2004 Public Fund Digest Vol4 No2

The International Consortium on
Governmental Financial Management
Public Fund Digest

Volume IV, No. 2, 2004
International Consortium on
Working globally with governments, organizations, and individuals, the International
Consortium on Governmental Financial Management is dedicated to improving financial
management by providing opportunities for professional development and information
exchange.
To achieve the above mission, the Consortium’s international activities include:
1. Providing comprehensive professional development activities in the fields of
accounting, auditing, budgeting, information systems, cash management,
debt administration, and financial management;
2. Contributing to the advancement of government financial management
principles and standards, and through educational events, promoting best
practices in government financial to improve management control and
accountability to the public;
3. Disseminating and promoting to its members and to the public information
concerning government financial management;
4. Promoting the development and application of professional standards to sup-
port government financial management activities;
In addressing issues, the Consortium embraces many disciplines of governmental
financial management including: accounting, auditing, budgeting, debt administra-
tion, information technology, tax administration and treasury management. These
areas provide the general frame of reference for the programs, activities and opera-
tions of the Consortium.
The material published herein may be reproduced without the consent of the
Consortium, which in fact encourages their reproduction, translation and distribu-
tion. The views expressed in this publication do not necessarily reflect those of the
editor nor do they coincide with the positions taken by the Consortium.
The editor invites submission of articles, research papers, letters and reviews of
books and documents. Please submit articles to the editorial office indicated below.
Also, requests for information on the Consortium should be addressed to:
The International Consortium on Governmental Financial Management
444 North Capitol Street-Suite 234
Washington, DC 20001, USA
Telephone 202 624-5451 • Fax 202 624 5473
Email: ICGFM@yahoo.com
www.icgfm.org
Copies of the Public Fund Digest may be obtained by writing to the address above.
The cost is US $10 for ICGFM members; US$15 for nonmembers.
Copyright 2004 by the International Consortium on Governmental Financial Management.

Public Fund Digest
Vol. 4, No. 2
ISSN: 0736-7848
Published by the
Washington, D.C.
August 2004
General Information
“Working globally with governments, organizations, and individuals, the
International Consortium on Governmental Financial Management is dedicated
to improving financial management by providing opportunities for professional
development and information exchange.”
Our mission includes three key elements. First, it highlights that, within the
international community, the Consortium is unique—it serves as an “umbrella”
bringing together diverse governmental entities, organizations (including uni-
versities, firms, and other professional associations), and individuals. At the
same time, it welcomes a broad array of financial management practitioners
(accountants, auditors, comptrollers, information technology specialists, treasur-
ers, and others) working in all levels of government (local/municipal,
state/provincial, and national). Additionally the mission statement emphasizes
the organization’s focus on activities to promote professional development and
the exchange of information.
Our programs provide activities and products to advance governmental
financial management principles and standards and promote their implementa-
tion and application. Internationally, the Consortium (1) sponsors meetings, con-
ferences, and training that bring together government financial managers from
around the world to share information about and experiences in governmental
financial management, and (2) promotes best practices and professional stan-
dards in governmental financial management and disseminates information
about them to our members and the public.
provides three options for membership.
1. Sustaining Members: organizations promoting professional development,
training, research or technical assistance in financial management; willing to
assume responsibility for and to actively participate in the affairs of the
Consortium. Each Sustaining Member has a seat on the ICGFM’s Board of
Directors and receives 10 copies of all ICGFM publications to be distributed
within their organization. (Dues: $1,000)
2. Organization Members: government entities with financial management
responsibilities, educational institutions, firms, regional and governmental
organizations, and other professional associations. Six organization members
serve on the ICGFM’s Board of Directors and organization members receive 5
copies of publications to be distributed to their members. (Dues: $250/$150*)
3. Individual Members: persons interested in, dedicated to, or working with
activities directly related to financial management and who wish to be mem-
bers in their own right. Six members of the ICGFM Board of Directors will be
selected from among all individual members. Each individual member will
receive a copy of all ICGFM publications. (Dues: $100/$50*)
* A special discount is offered to developing countries, countries with economies in transition and
regional groups and organizations in such countries to encourage their participation. This discount is
available to all countries other than Australia, Canada, China, Egypt, European countries (except
transition economies) India, Iran, Israel, Japan, Kuwait, Libya, Mexico, New Zealand, Nigeria, Oman,
Saudi Arabia, United Arab Emirates, USA, Russia, and Venezuela.
Foreword
It is always difficult to implement good financial management practices in
the public sector. This is especially true in those countries that are in transition
to a market economy or the heavily indebted poor countries. In this issue, I
have included a couple of articles identifying the actions taken by two separate
donor agencies to assist developing countries in their efforts to improve gover-
nance in the public sector. The first details the countries that are eligible for
assistance by the Millennium Challenge Corporation in Fiscal Years 2004 and
2005, as well as the conditions associated with that assistance. The second iden-
tifies actions taken by the U.S. Agency for International Development to assist
countries throughout the world in their efforts to discourage and detect corrupt
practices.
These articles are followed by two articles dealing with actions taken in spe-
cific areas to implement good financial management practices. The first article
provides an excellent overview of legislative budget oversight in the various
countries of South America. The second identifies the actions taken in
Bangladesh to establish good governance practices and improve their ranking
in the Corruption Perception Index.
A key component of good financial management practices is external audit-
ing and we have included three articles on this area of expertise. The first article
identifies the new structure of the International Standards on Auditing and
identifies which public sector reports might be subject to external attestation.
The second provides the elements needed to establish or enhance audit legisla-
tion for the Supreme Audit Institutions (SAIs). The third spells out the actions
taken in Macedonia to improve their audit practices and challenges SAIs to
work more closely together as each attempts to learn from each other based
on the experiences in their countries.
The last article lays out a framework for performance measurement in public
financial management (PFM). The primary purpose of the PFM Performance
Measurement Framework is to provide a standard set of high level indicators
that will enable the performance of country PFM systems to be regularly moni-
tored, by domestic and international stakeholders. The framework was devel-
oped by a working group involving staff from the World Bank, IMF and the
Public Expenditure and Financial Accountability (PEFA) Secretariat. It is still
in draft form and you are encouraged to make comments.
Following this Foreword, I have included some references that you might
find beneficial in your work. I have also included some timelines to help you
identify where you might be in your efforts to implement accrual accounting
in your country. If you have difficulty understanding the timelines, I would
encourage you to read the Hughes/Minovski article in the last issue of the
Public Fund Digest or go to the www.icgfm.org website to download the article.
As always, we invite your comments on these papers and any issue of the
Public Fund Digest as we debate the issues. Contact me at jhughes@odu.edu if
you would like to contribute an article or discuss a government financial
management issue. Or contact us by telephone, facsimile, and on the Internet
at www.icgfm.org.
Jesse W. Hughes Relmond Van Daniker

