.lt makes for a better understanding of government efforts in relation to overall policies and strategies and for a more informed debate on the Supply Bill. Administrators, on the other hand, are encouraged to rationalise their programmes and activities. However, unless realistic targets are set for each programme against which outputs can be compared and relevant performance indicators developed, the present format of this budget document will largely be of limited usefulness.
5.3 MODIFIED BUDGETING SYSTEM
In its continuing effort to improve efficiency in operating agencies and to provide flexibility in the management of financial resources, the Treasury introduced modifications to the existing system in the 1990 Budget by means of a pilot project involving three ministries. The Modified Budgeting System (MBS), which in effect is the final phase of PPBS, essentially advocates a concept of 'let managers manage'-a decentralisation of authority giving controlling officers (agency heads) greater autonomy in financial management. Departmental heads set their own targets, prioritise their programmes and conclude an understanding with the Treasury on proposed achievable targets. Under the system, the Treasury will undertake periodic evaluation of the programmes and activities of the agency to determine performance against targets. In a further development, appropriate costing systems are being developed. A feature of MBS is that Treasury control over expenditure is reduced to an overview of aggregates while allowing implementing agencies to maintain detailed financial control over their operations.
In this modified budgeting system, it is incumbent on agencies to develop their own financial and management skills. The progress of the ministries involved in the initial pilot project is being monitored to gauge whether yardsticks to measure performance and relevant unit costs are being developed. The modified system will be phased-in to other agencies, depending on the progress and success of the pilot project.
5.4 BUDGET CLASSIFICATION
The main sources of revenue for the federal budget comes from income taxes, customs and excise duties, royalties from petroleum etc (all direct taxes); motor vehicles and broadcasting licence fees, interest and returns from investments, service fees etc (all non-tax revenues); and receipts from other government agencies, refunds of expenditure etc (non revenue receipts).
The expenditure budget has two major components-operating (supply and charged) expenditure and development expenditure. Supply expenditure, which is provided for under the Supply Act, includes all charges to the budgetary appropriations for goods and services, and for transfer payments to statutory funds, state governments and public enterprises. Charged expenditure such as statutory grants to state governments, pensions and debt charges are obligatory payments under the law and do not require to be appropriated annually.
Development expenditure is met from the development fund. Receipts of the fund consist mainly of loans raised for development, contributions from the revenue account of the consolidated fund and from recoveries of loans from the development fund. Expenditure from the fund is only for development purposes as specified in the Development Funds Act and includes grants, loans and investments for development purposes.
6.1 PLANNING
In achieving national development goals, the role of planning and budgeting are integrated. The successive Five Year Malaysia Plans formulate operational goals and strategic means of achieving them. The Malaysia Plans were the blue prints for development covering all aspects of the national economy. The Plans outlined an action-oriented agenda of policies, programmes and projects which, in the first twenty-year Outline Perspective Plan (1971-1990), was to eradicate poverty and restructure society.
Development programmes cover rural, urban, agricultural, mining, manufacturing, housing and all other aspects of socio-economic concern. The development budget, therefore, follows closely the policies formulated in the Malaysia Plan documents and progress and achievement for each of the Plans are subject to detailed scrutiny during the Mid Term Review. Physical progress and financial outgoings are examined to determine performance against planned prospects, and necessary decisions taken to rectify shortcomings. Greater emphasis is now being given to motivate the private sector in spearheading economic growth. The government has now clearly indicated that commerce and industry is best left to the private sector by withdrawing in many fields through its privatisation programmes.
The main objective of the financial planning strategies of government is to balance the budget through prudent fiscal policies, and effective and efficient mechanisms for expenditure control and utilisation of resources. Fiscal policy aims at hastening economic recovery and enhancing the revenue generating capacity of government. Expenditure control measures an efficient utilisation of resources aimed at increasing productivity. However, as balanced budgets are not always the answer for broadening the productive base of the economy, deficit budgeting is resorted to as a means of stimulating economic growth.
6.2 ORGANISATION AND ROLE OF THE BUDGET MANAGEMENT DIVISION
The organisational structure of the Division follows the sectoral classification of the budget (eg. general administration sector, security sector, natural resources sector, etc). The Director of the Budget is supported by Senior Assistant Directors in charge of each sector with four or five Budget Review Officers (BRO's) assisting each of them. The number of departments under each BRO is dependent on the size of each.
