The Kingdom of Nepal has a unitary system of government with an administrative network of central ministries with district level offices. Specific development projects function under the various ministries or departments. The financial management system of the public sector is mainly governed by the Constitution, supplemented by Acts of Parliament.
1.1 FINANCIAL PROCEDURE
The Constitution of the Kingdom of Nepal 1990 contains the broad financial procedures. In terms of article 73 of the Constitution: "No tax can be levied and collected except in accordance with the law and no public loan shall be raised or guaranteed by His Majesty's Government except in accordance with law". Annual Estimates of Revenue and Expenditure are to be made and presented to a joint session of Parliament.
1.2 CONSTITUTION OF FUNDS
The Constitution provides for the establishment of consolidated and contingency funds as follows:
Consolidated Fund : All revenues received by His Majesty's Government, all loans raised on the security of these revenues, and all moneys received in repayment of any loans made under the authority of an Act shall, unless otherwise provided by an Act, be credited to a public fund known as the Consolidated Fund.
Contingency Fund : An Act may create a Contingency Fund into which the amounts determined by law shall be paid from time to time. Such a fund shall be under the control of His Majesty's Government, and unforeseen expenditures shall be met out of such Fund by his Majesty's Government. Such expenditures shall be reimbursed as soon as possible by an Act.
Parliament plays a very important role in financial accountability and management. It authorises the Government of Nepal to impose personal taxes, and to mobilise other resources for approved programs, projects and organisations. Further, legislatural control is exercised over governmental operations through various measures including parliamentary debates, discussions, resolutions, motions and questions.
2.1 APPROPRIATION PROCEDURES
The Constitution provides for effective legislatural control over the public purse. Accordingly Section 77 of the Constitution provides that Annual Estimates explaining the following matters are to be laid before the relevent joint session of Parliament:
The presentation of the Annual Estimates also includes a statement of the expenses allocated to each Ministry in the previous fiscal year and the objectives achieved.
There is also provision for Supplementary Estimates in Article 79:
The amount included in the Supplementary Estimates shall be specified under separate heads in a Supplementary Appropriation Bill.
2.2 VOTE ON ACCOUNT
The Constitution envisages a Vote on Account Act to enable any portion of the expenditure estimated for a financial year being incurred pending the enactment of the Appropriation Bill. A vote on account cannot however be submitted until the estimates of revenue and expenditure have been presented to Parliament. The amounts involved in the vote on account should not exceed one-third of the Annual Estimates of Expenditure.
In Nepal the principle of separation of powers has assigned diverse responsibilities to the Executive to ensure financial accountability and managerial effectiveness. The Executive receives financial authority from Parliament. There are different levels of organisations to carry out governmental business in accordance with the authority.
Several laws and regulations have been formulated to maintain sound financial administration of the Government. Some of them are described below:
3.1 THE TREASURY (MINISTRY OF FINANCE)
According to the Regulations Concerning Division of Work of His Majesty's Government, the Ministry of Finance is fully responsible for the preparation of annual estimates of income and expenditure. The Ministry of Finance obtains approval from Parliament and delegates the authority to carry out governmental financial operations according to the Appropriation and Finance Acts and Regulations. To assist the Ministry in preparing the budget, all Government offices are required to submit annual estimates of income and expenditure in the approved format within a prescribed timeframe.
The Ministry of Finance modifies and adjusts the proposals submitted by the line ministries in consultation with them, taking into consideration the financial position of the nation. The Ministry is authorised to transfer budgetary provisions from one head to another, but the Auditor General's Office and the Financial Comptroller General's Office are notified of such transfers. The Ministry is also responsible for the preparation of the Central Financial Statement and the arrangements for its audit. In accordance with current Regulations, the Ministry plays a leading role in maintaining financial discipline through the setting of relevant standards.
3.2 OTHER CENTRAL AGENCIES
In addition to the Ministry of Finance, other central agencies have major responsibilities in financial administration and management. The Regulations relating to Government Income and Expenditure (Operation) 1982 contain the duties of central agencies regarding financial operations. The Regulations describe the rights and duties of different ministries in connection with budget disbursement, revenue realisation, preparation of central level financial statements, and corrective actions following audit observations.