Publications Editor President
Table of Contents
8. Reference Material
9. Timelines for Transitioning to Accrual Accounting
10. The Millennium Challenge Corporation

David Nummy
22. U.S. Agency for International Development

Frederick W. Schieck
28. Reforming Fiscal Institutions and Strengthening Government

Accountability: Legislative Budget Oversight in Emerging Economies
Carlos Santiso
40. The Challenges of Good Governance: A View from Bangladesh

Nurul Momen and Marzina Begum
50. Which Financial Reports In The Public Sector Should Be

Subject To External Attestation?
Jesse Hughes and Wayne Cameron
60. Promoting Government Accountability: Critical Elements in

Establishing or Enhancing Audit Legislation
Linda L. Weeks
68. Current Situation and Perspectives of Development for

Financial Control in the Republic of Macedonia
Mito Naumoski
74. Public Financial Management Performance Measurement

Framework Revised Consultative Draft, February 12, 2004
[With Amendment Regarding Procurement]
100. Public Sector Committee Update 12
August 2004 7
Some Reference Material
(e-mail—jhughes@odu.edu)
2003 book on “Reforming Government Accounting and Budgeting in
Europe” edited by Klaus Luder and Rowan Jones published by Fachverlag
Moderne Wirtschaft, Frankfurt, Germany:
3 countries (Finland, Spain, & Sweden) have completed the move to full
accrual.
1 country (UK) has essentially completed the move to full accrual except no
whole-of-government financial statements are yet in place.
2 countries (France & Switzerland) have begun the reform process
3 countries (Germany, Italy, & the Netherlands) have not yet begun the
reform process
2002 summary of five African countries on Budget Transparency and
Participation in the Budget Process
(www.internationalbudget.org/resources/africalaunch.htm).
Legal Transparency Participation
South Africa good moderate moderate
Ghana moderate weak weak
Kenya moderate weak weak
Nigeria weak weak weak
Zambia weak weak weak
OECD/World Bank 2003 Survey of Current Budgetary Practices for 30 OECD

countries and 30 non-OECD countries (ocde.dyndns.org)
Treasury Reference Model in 2001 by Ali Hashim (World Bank) and Bill Allan
(IMF), www1.worldbank.org/publicsector/pe/trmodel.htm
IMF Code of Good Practice on Fiscal Transparency
(www.imf.org/external/np/fad/trans/index.htm)
GFOA (US) Best Practices in Public Budgeting with 4 principles and 12
elements (www.gfoa.org/services/nacslb/budgetmenu.htm)
UNDP Key Factors in Budget Preparation Process
(magnet.undp.org/Docs/efa/CONTAC~1.htm)
World Bank Country Financial Accountability Assessment
(www1.worldbank.org/publicsector/cfaa.htm)
OECD Best Practices for Budget Transparency (www.oecd.org)
Information Systems for Government Fiscal Management by Ali Hashim
& Bill Allan, The World Bank, 1999
The Government Finance Statistics Manual, 2001 (IMF)
(www.imf.org/external/pubs/ft/gfs/manual/index.htm)
International Federation of Accountants (www.ifac.org) where International
Public Sector Accounting Standards and studies can be downloaded for free.
International Consortium of Government Financial Managers (www.icgfm.org)

for case studies published in the Public Fund Digest and announcement of
conferences.
8 Public Fund Digest

Timelines for Transitioning to
Accrual Accounting
For Each Government Entity (Except GBEs) at Central, State, and Local Levels
Cash Basis Budget/Actual All 20

AP and Long Term AR and Fixed Net Assets/
IPSAS (Part 1) Comparative Accrual
Other CL Debt Other CA Assets Equity
Statement IPSASs
Cash Basis
IPSAS (Part 2)
For Each Government Business Entity (GBE)
IAS 7 on AP and Long Term AR and Fixed Equity All