The role of the Budget Division is to analyse and examine all proposed financial plans and programmes of government agencies to ensure that they are in accordance with prescribed national objectives and that the resources are applied in an economical, efficient and effective manner to sustain stable economic growth.
The Division's functions can be classified as follows-budget examination and appropriation, federal/state governments relationships and research, coordination and budget analysis. The Division ensures that budget preparation and budgetary expenditure of both the federal and state governments are planned and controlled. Profiles of past and future expenditure patterns and trends are also reviewed so as to enable more reliable forecasting when fixing expenditure targets .
Recently an Expenditure Control Unit was created by the Cabinet committee on Government Management to identify areas of financial mismanagement and wasteful expenditure. The Unit follows up adverse reports of the SAI on departments and ensures that remedial measures are taken to correct weaknesses.
6.3 BUDGET STEPS (Figure 3.)
The budget year is from 1st January to 31st December. In January of each year the Ministry of Finance issues a circular prescribing guidelines for the preparation of the budget estimates for the following year. The circular sets out, amongst other things, the expenditure budget policy, prescribes the formats to be used and the timetable for submission of the budget proposals. The Treasury at this time computes the total commitments for the budget year taking into account such known factors as charged expenditures and personal emoluments. Once the 'the locked-in' expenditure figure and the projected revenue for the year is known, the Treasury can decide on the ceilings for operating expenditures.
Agencies submit their budget estimates by the end of March, while the Budget Division examines the proposals from April to July .Budget hearings with each of the agencies are conducted by the budget review officers (BROs) who during the preliminary hearings only discuss policies and issues of a general nature. The detailed hearings examine the justifications given for the estimates proposals and the implications. The BROs are assisted by the representatives of two other central agencies-the public services department (PSD)-a staff agency which controls the personnel system and the economic planning unit (EPU) of the Prime Ministers Department. The PSD has responsibilities for examining the manpower requirements of the agency and the EPU would advise on proposals made in the annual development estimates. The plan ceilings of projects in the development estimates would have already been approved by the EPU and the Treasury as proposed in the Malaysia Plan. The only consideration given at the budget hearing for determining the annual allocations is the cash flow position of government and the ability and capacity of the agency to implement the programmes. The BRO then has the overall responsibility of recommending the amount of funds to be allocated to the agency for the coming year based on convincing arguments put up by the agency during budget hearings, its track record of past performance and ceilings imposed by the Ministry of Finance itself which are dependent on the overall revenue position and its capacity to raise loans to finance these projects.
For the revenue budget, each agency would provide forecast earnings for the year. The Treasury in consultation with the revenue earning departments also explores possibilities of new sources of revenue, reviews revenue areas to improve collections, reduce or even do away with existing taxes and duties. In recent years, the Minister of Finance holds 'budget dialogues' which consist of a series of meetings with a wide range of organisations representing industry, agriculture, consumer groups, trade unions etc to listen to their views on government financial and fiscal policies and other specific measures. The budget dialogues allow the minister to sense the mood of the taxpayers in order to obtain valuable feedback on existing fiscal measures and ideas for the next budget.
Budget hearings are completed by the end of July and the BROs then present their recommended expenditure budget estimates to the Budget Director for his consideration and submission to the Minister of Finance. These are then submitted to Cabinet for its consideration before being tabled in parliament some time in October.
The annual estimates of the federal government are presented in parliament as the Supply Bill by the Minister of Finance who in his Budget Speech highlights fiscal and financial strategies and policies for the ensuing year. New revenue measures are announced and the Finance Bill introduced to provide for new taxes or modifications to existing tax structures. The estimates of each Ministry are then debated and taken through the various stages in the House of Representatives, after which the Minister will move that the Supply Bill be passed.
The Supply Act becomes law when it receives the royal assent and by the first week in January of the budget year, the general warrant is issued by the Minister of Finance to the Accountant General authorising expenditure from the consolidated fund. This is the final act in the budget process.
6.4 THE ROLE OF CENTRAL AGENCIES IN THE BUDGET PROCESS
As described earlier, the Treasury has the key role in the budget process but two other agencies and a number of committees also have important functions to perform. The Public Services Department (PSD) -the staff agency which controls personnel in the public service, is mainly concerned with the operating budget and its function is to review all budget proposals for increases in numbers and grades of staff. The Economic Planning Unit (EPU) of the Prime Minister's Department has many functions but its budget-related activities concern the formulation of the five year development plans (the Malaysia Plans). Its role is to examine, review and recommend fund allocations for programmes in the five year development plans and to reasses overall progress during the mid term reviews and to determine whether development projects are in conformity with national objectives. It also services the Estimates Sub Committee and the National Development Planning Committee (NDPC).