The Cabinet Secretariat is the co-ordinating mechanism in financial matters. The Financial Comptroller General is another important central agency which is entrusted with the following responsibilities:
The process of planned development for the national economy of Nepal began in 1956. Since then seven plans have been implemented. The National Planning Commission, as central planning authority, is responsible for the formulation, monitoring and evaluation of development plans. The main functions of this body are:
The Central Bureau of Statistics also operates under the Planning Commission. The Bureau is responsible for the collection, analysis and publication of statistics regarding matters such as national census, national accounts, and physical and natural resources.
3.3 ROLE OF THE CENTRAL BANK
The Nepal Rashtra Bank (NRB) was established in 1956 as the central bank of the country. It supervises all commercial banks and other financial institutions. The main functions of NRB are:
In recent years, the NRB has played an active role in promoting financial institutions to make them responsive to the growing need of finance and related services. Further, the Agriculture Projects Services Centre (APROSC) and Credit Guarantee Corporation (CGC) have been established with the active participation of the NRB.
3.4 PRIVATISATION
In recent years privatisation has assumed major importance in the public economic agenda. The reasons behind privatisation include the liberalisation of the economy, deregulation, free competition, divestment of public ownership, and the creation of an environment where private capital and managerial skills contribute significantly to national economic and social development.
The concept of privatisation was introduced in Nepal through the seventh plan (1985-1990) with the objective of full or partial divestiture, management contract or leasing out to the private sector and providing more autonomy in the operation of public enterprises. His Majesty's Government recognises the need for an open market policy and for reducing excessive control over public enterprises and other government commercial activities. Government's first efforts were at privatising some of the public enterprises in 1992 with plans to include other enterprises in the future. A high level committee chaired by the Minister of State for Finance has been set up to formulate plans and policies.
The system of statutory external audit in Nepal was introduced in 1959 with the establishment of the office of the Auditor General. The Constitution provides that there shall be an Auditor General appointed by His Majesty the King on the recommendation of the Constitutional Council for a renewable term of six years.
The Auditor General is authorised to carry out the audit of accounts for all Government Departments and other organs of the State including the Supreme Court, Parliament, and other constitutional bodies with due consideration to regularity, efficiency, effectiveness and propriety. As the Constitution provides that the Auditor General and his assistants shall have at all times access to necessary documents, it is the duty of the authority concerned to provide all such documents and information as required.
The Auditor General submits an annual report on the work done by his office to His Majesty the King. The report thus submitted shall be caused by His Majesty to be laid before the Parliament for detailed deliberations.
The Auditor General plays an important role in strengthening financial management systems and ensuring reasonable accountability relationships in the public sector of Nepal. The Audit Act of 1991 has prescribed the role and responsibilities of the Auditor General.
According to the Audit Act the Auditor General has to audit with due regard to regularity, economy, efficiency and effectiveness, and decide whether:
In his audit, the Auditor General shall also examine the propriety of the following expenditures and transactions:
Issues which are not material are excluded from the audit reports.
In addition to the matters mentioned above, the Auditor General is empowered to issue special instructions covering the broad scope of the audits of specific programs or activities of Government.
4.1 RELATIONSHIP OF THE SAI WITH THE PUBLIC ACCOUNTS COMMITTEE OF THE PARLIAMENT
The Public Accounts Committee (PAC) is one of the select committees of the House of Representatives. In accordance with the Regulations relating to the House framed under the new Constitution, the function of the PAC is to examine the Public Accounts and the Report of the Auditor General.
The formal relationship between the PAC and SAI has been crystallised under the new multiparty democratic system. The rules of the House of Representatives clarifies the functions of the PAC and the SAI is expected to provide assistance to it in discharging its responsibilities. Accordingly the SAI continues to assist the PAC by explaining audit findings in the context of relevant legislation, policies and agreements. The SAI has also provided the PAC with references to previous audit decisions in the interest of uniformity.