IASs
Cash Flows Other CL Debt Other CA Assets
All Pertinent IASs
For Consolidated Government Entities For Consolidated Government Business

(except GBEs) Enterprises (GBEs)
Consolidated Consolidated Consolidated

Consolidated
Cash Statement Financial Statements Statement on Cash Financial Statements
(Part 1, Cash (IPSAS 6) Flows (IAS 7) (IAS 27)
Basis IPSAS)
For Whole-of-Government Financial Statements
Consolidated Central Government

Consolidated Whole-of-
Consolidated State Governments
Government Financial
Consolidated Local Governments Statements (IPSAS 6)
Consolidated GBEs
August 2004 9
The Millennium Challenge Corporation
Remarks by David Nummy
International Consortium on Government Financial Management
20 April 2004
Lessons in Development
For the last 10 years, I have worked in the US Treasury Department’s techni-
cal assistance program responsible for managing all projects related to public
expenditure management. Our counterparts are typically Ministries of Finance
in transitioning countries.
I want to relate a story that all of you at this conference will uniquely
understand which I think helps to explain why the MCC is positioned to be
very successful.
The very first country I engaged with ten years ago was a relatively new
country coming out of difficult times. One of my first meetings was with the
Minister of Finance and I asked him to explain briefly how government rev-
enues were managed. He explained that each morning at 9am, he called the
Governor of the Central Bank to learn how much revenue had been deposited
the day before, he conferred with his cabinet colleagues and made a decision on
how to spend yesterday’s receipts. The process started anew the next morning.
That was the sum of both budget formulation and budget execution.
Needless to say, I concluded that the government could benefit from
assistance and the Treasury Department began an engagement to help them
improve government finances. Over time, I learned some very valuable lessons
observing this particular country.
Our program, along with other donors, explained the need to have an open,
transparent, accountable and comprehensive budget process that provided
meaningful information to its citizens. Being overburdened by the problems of
the day, little commitment to change was made, not out of resistance but
because it wasn’t a priority.
This particular country has a very large and successful Diaspora, including
one individual with one of the world’s larger fortunes. This individual was par-
ticularly generous toward his homeland and offered to provide a substantial
amount of money to address some of the most urgent needs of its people. He
informed the government that he would consider providing funding directly
through government mechanisms but did not have faith that the existing finan-
cial management process could appropriately track his funds and provide infor-
mation about impact and results. He chose to establish a foundation but left out
the possibility of directly supporting government programs.
Almost immediately, Ministry of Finance officials laid out a program to
modernize and reform their budget and financial management processes. My
first lesson...incentives are powerful.
In deciding what course they wanted to take in financial management
reform, they began to look at the experience of their peer countries, they
thought a great deal about their own needs, the experience and strengths of
their employees, and the pace at which it made sense for them to proceed. Their
program was far more effective than any which had previously been suggested.

My next lesson...when governments have developed their own reform course, it
is frequently more successful than when imposed from outside.
Being a poor and inexperienced country, they needed technical expertise and
financial resources. They turned to our program and to other donors and, work-
ing all together, the collective assets of determination, experience, and finance
resulted in rapid and meaningful change.
Today, that country has one of the best financial management information
systems among its peers and it has made the transition in budgeting from what
I call, “what we spend money on” to “why we spend money,” instituting a pro-
gram-based budget process that is carefully establishing performance indicators.
Another lesson...when donors are able to work as partners with their counter-
part countries, their contributions are symbiotic.
This reform has impacted every aspect of resource allocation and the overall
efficiency and effectiveness of all public monies has dramatically changed, not
least of which is due to the attention being paid to results. Economic growth has
taken off and people’s lives are demonstrably better. Yet another lesson is one
that you have discussed at this conference...policy driven by the effective
measurement of results has real impact on people.
Since my first encounter with this particular country, I have been involved
with over thirty countries either in transition from one economic system to
another, various stages of development or in a post-conflict situation. The les-
sons I’ve referenced have been reinforced time and again. But perhaps the most
important lesson of all that I’ve gained from my experience is that policies
matter. No amount of technical expertise, financial resources, or good
intentions will impact the lives of people suffering from poverty if they are
not accompanied by the kind of public policies that promote growth and
provide opportunity to every citizen.
The Millennium Challenge Corporation