The development estimates which form part of the annual budget are processed separately from the annual operating estimates. A year or more before the end of a five year Malaysia Plan, the EPU will issue a call circular to all agencies requesting submission of their proposed plans on development projects and programmes for the next plan. All proposals are screened to ensure conformity with national policies, objectives and priorities. The draft Plan is then submitted by the EPU to the National Development Planning Committee (NDPC) for consideration. The NDPC is a committee of top civil servants- chaired by the Chief Secretary to the Government and includes the Secretary General of the Ministry of Finance.
The NDPC reviews the plan, resourcing proposals and implementation problems to ensure effective delivery. The draft Plan is then submitted to the Cabinet Committee which will give its final stamp of approval before the Plan is tabled in Parliament for approval .The Prime Minister's special committee (PMC), an ad hoc committee comprising the Prime Minister, his deputy and senior ministers may meet to discuss the Plan proposals before it is presented to the Cabinet Committee, but this is rare. There is also an Estimates Sub-Committee of senior civil servants (Treasury, EPU, Public Works Department etc) of deputy level ranking which does the spadework for the NDPC. t is involved in such activities as examining proposals for new projects and requests for increased allocations.
Once the five year Malaysia Plan is approved by parliament, ministries and departments will request from the Treasury annual appropriations for development in accordance with the annual targets. Since the five year Malaysia Plan would already have been approved by parliament, the annual development estimates are only required to be tabled and passed by a resolution of the House.
7.1 ROLE OF DEPARTMENTS IN SPENDING AND CONTROL
Every public officer of any rank who has dealings with public moneys or stores is an 'accounting officer. 'All accounting officers are required to comply with financial and accounting procedures prescribed by the Treasury and are held accountable for their actions.
The accounting officer in charge of a purpose of expenditure (vote head) is designated as 'controlling officer' and is appointed by the Minister of Finance. He is usually the head of department and it is his business to know how much is required to carry out departmental policies effectively and to seek the necessary funding. Once funds are obtained, it is his duty to see that the money is spent wisely and economically.
In particular he must ensure that:
If he fails in any of these duties, he may face disciplinary proceedings and be liable for surcharge.
The financial and accounting duties of subordinate officers under a controlling officer must be clearly laid down so that responsibility for any irregularity can be readily determined. Although the controlling officer is appointed by the Minister of Finance, his responsibility is to his own minister who is by constitutional practice accountable to parliament for all the activities of his department.
7.2 INTERNAL AUDITING
Financial accountability at departmental levels rests with the controlling officers. The SAI for the last three decades has been lobbying for the establishment of effective internal audits to ensure that independent appraisal functions exist within each organisation to assist controlling officers discharge their duties effectively.
To date eleven ministries and departments have established internal audit units. Although the Treasury is responsible for the overall policy of developing internal audit functions in agencies, training internal auditors and issuing standards and guidelines for their compliance, the internal auditors are responsible directly to the controlling officers.
The internal audit functions are mainly housekeeping-to check the financial propriety of transactions and compliance with applicable laws and regulations. Internal audit units also undertake performance audits of programmes and projects of their agencies. Internal audit reports are made directly to the controlling officers but are also made available for scrutiny by the SAl. The staff are from various disciplines and the senior posts are filled by civil servants and seconded officers from the SAI and the Accountant General's Department. The concept of an "open post" establishment for internal auditors is based on using expertise from various professional backgrounds for evaluating public sector activities.
7.3 THE PUBLIC DEBT
Any study of the budget and public accounts will be incomplete if no reference is made to the public debt. It is significant because in Malaysia, 20% of budget receipts come from borrowings, and debt service charges also amount to about 20% of the expenditure budget. Financial policy in Malaysia dictates that all operating expenditure is met from current revenues. Borrowings, if necessary, are to be obtained specifically for development purposes or for capital investment only.
The government is only empowered to borrow on the authority of parliament and such authority is made through the relevant laws which set out the purposes and the ceilings for such borrowings. Borrowings by public enterprises are not subject to direct legislatural control but are guaranteed by government. The list of borrowings is tabled in parliament and is also disclosed in the public accounts.