4.2 AUDITING STANDARDS
In Nepal auditing standards represent broad but basic principles and conditions relating to the professional and personal conduct expected from auditors in the planning and conducting of audits, and in the reporting and evaluating of audit results. These standards, which are influenced by the legal, political and administrative environment, foster the quality, consistency and credibility of the public sector auditing function.
The Auditor General is the only authority to determine auditing standards for the public sector. These standards signal to the public and profession at large that the SAI is committed to the maintenance of certain quality specifications. Where the national audit office and the private sector follow different auditing standards, the auditors involved have to specify in their respective reports which professional standards were observed by them.
The published auditing standards of the Auditor General were developed in line with the standards issued by some of the SAIs around the world which were found to be suitable. In Nepal public sector audits are conducted with due consideration to existing legislation, departmental orders and professional judgement.
In addition to the Public Accounts Committee, there are other select committees of the House of Representatives and State Assembly which are relevant to the financial accountability and management in Government. These are:
Finance Committee: This is a committee of the House of Representatives. The committee's function is to examine the financial affairs of government, the method of preparation of the annual estimates of revenue and expenditure, and to suggest economies and improvements in budgeting.
Subject Committees : These include the National Resources Endowment and Environmental Protection Committee, Population and Social Committee, and Development and Communication Committee of the House of Representatives; and the Remote Area Development Committee of the State Assembly. These committees are responsible for the evaluation of the performance of the Government in implementing policies and programs relating to their respective subjects.
The national budget of Nepal was officially presented by the then Finance Minister for the first time in 1952. With the establishment of the State Assembly, submission of the budget to the House of Representatives has become the practice.
6.1 DEVELOPMENT PLANS AND BUDGET
In order to accelerate economic development, Nepal has introduced seven consecutive development plans since 1956. With the implementation of these plans Nepal has gained experience in the process of planned management of the national economy and resources.
6.2 PROGRAM AND PERFORMANCE BUDGETING
Nepal has given significant emphasis to budgeting as a tool in managing the national economy. Accordingly constant efforts are made to make the budgetary system both realistic and development-oriented.
In order to make the national budgetary system effective and reliable, Nepal introduced the concept of program budgeting in the fiscal year 1969/70. In addition to determining national priorities, this system aimed to analyse the effectiveness of investments and their returns. Since 1969/70 regular attempts have been made to improve the budgeting system but results were not significant until 1984/85 when program budgeting was applied to specific projects in order to obtain experience in implementing development projects. This system has proved effective in bringing about co-ordination between the plan and the budgeting processes. The Government is now endeavouring to extend program budgeting to various sectors of the economy so that the outputs and benefits of programs and projects can be quantified and measured against their costs.
6.3 BUDGET CLASSIFICATION
Establishing an appropriate budget structure and classifying receipts and expenditures are important steps in good budgeting. Their importance stems from the fact that the budget serves several purposes, including both accountability for funds and providing information on what the Government proposes to do. The budget classification adopted is meaningful and useful for the following reasons:
The expenditure side of the budget is divided into regular and development catagories. Recurring administrative expenses and loan repayments with interest are grouped under regular expenditure. The broad classification of revenue and expenditure is given in the following table:
Budget Classification in Nepal
| Expenditure | Revenue |
| Regular | |
| 1. Constitutional Organs | 1. Customs |
| 2. General Administration | 2. Tax on Consumption and Services |
| 3. Revenue Administration | 3. Land Revenue and Registration |
| 4. Economic Administration and Planning | 4. Tax on Property. Profit and Income |
| 5. Judicial Administration | 5. Charges, Fees, Fines and Forfeiture |
| 6. Foreign Service | 6. Receipt from Sales of Commodities and Services |
| 7. Defence | 7. Dividends |
| 8. Social Services | 8. Royalty and Sales of Fixed Assets |
| 9. Economic Services | 9. Principal and Interest Repayments |
| 10. Loans and Investments | 10. Miscellaneous |
| 11. Loans Repayment and Interest | |
| 12. Miscellaneous | |
| Development | |
| 1. General Administration | |
| 2. Economic Administration | |
| 3. Social Services | |
| 4. Economic Services | |
| 5. Miscellaneous |
7.1 PLANNING
Planning is a very important prerequisite of budgeting from the viewpoint of streamlining the financial management system as a whole. In this planning step due emphasis is given to integrating national development and administrative priorities with resource requirements, capacity to generate additional resources and efficiency in administering budget. In general terms, planning includes the following steps:
General goals and objectives are identified with the joint efforts of the National Planning Commission, line ministries and the Ministry of Finance. The physical targets of different sectors of economy are specified in periodic plans, divided into annual targets. However, there is a basic lack of co-ordination between the periodic plan and annual plan. As the development budget depends largely on foreign aid, budget planning is also guided to some extent by donor agencies. Translating development strategies into specific programs and projects is certainly a critical task.