When I had the opportunity to become a part of the Millennium Challenge
Corporation, I knew immediately that it was an organization I wanted to be
part of because the MCC is built around some fundamental principles including
incentives, country driven development programs, working as a partner, being
accountable for results, and, most importantly, the idea that policies matter.
The MCC was proposed by the President two years ago coincident with the
Summit on Financing for Development held in Monterrey, Mexico, and enacted
into law in January of this year. I would like to briefly explain how these core
principles permeate all aspects of the MCC’s design and operations.
Incentives
One of the brilliant aspects of the law creating the MCC is that it mandates
that a country’s eligibility to benefit from the MCC is determined by their
actions and the impact of their policies. The President and Congress have insu-
lated the MCC from being impacted by the political imperatives of the day.
In our first year, only countries that can borrow from the International
Development Association (IDA) with per capita incomes of $1415 are
candidates to participate. That results in a list of 75 countries. Twelve of those
are prohibited by other provisions of law from receiving US assistance, leaving
63 “candidate countries.”
August 2004 11
These 63 countries will be measured against their peers using sixteen indica-
tors taken from independent sources. These indicators have been chosen to
measure a country’s performance in three important areas: Governing Justly,
Investing in People, and Encouraging Economic Freedom. The details of these
indicators and more detail about everything I mention today can be found at
our web site, MCC.GOV.
Governing Justly
1. Civil Liberties (Freedom House)
2. Political Rights (Freedom House)
3. Voice and Accountability (World Bank Institute)
4. Government Effectiveness (World Bank Institute)
5. Rule of Law (World Bank Institute)
6. Control of Corruption (World Bank Institute)
Investing in People
7. Public Expenditure on Health (National Governments)
8. Immunization (World Health Organization WHO)
9. Total Public Expenditure on Primary Education (National Governments)
10. Primary Completion Rate (World Bank and UNESCO)
Encouraging Economic Freedom
11. Country Credit Rating (Institutional Investor Magazine)
12. Inflation (Multiple)
13. Fiscal Policy (National Governments)
14. Days to Start a Business (World Bank)
15. Trade Policy (Heritage Foundation)
16. Regulatory Quality Rating (World Bank Institute)
Our Board of Directors will then make a final selection of those countries that
are eligible to request MCC assistance. The primary factors in their considera-
tion will be whether countries:
• Rank above the median on half of the indicators in each three categories;
• Rank above the median on the corruption index, one of the indicators in the
category of ruling justly; and,
• Whether a country has an inflation rate of less than 20 percent.
These considerations will be the predominant factor but the Board may con-
sider data gaps, lags, trends, or other weaknesses in the indicators. Additionally,
the Board may deem ineligible a country that performs substantially below its
peers on any indicator and has not taken appropriate steps to address the
shortcoming.
Key aspects of this selection process are that it rewards countries who have
been following sound policies and that it provides a powerful incentive to can-
didate countries to enact policies that will change their ranking. The first group
of eligible countries will be selected at a Board meeting taking place next week.
We have already gotten indications that candidate countries are examining how
they rank among their peers and discussing what policy changes they can make
to improve them.

To further increase the incentive provided by MCC assistance, we expect that
the MCC will be one of the most substantial donors in those countries with
whom we eventually conclude an agreement. In addition, our assistance com-
mitments will be multi-year in nature. We expect them to cover a period of three
to five years in duration.
Our appropriated funding for this fiscal year is $1 billion. The request in the
FY 2005 budget is $2.5 billion and is projected to be $5 billion in FY 2006. This
will represent in increase of 50 percent in US development assistance. In short,
an MCC partnership will be substantial, real, and will have a significant impact
in the recipient country.
Country Driven Programs

Once countries are selected by the Board, it does not mean that they will
automatically receive MCC assistance. These countries will be invited to make a
comprehensive proposal outlining a program to be funded or partially funded
by the MCC.
The MCC will expect the country itself to have developed the key elements
of its proposal, the core element being their determination of the primary obsta-
cles blocking economic growth and poverty reduction.
The MCC will expect a compact proposal to have been developed using a
consultative process, which includes citizens and civil society, to develop its
Compact program and will expect it to include measurement benchmarks that
can be used to evaluate progress.
A Philosophy of Partnership
If negotiated to a successful conclusion, the MCC will sign an agreement
with an eligible country called a Compact, much like a partnership agreement.
One of the primary principles of our organizational culture will be to refrain
from identifying problems or imposing solutions but, rather, to work together
with countries in making our relationships successful.
It is our mandate and our intent to work in partnership with other US, multi-
lateral, and bilateral donors. While an independent Federal corporation, our
Board of Directors is chaired by the Secretary of State and includes the Secretary
of the Treasury, the US Trade Representative, and the Administrator of USAID.
Their presence will assure that we are reflecting the most important policy
priorities of partner agencies in the US Government within the MCC context.
Measurable Results
In the next few days, we will post on our web site a set of Compact Proposal
Guidelines to inform eligible countries on the elements that we will look for in
their proposals. As mentioned above, the most important elements will be an
identification of the obstacles to economic growth and poverty reduction, goals
and outcomes they believe will overcome those obstacles, and indicators that
will serve as a benchmark and a measure of progress in achieving Compact
goals.
I believe one of the unique aspects of MCC is that assistance discussions will
initially be centered on measurable outcomes, a strategy to change economic
growth and poverty reduction, and, only later on specific projects and imple-
mentation. If you have a chance to read the guidelines, when posted, I think
August 2004 13
you’ll find a business-like approach to a partnership agreement that reflects all
the principles that I’ve outlined.
One key element of interest to you, will be a fiscal accountability plan for the
Compact program which we will evaluate using all the MCC principles I touch
on today including accountability, results, and transparency. We will also look at
factors such as whether vendors can be paid in a timely fashion. As we’ve
learned in our own government, when we can’t pay our bills on time, we hurt
the private sector. In many of these countries, the government is one of the
largest customers in the economy and they set a standard for good business
practices.
Policies Matter
As I’ve already mentioned, the MCC is founded on the belief that policy
change is the most important ingredient of development. Our mandate and our
actions will be guided by that belief. We will and should be measured on our
own success by our ability to motivate governments to adopt the kind of poli-
cies that we know result in positive change in people’s lives. While those poli-
cies are many and diverse, we characterize them in three broad categories: gov-
erning justly, investing in people, and encouraging economic freedom.
Summary
I find it a great privilege to be able to be part of this new approach to assis-
tance. When I was asked why I was interested in working for the MCC, I
responded that, first, it had a mission that I could believe in and that it embod-
ied all the lessons I had learned working for ten years with governments want-
ing to improve their countries and the lives of their citizens.
Paul Applegarth, the nominee to be our CEO, has put it quite succinctly and
to the point, “the MCC is an effort to be something new and different and
good.” I want to thank the ICGFM for giving me the opportunity to be here
today and introduce you to the MCC.
Millennium Challenge Corporation