The bulk of the loans are domestic in the form of Treasury Bills which are short term borrowings intended to meet cash flow needs. Malaysian Government securities issued for periods ranging from five to twenty years at fixed rates of interest are the main source of funds for capital requirements. Direct external loans take the form of-
Indirect borrowings, both internal and external, are normally obtained from a consortium of banks both within the country and externally for specific projects undertaken by public enterprises. These are normally long term and are obtained at market rates of interest. The government only functions as a guarantor and does not actively manage the loan funds.
The Employees Provident Fund, a social security scheme, is the single largest source of domestic loans. The balance is from commercial financial institutions and insurance companies.
Malaysia has a fairly large external debt and has to manage risks against currency fluctuations. In 1987 and 1988 the government made prepayments of $5.8 billion (ringgit) on existing loans to hedge against sharp appreciation of the major currencies.
Generally it is accepted that parliament exercises overall control over the budget but, in respect of borrowings, has delegated authority to the government. By this delegation, parliament has less control over the levels of borrowing and only ensures that the total loan borrowings do not exceed the maximum limits prescribed under the respective loan laws.
8.1 ROLE OF DEPARTMENTS AND OTHER AGENCIES
A data based system of monitoring and reporting has been installed in the budget process to provide timely and meaningful information on government expenditure to central and operating agencies. Monitoring of the operating budget is purely for control purposes to keep track of the amount expended under each standard object of expenditure. The monitoring of the development budget, on the other hand, is for obtaining information on development projects in terms of physical and financial progress.
The federal government accounts are wholly computerised. There are two levels of capturing data-firstly, at each of the 24 Accountant General's Branch Offices and 7 Self-Accounting Departments (SAD) under the Branch Accounting Systems (BAS), and secondly, at central level through the Centralised Accounting System (CAS), which is a consolidation of all the BAS data. The annual financial statements are compiled from data in the CAS.
Control over expenditure is exercised initially at the agency level. Agencies are required to record details of all expenditures incurred and commitments made on a daily basis in the "vote book", so called because it records all charges to each vote. The Accountant General provides monthly operating and development expenditure reports (flimsies) from BAS and CAS to the respective agencies. Each agency is required to verify and confirm these reports with its vote books and a reconciliation statement put up for any differences. The updating and proper maintenance of the Accountant General's ledgers facilitates the prompt compilation of the annual financial statements.
All agencies are also required to submit to the Treasury (Budget Division) and to the Accountant General monthly reports on the status of both the operating and development budgets of their respective organisations. One of the main purposes of these reports is to enable the Treasury to monitor expenditure trends and manage cash flows. The reports ensure that the Treasury and the respective controlling officers have effective control over approved allocations and enable the Treasury to determine fund requirements of the various agencies.
In addition, the Accountant General has developed the Departmental Reporting System (DRS), to provide financial information relevant for departmental management. DRS will serve the departments and central agencies by providing detailed or aggregated financial information in a variety of analytical formats. The DRS has been implemented in three pilot agencies since mid-1989 and will be extended to others as the system is developed.
The main agency responsible for monitoring and evaluating the performance of development projects is the Implementation and Co-ordination Unit (ICU) of the Prime Minister's Department. It maintains an Integrated Project Management Information System (SETIA) which tracks the financial progress of projects. The Accountant General provides specific codes for capturing data relating to these development projects. Copies of tapes are sent monthly to the ICU for updating its records. Although financial data are readily available, the up-to-dateness of the data on physical progress is uneven and so a computerised project planning system-the Integrated Scheduling System (SIAP) was recently introduced to monitor physical progress of projects. Data input will be at implementing agency level and SIAP will enable all agencies concerned to plan their working schedule; provide annual estimates of financial allocations for projects according to implemetation schedules; trace and monitor progress of the projects; identify problems at an early stage; take immediate remedial action; and manage financial resources more effectively. Quarterly progress reports from all agencies are required to be sent to the ICU but exception reports of projects running behind schedule must be submitted on a monthly basis. Both SETIA and SIAP enable the ICU, to review projects, identify bottlenecks, suggest remedial measures and formulate new strategies to speed up implementation.