7.2 ORGANISATION AND ROLE OF BUDGET OFFICE
The Ministry of Finance has responsibility for reviewing and consolidating the budgets of all ministries and constitutional bodies, and for preparing a Budget Book and supporting documents for presentation to the legislature.
All Ministries have separate planning and Financial Administration Divisions. These two divisions are mainly involved in the proces of budget preparation. The Planning Division generally appraises progress made by projects in the last fiscal year as a reference to determine the level of investment for the next fiscal year. This division consults line agencies in reviewing and monitoring progress. The Financial Administration Division consolidates the budget requests in a prescribed format which is submitted to the Ministry of Finance for final consideration, and also participates in related budget meetings.
All operating level offices, departments and constitutional bodies are required to prepare and submit their budget (expenditure estimates) for the next fiscal year as prescribed by the Ministry of Finance. Subordinate departments have a responsibility to review and consolidate the budgets of their operating level offices. All ministries are required to prepare budget (expenditure estimates) for their own operations on the same basis as the operating level offices. In addition, the ministries have a responsibility for reviewing and consolidating the budgets of all subordinate departments and operating offices. The Ministry of Finance is the senior financial authority of the Government and, among other things, has the overall responsibility for budgeting including policy and planning, in addition to certain controls over budgetary appropriations.
7.3 BUDGET STEPS
The following procedures are followed before the legislature reaches decisions on budget proposals.
In this step extensive discussions are held to decide policy matters, the level of development activities, and ways and means to meet the targets fixed in periodic plans and in some cases donor agencies.
The Ministry of Finance reviews these proposals in consultation with line ministries and the National Planning Commission.
7.4 PUBLIC DEBT
Public debt is an important source of financing in developing countries such as Nepal. As internal resource mobilisation (revenue generation) is inadequate in comparison to resource requirements, public debt has been the alternative. Public Debt includes internal and external borrowing of the Government. It also covers loans received by public enterprises against Government guarantees. Deficit financing or the utilisation of cash balances made available by Nepal Rashtra Bank is also regarded as part of the public debt.
Internal debt consists of borrowings through securities such as Development Bonds, National Saving Certificates, Treasury Bills and other special bonds. These securities are to be repaid within a specified time.
External debt comprises loans and credits made available on concessional, semi-concessional or commercial terms from multilateral and bilateral sources. These loans include project loans, non-project loans, commodity loans, relief loans and balance of payment support loans.
Most of the large development projects and activities are financed through loans provided by multilateral agencies and friendly countries. The purpose and use of each external loan are specified in the relevant loan agreement. Project appraisal reports, which are an integral part of the loan agreement identifies the particular project, its objective and scope, activities to be undertaken, structure and organisation of the project, cost estimates, classification of funds to be allocated to various categories, procurement and contract procedures, accounting and auditing system, benefits to be achieved from individual projects, and schedules of debt servicing and amortisation.