Reducing Poverty Through Growth
PRESS RELEASE (May 6, 2004)
The Millennium Challenge Corporation Names MCA Eligible Countries
Washington, DC—Today, the Board of Directors of the Millennium Challenge
Corporation (MCC) selected the 16 countries eligible to apply for Millennium
Challenge Account (MCA) assistance in FY04. MCC, a newly created govern-
ment corporation designed to work with some of the poorest countries in the
world, is based on the principle that aid is most effective when it reinforces
sound political, economic, and social policies that promote economic growth.
“This is a historic day for the Millennium Challenge Corporation,” said
Secretary of State, Cohn L. Powell, Chair of the MCC Board. “The President’s
vision has come to pass, and today’s decision by the Board of Directors is a
major step in implementing the vision of the MCC.”
The selected countries include: Armenia, Benin, Bolivia, Cape Verde, Georgia,
Ghana, Honduras, Lesotho, Madagascar, Mali, Mongolia, Mozambique,

Nicaragua, Senegal, Sri Lanka and Vanuatu. In making its determinations, the
Board considered both the past and current policy performance of the candidate
countries in the areas of governing justly, investing in their own people and
promoting economic freedom. The Board also considered trends that indicated
policy improvement or slippage.
“Our mission—encouraging and rewarding good policies that produce
sustainable economic growth—holds profound implications for freedom and
security across the globe,” MCC CEO Paul Applegarth said today. “Today’s
decision demonstrates the clear commitment of the U.S. to reducing poverty
and human suffering.”
The Board also approved a “Threshold Country” program, which will be
directed toward a limited number of candidate countries that have not met the
requirements for MCA eligibility but demonstrate a significant commitment to
meeting the requirements for eligibility. The Threshold Country program will
provide an added incentive to countries that are committed to reform, and will
be used to assist such countries in making further progress towards becoming
eligible for MCA assistance in future years. MCC expects to work closely with
USAID in this effort.
The United States is committed to the MCC as an innovative approach to
delivering foreign aid. Congress has appropriated $1 billion for the MCC for
this fiscal year, and President Bush has requested $2.5 billion for FY05.
Abstract of Remarks by President George W. Bush at Ceremony

Celebrating Countries Selected for the Millennium Challenge
Account (May 10, 2004)
Two years ago, I announced a new and hopeful approach in America’s aid to
developing nations. Under this approach, America has pledged to increase
development assistance by 50 percent over three years. To make sure that gov-
ernments make the right choices for their people, we link new aid to clear stan-
dards of economic, political, and social reform. We invited governments in
developing nations to meet those standards so that they may truly serve their
people.
America formed the Millennium Challenge Corporation to oversee this new
program. Last week, the first group of Millennium Challenge Account nations
was selected. I congratulate representatives with us today from Armenia, Benin,
Bolivia, Cape Verde, Georgia, Ghana, Honduras, Lesotho, Madagascar, Mali,
Mongolia, Mozambique, Nicaragua, Senegal, Sri Lanka, and Vanuatu. You have
chosen the path of reform, and your people and your nations are better off as a
result of the decisions your governments have made.
I want to thank the Secretary of State (Colin Powell) for leading this effort.
He is the chairman of the board of the new corporation. I appreciate other board
members who are with us-- Secretary John Snow, the Secretary of the Treasury;
Ambassador Bob Zoellick, the United States Trade Representative; Andrew
Natsios, the Administrator of the US Agency for International Development;
and Paul Applegarth, who is the CEO of the Millennium Challenge
Corporation.
I want to welcome the ambassadors and representatives from the 16
Millennium Challenge Account nations. We are glad you’re here.
Congratulations.
August 2004 15
In many nations, poverty remains chronic and desperate. Half the world’s
people still live on less than $2 a day. This divide between wealth and poverty,
between opportunity and misery, is far more than a challenge to our compas-
sion. Persistent poverty and oppression can spread despair across an entire
nation, and they can turn nations of great potential into the recruiting grounds
of terrorists. The powerful combination of trade and open markets and good
government is history’s proven method to defeat poverty on a large scale, to
vastly improve health and education, to build a modern infrastructure while
safeguarding the environment, and to spread the habits of liberty and enter-
prise.
The Millennium Challenge Account encourages all nations to embrace politi-
cal and economic reform. The United States has pledged to increase its core
development assistance by half, adding $5 billion annually by 2006. To be eligi-
ble for this new money, nations must root out corruption, respect human rights,
and adhere to the rule of law. They must invest in their people by improving
their health care systems and their schools. They must unleash the energy and
creativity necessary for economic growth by opening up their markets, remov-
ing barriers to entrepreneurship, and reducing excessive bureaucracy and regu-
lation.
The 16 nations represented here today have done all this and more. Each has
worked hard to be here today, and their efforts are already yielding results. For
example, Madagascar is aggressively fighting corruption. The Ministry of
Justice has suspended a dozen magistrates on suspicion of corrupt activity. The
government is also implementing an ambitious program of judicial reform.
Senegal, Africa’s longest-standing democracy, has also enacted new anti-corrup-
tion laws, and is implementing new measures to fight money laundering.
Honduras has made the improvement of education and health services a top
priority. Its immunization rate of 96 percent is among the highest of all eligible
countries.
The new government of Georgia has doubled its investment in health care
and raised teacher salaries by two-thirds. Mozambique has curbed government
spending and lowered tariffs. These, and other reforms, have resulted in dou-
ble-digit growth rates over the last decade. Since launching its program of eco-
nomic reform in 2002, Sri Lanka has reduced its budget deficit by a third, and
cut inflation by half. Other nations represented here can point with pride to
similar examples of progress.
Yet funding is not guaranteed for any selected country. To be awarded a
grant, nations must develop proposals explaining how they will further address
the needs of their people, and increase economic growth—proposals that set
clear goals and measurable benchmarks.
The countries selected today represent a small fraction of those struggling to
emerge from poverty and establish reform. I urge all nations of the world to fol-
low the progressive standards of governing justly, investing in people and
encouraging economic freedom.
Reform can bring more aid from America, and it will also bring more invest-
ment and more trade, lessening the need for aid over time. Reform will be
repaid many times over in the relief of poverty, and rising national wealth and
stability for their countries.
The 16 chosen in this round are showing the way, are showing what is possi-
ble, are serving as a bright light in the developing world. You have taken the
first courageous steps toward greater independence and greater wealth, and
greater hopes for the people you serve.