Under the New Modified Budgeting System as described earlier, we noted that controlling officers were also engaged in developing performance indicators in their respective ministries. The Treasury also plans to introduce cyclical programme evaluation at least once in 5 years covering the activities of each agency .These results will provide the Treasury with a basis for making decisions on projected resource allocations. Additionally, Internal Audit units in the various agencies are also examining the economy and efficiency of the numerous activities carried out.
These evaluations are measures which are internal to the administration. The Supreme Audit Institution (SAI) is the only agency which evaluates the performance of programmes and activities from outside the system with a view to making its report to parliament.
As mentioned earlier in the chapter, accounting is a federal matter and therefore the states would need to comply with directions from the central government in all accounting matters. The Accountant General (AG) is the principal accountant in the government and head of the accounts division of the Treasury with authority in matters of accounting procedure over the accounts of the governments of the federation and of the states. His principal functions are to safeguard, account for and be the custodian for all federal government collections of revenue, loans and trust funds. He is responsible for all federal disbursments and for the preparation of the annual financial statements of the federal government.
9.1 TYPE OF ACCOUNTING SYSTEM
Government accounting is on a "cash" basis under which revenues are reflected in the accounts in the period in which they are received and expenditures are accounted for when the actual disbursements are made. This is so because the operation of the consolidated fund is by law a cash account -regulating the flow of cash receipts into and cash payments out of the fund. Revenues are also reported on a cash basis and therefore accruals are not recorded in the government accounts as "accounts receivable".
Under the "accrual" basis of accounting revenues are accounted for when earned or due even though not collected in the accounting period and expenditures are accounted for when the liabilities are incurred whether payments are made in that accounting period or not. However when the PPBS system of budgeting was introduced, the Financial Procedure Act was amended in 1974 to allow a "modified cash" basis of accounting. Accordingly payments for the discharge of debts properly chargeable to the old year accounts can be made for 31 days after the end of the fiscal year. With this change, liabilities under contracts and for services payable by December 31 can be paid in the month of January but charged to the previous year and accounted for in the accounts as "accounts payable".
The Civil Aviation Department and the Postal Services Department whose operations are of a commercial nature maintain their accounts on a commercial basis. Since government accounts are kept on a cash basis, separate trust funds for them were set up in the federal accounts to account for their receipts and payments. However, their financial statements on commercial lines are tabled separately in Parliament.
9.2 SPECIFIC LEGISLATION-THE CONSOLIDATED FUND
The national accounting system is based on the provisions of the Constitution and the Financial Procedure Act. Article 97(1) of the Federal Constitution reads:
All revenues and moneys howsoever raised or received by the Federation shall, subject to the provisions of this Constitution and of federal law, be paid into and form one fund to be known as the Federal Consolidated Fund.
The Federal law sighted in the above Article refers to the Financial Procedure Act (FPA) which amplifies the financial provisions contained in the Constitution. Section 7 of the FPA describes the consolidated fund in more detail as follows:
There shall be maintained by the financial authority (i.e. The Treasury) in respect of the Consolidated Fund three separate accounts-
The consolidated fund, therefore, comprises the three separate accounts. The consolidated revenue account is the general receipts and payments account in which are kept all moneys except loan moneys and trust moneys. All loan borrowings are kept in the consolidated loan account and trust moneys, such as deposits received from the public for a particular purpose and appropriations to specific funds set up by law as in the case of the development fund, are kept in the consolidated trust account. Expenditure from these accounts is also kept separate in accordance with the laws and regulations governing the use of these accounts. Figure 4 explains diagramatically the operation of the fund.
9.3 SUPPLEMENTARY REGULATIONS
Since 1984 the public accounts of the government have been supplemented with financial reports from a number of agencies. These reports highlight the objectives, programmes, strategies and overall financial performance of these departments. It is intended that disclosure of the performance of programmes in government agencies will enhance the quality of the accounts and make them more meaningful to the various users.
9.4 ACCOUNTING STANDARDS
The responsibility for financial and accounting procedure vests with the Minister of Finance. It is the duty of the Treasury and its principal accounting officer, the Accountant General (AG), to issue instructions and directions on accounting matters and procedures, monitor that a proper system of accounts is established and ensure that procedures comply with generally accepted accounting principles and standards. The financial laws provide for the broad scope and format of the public accounts and Treasury Instructions, circulars and AG's circulars provide the guidelines. On-going efforts by the Treasury in its Financial Management Improvement Programme have been targeted to produce quality financial reports by improving their timeliness, understandability, comparability, consistency and reliability .There is no doubt that the present financial reports have achieved some of these objectives and now provide much improved information to legislators, government managers, lenders and other end users.