The audit of the public debt aims at ensuring that:
8.1 ROLE OF DEPARTMENTS IN BUDGET CONTROL
The line ministries are responsible for the monitoring and control of their approved appropriations. As these appropriations are disbursed mainly on a trimester basis the respective ministries review progress made during the past trimester and issue orders to the District Treasury and Accounts Control Offices (DTCOs) if the disbursement schedule has to be altered. Central agencies are also required to co-ordinate donor agencies and individual projects to ensure that progress is in accordance with provisions of the various project agreements.
Every public officer dealing with public money is accountable to his superior. The Secretaries of Ministries are legally considered as "Chief Accounting Officers", who are responsible for complying with applicable financial and other rules and regulations in carrying out public activities.
The Secretary of the Ministry of Finance authorises the Secretaries of the other ministries to spend budgeted amounts within the limits of the Appropriation Act, while the DTCOs are requested to disburse voted amounts on a trimester basis after receiving formal requests from operating agencies. Due to the decentralised system of public sector accounting, departments have very limited control over day to day accounting operations. However individual departmental control is exercised in cases of impropriety and in the management of large projects. Ministries and departments compile annual accounts for all activities and submit data in the required format for preparation of the Central Accounts.
Operating agencies are required to incur expenditure and realise revenue with due care to ensure that:
8.2 INTERNAL AUDITING
The DTCOs are responsible for carrying out internal auditing of operating offices at the district level on a continuing basis. Funds disbursement may be withheld if audit observations are not cleared in time. The audit observations of DTCOs to the SAI facilitate audit planning and specify the scope of individual audits. Internal auditing has been an effective means of disclosing accounting weaknesses and encouraging compliance with existing regulations.
9.1 ROLE OF DEPARTMENTS
Budget reporting is the primary responsibility of operating level agencies which are required to prepare monthly statements of budget expenditure and revenue realisation. Copies of such monthly statements are forwarded to the relevant departments and ministries, and also to the DTCOs for internal auditing. Departments exercise their controlling authority by obtaining information from such statements and by requesting specific details where necessary. Audited copies of the financial statements are forwarded to the SAI for final audit, while reports on the financial position of subordinate offices are forwarded by departments to their respective ministries.
9.2 OTHER AGENCIES
The DTCOs and the central bank are also responsible for financial reporting. The DTCOs are required to prepare monthly statements of disbursement and revenue realisation on the following lines and report to the Office of the Financial Comptroller General:
These two statements are sent to the ministries concerned to facilitate evaluation and financial control.
Nepal Rashtra Bank, as central bank, makes available monthly statements regarding the financial position of the Government to the Ministry of Finance. This statement comprises budget disbursements, revenues, foreign assistance and internal loans, including any overdraft. It gives a comprehensive picture of the Government's balance sheet, which facilitates resource forecasting and expenditure planning.
The National Accounting System (NAS) is an important means of ensuring financial discipline, providing a statement of income and expenditure for financial control, and facilitating economic and development planning. The authority to approve the NAS is vested in the Auditor General.
The Office of the Financial Comptroller General (FCGO) plays a key role in the different states associated with the NAS. The main functions of the FCGO in relation to the NAS are as follows:
10.1 DESCRIPTION OF THE NATIONAL ACCOUNTING SYSTEM
The existing NAS of Nepal based on double entry, was introduced in 1961. Accounting formats, which are approved by the Auditor General , total 192 including 46 applicable to various offices, with the remainder used to record special transactions.
There are two levels of accounting:
10.2 TYPE OF ACCOUNTING SYSTEM
Government accounting is on a cash basis whereby revenues are shown in the accounts for the period in which they are received in cash and expenditures are accounted for when the disbursements are actually made. Accordingly there are no accounts receivable or payable in the accounting system of the Government.
The Government is facing the problem of maintaining accounts for foreign loans received in different currencies. In view of changing exchange rates, loan accounts are maintained in both local and foreign currencies, with the annual statement showing the financial position at the end of the fiscal year in both types of currencies.
The inadequacies of the existing NAS, designed some three decades ago, have now become apparent. With the financial assistance of the Asian Development Bank, accounting and auditing improvements are now being investigated.