I want to thank you all for being here. I congratulate you on your work. And
may God bless your countries and the people in the countries. Thank you for
coming.
Report on Countries That Are Candidates for Millennium

Challenge Account Eligibility in FY 2005 and Countries That
Would Be Candidates but for Legal Prohibitions.
SUMMARY: Section 608(d) of the Millennium Challenge Act of 2003 requires
the Millennium Challenge Corporation to publish a report that identifies coun-
tries that are “candidate countries” for Millennium Challenge Account assis-
tance during FY 2005. The report is set forth in full below.
Report: This report to Congress is provided in accordance with section 608(a)
of the Millennium Challenge Act of 2003, codified at 22 U.S.C. 7701 and 7707(a)
(the “Act”). The Act authorizes the provision of Millennium Challenge Account
(“MCA”) assistance to countries that enter into compacts with the United States
to support policies and programs that advance the prospects of such countries
achieving lasting economic growth and poverty reduction. The Act requires the
Millennium Challenge Corporation to take a number of steps in determining the
countries that, based on their demonstrated commitment to just and democratic
governance, economic freedom and investing in their people, will be eligible for
MCA assistance during Fiscal Year 2005. These steps include the submission of
reports to the congressional committees specified in the Act and the publication
of notices in the Federal Register that identify:
1. The countries that are “candidate countries” for MCA assistance during Fiscal
Year 2005 based on their per-capita income levels and their eligibility to
receive assistance under U.S. law and countries that would be candidate
countries but for legal prohibitions on assistance (section 608(a) of the Act);
2. The criteria and methodology that the Board of Directors of the Millennium
Challenge Corporation (the “Board”) will use to measure and evaluate the
relative policy performance of the candidate countries consistent with the
requirements of section 607 of the Act in order to select “eligible countries”
from among the “candidate countries” (section 608(b) of the Act); and
3. The list of countries determined by the Board to be “eligible countries” for
Fiscal Year 2005, including which of the eligible countries the Board will seek
to enter into MCA compacts (section 608(d) of the Act).
This notice is the first of the three required notices listed above.
Candidate Countries for FY 2005
The Act requires the identification of all countries that are candidates for
MCA assistance in FY 2005 and the identification of all countries that would be
candidate countries but for legal prohibitions on assistance. Section 606(a) of the
Act provides that, during FY 2005, countries shall be candidates for the MCA if
they:
1. Have a per capita income equal to or less than the historical ceiling of the
International Development Association for the fiscal year involved (or $1465
for FY 2005); and
2. Are not subject to legal provisions that prohibit them from receiving United
States economic assistance under part I of the Foreign Assistance Act of 1961,
as amended.
August 2004 17
Pursuant to section 606(c) of the Act, the Board of Directors of the
Millennium Challenge Corporation has identified the following countries as
candidate countries under the Act for FY 2005. In so doing, the Board has antici-
pated that prohibitions against assistance that applied to countries during FY
2004 will again apply during FY 2005, even though the Foreign Operations,
Export Financing and Related Appropriations Act for FY 2005 has not yet been
enacted and certain findings under other statutes have not yet been made. As
noted below, the Millennium Challenge Corporation will provide any required
updates on subsequent changes in applicable legislation or other circumstances
that would affect the status of countries as candidate countries for FY 2005.
1. Afghanistan 24. Guinea 48. Pakistan