Section 16 of the Financial Procedure Act requires that the annual financial statements be prepared as soon as practicable after the end of every year for the purpose of audit, but no date is mentioned in this law for the submission of the accounts. Section 9(2) of the Audit Act, however, covers this omission and states that, if any such statement is not received within a period of seven months after the close of the year, the Auditor General shall submit a report to His Majesty the King who shall cause the report to be laid in parliament. No such report has yet been made as the accounts are received well within the statutory period for submission.
10.1 STEPS IN THE ACCOUNTING PROCESS
Responsibility centres-so called because they are responsible for collecting government revenues and making disbursements, are spread throughout the length and breadth of the country. It is from these diversified sources that the accounts have to be processed, compiled and consolidated to issue ultimately as the public accounts.
To facilitate speedy accounting and transmission of data, the Accountant General's office operates on a decentralised basis. The central office is in Kuala Lumpur and an accounting office in each state, except for Sabah and Sarawak which have five and seven regional accounting offices respectively because of their geographical size. In addition, seven large ministries and departments are self accounting.
Each of these branches is responsible for processing the payroll and all financial transactions for the federal ministeries and agencies whose offices lie within the branch's administrative catchment area. In addition to these basic computer bureau services, each branch provides on a monthly basis detailed and summarized financial reports to local offices of individual ministries and agencies, and magnetic tapes of detailed transactions for processing by the Accountant General's central information systems. The Accountant General's Department (AGD) has installed a number of systems and sub-systems for its information processing activities.
The computerised accounting system consists of four main systems and a number of subsidiary systems (Figure 5).
The Branch Accounting System (BAS) is a stand- alone system, which processes financial receipts and payments at responsibility centre (R.C.) levels and also acts as a data collection system providing operational, management and financial reports to the various departments and responsibility/cost centres served by the AGD. It is operational at 24 branch accounting departments and in 4 self accounting departments (SADs).
Three other SADs have their own main frame computers linked on line with headquarters (AGD).
At headquarters (AGD) the Data Control System (DCS) basically monitors and controls data transfer. It ensures central control of the development, maintenance and distribution of accounting codes from branch systems to the central accounting system (CAS), the departmental reporting system (DRS) and the subsidiary ledger accounting system (SLAS). The DCS also ensures that transferred data is authorized. complete and accurate from branch systems to external agencies such as the ICU, Treasury and statistics department.
The Central Accounting System (CAS) is centred around a database fed by the DCS. It is the central data bank where financial inputs from all branches are consolidated and ultimately generated as the public accounts. The reliability of the final accounts is directly dependent on the quality of the first level inputs. The BAS does not provide for commitment or liability accounting although the DRS is capable of generating this information. Besides producing management information reports for external agencies, such as SETIA and the Treasury, it also assists controlling officers in reconciling their subsidiary ledger accounts with the control accounts of the government, and provides them with data useful for managing their programs and activities.
The departmental reporting system (DRS) is designed to provide management information. It is capable of providing comparative figures of financial resources used against planned operational performance; accruals, commitments and non-financial inputs such as performance indicators; and of generating operational and management reports according to the needs and specifications of user departments and agencies.
The subsidiary ledger accounting system (SLAS) is the data base for conveyance loans, personal advances, miscellaneous advances and for rent on quarters. Transactions of SLAS are sent on BAS tapes to headquarters from the various paying offices. The investment and loans system (ILS) is not fully operational and now only maintains records relating to external loans.
The cash management system (CMS) has been designed for cash forecast and projections using modelling techniques. This system is not fully operational. Standard payroll systems (SPS) are operational at the branch offices and SADs.The payroll system interfaces with BAS to produce payroll cheques. It also extracts records from SAS on to magnetic media for transmisison to headquarters.
With greater sophistication in data processing capabilities, other areas at both central and departmental levels are being considered for review. Management accounting and reporting with emphasis on performance measurement and fund management through efficient and effective record keeping and reporting with direct access capabilities to related operational areas and agencies are also being considered. A direct communication network linking AGD headquarters with all its branches will reduce the time lag in synchronising postings at the branch and central levels providing for timely information and accounts. At the departmental level, accounting control systems for monitoring budget allocations, expenditure and revenue; assets and inventory systems; accounts receivable systems comprising billing, receipting and debtors subsidiary systems; creditor subsidiary systems and other trust accounts are some of the improvements contemplated.