10.3 SPECIFIC LEGISLATION
The NAS is based on the provisions of the Constitution and Guide Book of the New Accounting System of His Majesty's Government. The Auditor General is required to review the prevailing accounting system. The FCGO is also required by the Government Income and Expenditure (Operation) Regulation 1981 to implement the cash and commodity accounting system approved by the Auditor General. Further, the Nepal Rashtra Bank is required to maintain accounts relating to the internal loans of the Government in accordance with the National Debt Act authorising the central bank to process borrowings and repayments on behalf of the Government.
The Public Accounts of the Government are supplemented by financial reports from a number of agencies in accordance with the various provisions of different legislation defining their respective responsibilities on financial matters. The reports received from these agencies are expected to be relevant and reflect a clear picture of physical performance compared to resources spent. Disclosure of the performance of individual programs of governmental agencies enhances the quality of the accounts by making them more meaningful to the various users and ensuring the accountability of public officials.
10.4 ACCOUNTING STANDARDS
The Auditor General is constitutionally empowered to prescribe accounting formats and procedures to be followed in maintaining accounts, but it is the duty of the FCGO to issue directions to ensure financial accountability, discipline and reliable information. The Ministry of Finance is authorised to collect any information on financial and related matters to maintain the balance between resource requirements and availability. The combined ongoing efforts of these three parties are calculated to improve the effectiveness of the financial management system including the generation of timely, relevant, consistent and reliable accounting information.
The production of national accounts requires co-ordinated and concentrated efforts of the different agencies involved. Various processes are undertaken in preparing a comprehensive picture of national finance. The operating agencies have the primary responsibility of preparing the national accounts, whereas the central level agencies have the supervisory role of consolidating the accounts received from subordinate offices.
11.1 STEPS IN THE ACCOUNTING PROCESS
Generally there are two steps in the accounting process:
11.2 SCOPE OF PUBLIC ACCOUNTS
The Public Accounts of Nepal confine the annual financial statement of the Government. This statement, which is prepared by the FCGO on behalf of the Government, covers all governmental transactions.
The scope of Public Accounts is:
11.3 FORMAT OF THE PUBLIC ACCOUNTS
The format of the Public Accounts is very simple. It shows expenditure and revenue under the various budget heads discussed earlier in this chapter. The Public Accounts are published by the Auditor General as a part of his report.
12.1 ROLE OF THE SAI
The SAI has no direct authority or responsibility in the monitoring and control of the annual budget. However, as the accounts of all budget units are examined, the SAI has a comprehensive picture of public sector financial management. Further, as the audit report covers all pertinent issues associated with the management, administration and social implication of the public sector financial system, both the executive and legislature benefit substantially from this report. The audit observations are supported by a brief description of policy or program objectives, accomplishment and related issues. In view of the generality of audit observations, the Government receives reliable information on its operations and identifies weaknesses in the performance and accountability relationship.
12.2 PUBLIC ACCOUNTS COMMITTEE
The Public Accounts Committee receives informatibn on governmental financial activities mainly through the Auditor General's report, but any aspect of public financial activities with reference to the Public Accounts could be examined. The committee has to report to the House on its examination of the Public Accounts and the annual Auditor General's report before the annual estimates of revenue and expenditure for the next financial year are presented, in order to assist the House monitorthe implementation of the approved budget.
12.3 OTHER AGENCIES
There are some other agencies responsible for monitoring and control of government finances. Government ministries exercise control and monitoring authority from the executive viewpoint. The National Planning Commission ensures proper co-ordination between project performance and resource involvement. The FCGO is responsible for monitoring to ensure financial discipline and follow up compliance with accounting standards.
In Nepal the importance of financial management and accountability cannot be overlooked in the process of enhancement of the democratic political system. As Government activities have become too numerous and complex, it is essential to establish a structured and decentralised system of financial management. Such a system is possible only when at every level public officials discharge their responsibilites with integrity and sincerity. Legal organisational systems can be expected to be effective only if people working in them are really dedicated to the cause of the national interest.