2. Angola 25. Guyana 49. Papua New Guinea
3. Armenia 26. Haiti 50. Paraguay
4. Azerbaijan 27. Honduras 51. Philippines
5. Bangladesh 28. India 52. Rwanda
6. Benin 29. Indonesia 53. Sao Tome and
7. Bhutan 30. Iraq1 Principe
8. Bolivia 31. Kenya 54. Senegal
9. Burkina Faso 32. Kiribati 55. Sierra Leone
10. Cameroon 33. Kyrgyz Republic 56. Solomon Islands
11. Chad 34. Lao PDR 57. Sri Lanka
12. China 35. Lesotho 58. Swaziland
13. Comoros 36. Madagascar 59. Tajikistan
14. Congo, Dem. Rep 37. Malawi 60. Tanzania
15. Congo, Rep. 38. Mali 61. Timor-East
(Brazzaville) 39. Mauritania 62. Togo
16. Djibouti 40. Moldova 63. Turkmenistan
17. Egypt, Arab Rep. of 41. Mongolia 64. Tuvalu
18. Equatorial Guinea 42. Morocco 65. Uganda
19. Eritrea 43. Mozambique 66. Ukraine
20. Ethiopia 44. Nepal 67. Vanuatu
21. Gambia 45. Nicaragua 68. Vietnam
22. Georgia 46. Niger 69. Yemen, Rep.
23. Ghana 47. Nigeria 70. Zambia
1
Iraq is identified as a candidate country on a provisional basis. Iraq is sub-
ject to section 620(t) of the Foreign Assistance Act of 1961, as amended, which
prohibits assistance to countries with which the United States severed diplomat-
ic relations, unless diplomatic relations have been resumed and an agreement
for the furnishing of assistance has subsequently been entered into. While the
United States has resumed diplomatic relations with Iraq, an assistance agree-
ment, which would satisfy section 620(t), has not yet been completed. If such
an agreement has not been entered into by the date on which the MCC Board
determines eligible countries pursuant to section 607 of the Act, Iraq will not be
treated as a candidate country as of that date.

Albania, Bosnia and Herzegovina, Cape Verde, and Tonga were candidate
countries for FY 2004 but are not candidate countries for FY 2005, due to
increases in their levels of per capita income above the historical ceiling of the
International Development Association. In addition, Serbia & Montenegro,
which would have been a candidate country for FY 2004 but for legal prohibi-
tions that apply to Serbia, is not a candidate country for FY 2005 due to an
increase in its per capita income above the International Development
Association historical ceiling.
Countries That Would Be Candidate Countries but for Statutory Provisions
That Prohibit Assistance
Countries that would be considered candidate countries during FY 2005 but
are subject to legal provisions which prohibit them from receiving U.S. econom-
ic assistance under part I of the Foreign Assistance Act of 1961, as amended (the
“Foreign Assistance Act”) are listed below. As noted above, this list is based on
legal prohibitions against economic assistance that apply during FY 2004 that
are anticipated to apply again during FY 2005.
1. Burma. Section 570 of the FY 1997 Foreign Operations Act prohibits assistance
to the government with certain narrow exceptions. In addition, Burma has
been identified as a major drug-transit or major illicit drug producing coun-
try for 2004 (Presidential Determination No. 2003-38, dated 9/15/03) and
designated as having “failed demonstrably” to adhere to its international
obligations and take the measures required by section 89(a)(1) of the Foreign
Assistance Act, thus making Burma ineligible for assistance. Burma is listed
as a Tier III country under the Trafficking Victims Protection Act for not com-
plying with minimum standards for eliminating trafficking and not making
significant efforts to comply (Presidential Determination No. 2003-35,
9/9/03).
2. Burundi is subject to section 508 of the Foreign Operations, Export Financing,
and Related Programs Appropriations Act, 2004 (“FY 2004 Appropriations
Act”), which prohibits assistance to the government of a country whose duly
elected head of government has been deposed by a military coup.
3. Cambodia is subject to section 561(b) of the FY 2004 Appropriations Act,
which prohibits assistance to the central government of Cambodia, except
in specified circumstances.
4. Central African Republic is subject to section 508 of the FY 2004
Appropriations Act.
5. Cote d’Ivoire is subject section 508 of the FY 2004 Appropriations Act.
6. Cuba. Section 507 of the FY 2004 Appropriations Act prohibits direct assis-
tance to Cuba. The Cuban Liberty and Democratic Solidarity Act of 1996,
Pub. L. 104-114 requires the President to take all necessary steps to ensure
that no funds or other assistance is provided to the Cuban government.
7. Guinea-Bissau is subject to section 508 of the FY 2004 Appropriations Act.
8. Liberia is subject to section 620(q) of the Foreign Assistance Act and section
512 of the FY 2004 Appropriations Act, both of which prohibit assistance
under part I of the Foreign Assistance Act based on past due indebtedness to
the United States.
9. Somalia is subject to section 620(q) of the Foreign Assistance Act and section
512 of the FY 2004 Appropriations Act.
August 2004 19
10. Sudan is subject to: section 620(q) of the Foreign Assistance Act and section
512 of the FY 2004 Appropriations Act. Sudan also is subject to section 508 of
the FY 2004 Appropriations Act and section 620A of the Foreign Assistance
Act.
11. Syrian Arab Republic. Section 507 of the FY 2004 Appropriations Act pro-
hibits direct assistance to Syria.
12. Uzbekistan is subject to section 568 of the FY 2004 Appropriations Act,
which requires that funds appropriated for assistance to the central
Government of Uzbekistan may be made available only if the Secretary of
State determines and reports to the Congress that the government is making
substantial and continuing progress in meeting its commitments under a
framework agreement with the United States.
13. Zimbabwe is subject to section 620(q) of the Foreign Assistance Act and
section 512 of the FY 2004 Appropriations Act.
Countries identified above as candidate countries, as well as countries that
would be considered candidate countries but for the applicability of legal provi-
sions that prohibit U.S. economic assistance, may be the subject of future statu-
tory restrictions or determinations, or changed country circumstances, that
affect their legal eligibility for assistance under part I of the Foreign Assistance
Act during FY 2005. The Millennium Challenge Corporation will include any
required updates on such statutory eligibility that affect countries’ identification
as candidate countries for FY 2005, at such time as it publishes the notices
required by sections 608(b) and 608(d) of the Act or at other appropriate times.
Any such updates with regard to the legal eligibility or ineligibility of particular
countries identified in this report will not affect the date on which the Board of
Directors is authorized to determine eligible countries from among candidate
countries which, in accordance with section 608(a) of the Act, shall be no sooner
than 90 days from the date of publication of this notice.

