By Michael Armstrong
Effective public financial management is essential for economic success, and at its core is the need to build and maintain trust. Trust grows out of a culture of rigorous independent scrutiny which enables citizens to see that the decisions their leaders take are in the public interest.
According to ICAEW’s recent report on building trust in public finances, a culture of trust is pegged to a number of factors and elements.
Strong public financial management requires transparency in how resources are raised, managed and used, together with accountability, to instil confidence and promote continuous improvement.
For example, in Uganda, the budget information is usually uploaded on a website. This promotes transparency and accountability by showing detailed information on how resources are allocated and used, plus performance indicators from national down to parish level. Citizens and other stakeholders can provide feedback on service delivery in their local areas and report suspected corruption. An SMS and telephone service is also available to improve access for marginalized communities.
Strong governance and controls will ensure public officials are held accountable for the stewardship of public money, with feedback and sanctions when behaviour falls short of expectations. These also provide assurance that the system is operating as intended.
A wide range of professional skills are needed to ensure government has the capability to undertake the financial management of large public bodies in a complex stakeholder environment. Clear guidance on ethics will help public servants in situations of conflict. It is vital that robust systems and processes are underpinned by core accounting disciplines to ensure financial information is relevant, reliable, comprehensive, complete, understandable and produced on a timely basis.
A key example of how strong systems and processes can be implemented, lies in the ‘four-eyes’ method used by the European Commission. The concept entails separating the initiation and verification of transactions so that an action must be approved by at least two people.
Good financial management practices will include clearly defined responsibilities, segregation of duties, adherence to documented procedures and controls, regular management review, and reconciliation of account balances.
Independent audits give citizens confidence that the numbers presented by government are accurate. Internal audits should have a high degree of operational independence, while external audits should have constitutional safeguards that ensure their independence from the executive.
It is also vital to uphold the ‘social contract’. Citizens must be confident that they are protected by the law and that public institutions and servants will act in accordance with it. Public institutions with operational independence from political control are more likely to be trusted to act in the public interest.
A well informed population is far more likely to be confident about investing for the future. This means both providing appropriate information in ways that are accessible and easy to understand, and educating citizens as well as inviting them to participate in decision making.
Effective public financial management requires that decision makers, citizens and other stakeholders, are all able to ‘follow the money’ to see how taxes were raised, why decisions to spend it were made, how the money was actually spent and what was bought. Where government plans and activities are measured against expected outputs and outcomes, citizens and other stakeholders will be able to judge the performance of government. This in turn provides the basis for feedback and continuous improvement mechanisms.
For the public to believe that public officials will do the right thing, a range of controls to promote integrity and ethical behaviour and to tackle fraud and corruption are required. Most importantly, the public must believe that individuals will be held responsible for their actions, no matter who they are.
A climate for investment is created when investors believe a state is stable, well run and that political and fiscal risks will be managed effectively. A world of strong economies depends on trust in the public finances. Public servants spend other people’s money and citizens and investors need to have confidence that those funds will be properly and effectively used. Governments have a duty to demonstrate that they deserve that trust.
Equally, professional accountancy bodies have a valuable role to play in providing the frameworks and expertise to help government develop effective public financial management. This includes both technical accounting and management know-how and the strong ethical standards expected of professional accountants.
Michael Armstrong is the FCA and ICAEW Regional Director for Middle East, Africa and South Asia