10.2 THE SCOPE OF THE PUBLIC ACCOUNTS
The public accounts of Malaysia comprising the annual financial report of the government, is prepared by the Accountant General. It covers the financial transactions of government during a particular fiscal year irrespective of whether they are undertaken by or on behalf of a ministry.
As an accounting entity, the government includes all ministries and departments but does not include public enterprises.
The government's accounting system has its basis in the provisions of the Constitution and the Financial Procedure Act. As described briefly earlier, the consolidated fund concept of accounting is prescribed by law. The law also lists out, though not exhaustively, the accounts which should be presented for audit-
10.3 FORMAT OF THE PUBLIC ACCOUNTS
The balance sheet shows the cash and investments held in respect of the revenue, trust and loan accounts of the consolidated fund. In keeping with the cash basis principle of government accounting, only investments held for specific trust purposes are reported in the balance sheet. Acquisition of assets and costs of capital works are charged to expenditure at the time of acquisition or construction. Similarly accrued liabilities, such as interest accrued on public debt, are not taken into account in determining the obligations of government. The major assets (recoverable loans and investments) and. liabilities (public debt, guarantees and notes payable) of government although not included in the balance sheet are reported in the memorandum account.
The public accounts are presented in two volumes. Volume 1 contains the balance sheet and its summary financial statements together with the report of the Accountant General, and volume II contains the detailed financial statements.
11.1 ROLE OF THE SAI
The SAI has no direct responsibility for monitoring the performance of the budget, the physical progress of projects or of the existing management information systems. As mentioned in paragraph 4 of this chapter, the SAI would in the discharge of its duties only report on deficiences in budget implementation, improper payments and authorisation, inadequate or poor record keeping and weak systems and controls. Monitoring of information and achievment of plan objectives are the responsibilities of controlling officers and the central agencies.
11.2 THE PUBLIC ACCOUNTS COMMITTEE
The Public Accounts Committee (PAC) is a select committee of parliament appointed to examine:
The PAC's role and responsibilities relate to examining accounting and financial matters, and to issues raised in the Auditor General's reports. It has never monitored budget performance or requested feedback on operating, development or accounting programmes although its mandate may allow such a role. The PAC has relied mostly on reports and information supplied to it by the SAI.
11.3 OTHER AGENCIES
As mentioned in paragraph 8.1 of this chapter, the Implementation and Coordination Unit of the Prime Minister's Department and the Treasury monitor and evaluate budget programmes to regulate and supervise progress of activities and to obtain input for succeeding years and plans.
The Accountant General, on the other hand, requests financial and budgetary performance reports from several departments and ministries which are then included in his report and tabled with the public accounts for the year.
There is also a cash management committee comprising representatives from the Treasury, the Central Bank and from the Accountant General's Office which meets regularly to resolve matters relating to planning and monitoring of cash balances of government and to the planning of the timing, level and sources of loans to be raised.
In 1989 a Cabinet Committee on Government Management was established comprising seven senior minister (including the Minister of Finance), the Chief Secretary to the Government and the Director General of the Public Services Department. The Secretary General to the Treasury, the Auditor General and the Director General of the Anti Corruption Agency assist the Committee in its deliberations. The Committee is not an investigative body. It reviews reports on irregularities and mismanagement in government departments and statutory bodies and ensures that corrective action is taken by the defaulting agencies. Meetings are held on an ad hoc basis.
Successive Malaysia Plans have emphasised the need for strengthening and upgrading financial management in government. The areas that came under close scrutiny were the budgeting and accounting areas. For decades, there appeared to be "over control" by central agencies over spending. Government activities have become too numerous complex and enormous for central supervision to be effective. Better results could be achieved by making controlling officers more accountable for programmes under their care. Allowing "managers to manage" their own budgets cuts down red tape and encourages initiative and motivates them to produce results. Complementary to these developments is the move towards a fully automated financial reporting networks. The national accounting system has been fully computerised and subsidiary systems are being developing to meet user needs. The public accounts have also undergone several improvements in format, presentation and in disclosure efforts. Continuing developments in the financial management, budgetting and accounting systems puts pressure on the Supreme Audit Institution (SAIs) to review its own techniques and methodologies in auditing so as to play a dynamic role in the accountability process of government.