August 2004 21
U.S. Agency for International
Development
Remarks by Mr. Frederick W. Schieck
Deputy Administrator
Miami, Florida
April 20, 2004
I am pleased to have the opportunity to return to Miami to meet with you
today. I appreciate Mr. Van Daniker’s invitation. Two years ago I had the pleas-
ure of discussing with many of you the United States Agency for International
Development’s (USAID’s) role in financial management. Today I want to share
with you our views on the challenge to development presented by corruption
and what we can do to address this serious problem. I want also to give a spe-
cial thanks to two Inspector Generals, member of the ICGFM Board, with who I
have had the pleasure to work—Everett Mosley the IG of USAID, and Bill
Taylor recently retired from the Inter American Development Bank where I
worked for 10 years.
This is a country that has been seized periodically by reform movements.
Sometimes they have ushered in wholesale changes of policy that have trans-
formed how we view the subject at hand. One such instance began in 1977
when Congress passed the Foreign Corrupt Practices Act. This piece of legisla-
tion prohibited certain business practices of US companies, most notably, the
offering of bribes to foreign government officials. It was widely characterized in
some quarters at the time as ill-conceived and quite possibly counterproductive.
Critics said that US companies would be placed in a competitive disadvantage
with foreign firms. In fact, while the US was seeking to stop the practice of
bribery of foreign governments, other countries continued to allow their firms
to count such payments as tax deductible expense.
The criticism did not stop there. There was concern that law would put into
play certain negative incentives whose ultimate effect might even be to make
corruption worse. Given the competitive environment multinationals operate in,
it was thought that the law would encourage less scrupulous companies to
adopt more elaborate schemes to hide the outlawed practices. The law seemed
to be just another example of a naïve attempt to reform common behavior, if not
human nature itself. Like the earlier experience in the U.S. when the production
of alcohol was prohibited, the critics predicted that the Act would run up
against experience and eventually be repealed.
As it turned out, the Foreign Corrupt Practices Act was not another failed
attempt at reform—it was not a passing thought. It marked a fundamental
change in thinking about the subject of corruption and set off a growing recog-
nition of the problem. The existence of the ICGFM and our meeting here today
is part of a movement that began back then. What is now a global alliance
against corruption would have been dismissed as a mere “tilting at windmills”
a little more than a generation ago. I believe that where we stand today could
not even have been imagined back then.
It’s not that “corruption” was not discussed in the past. But then it was
reviewed mostly as a local issue which often had a political focus. Charges and

counter-charges of corruption have always been a part of political campaigns,
then as they are now.
Corruption in the developing world was assumed to be a “given,” a “fact of
life.” This was, more often than not, the attitude of businessmen. Policy-makers
had a different perspective. During the Cold War, strategic considerations often
overrode any concerns we might have had with certain allies and their prac-
tices. Academics, on their part, tended to view corruption as a “cultural” phe-
nomenon, an outgrowth of informal, traditional societies operating within the
structures of formal, modern political systems that were inherited from a colo-
nial past. According to this theory, corruption stemmed from the dislocations
that these societies suffered under imperialist rule. These academics tended to
make corruption almost a taboo topic—a politically “incorrect” subject, if you
will—while other circles either accepted or ignored it.
All this has changed. Corruption is far from a taboo subject. It is now on the
agenda of national, regional, and multinational policymaking bodies. It is the
concern of citizens and groups inside and outside societies that are most
affected. It is being confronted openly by businesses, civil society organizations,
academia, think tanks, and the media.
In this regard, I would like to note that the anti-corruption provisions of the
U.S. Foreign Corrupt Practices Act eventually inspired conventions broadly
adopted by the Organization for Economic Cooperation and Development
(OECD), the Organization of America States (OAS), and the United Nations.
Multilateral organizations such as the World Bank and the Inter-American
Development Bank also recognize the importance of the provisions. In this
regard, we second the World Bank in its support of the Extractive Industries
Transparency Initiative (EITI), which recognizes the high stakes at play around
the world, for both developed and developing countries, in helping to free oil,
gas, and mining industries from control by corrupt elites. The efforts of the
World Bank and various regional development banks are to be commended for
tackling the issue. Moreover, corruption will be prominently featured in the
June summit of the G8 at Sea Head, Georgia and we can anticipate further
initiatives on this score.
Bilateral agencies consider the issue of corruption as central to development
as well. As many of you know, the United States has established the Millennium
Challenge Corporation. Since the enactment of the law, President Bush reiterat-
ed strongly that “good governance is an essential condition of development. So
the Millennium Challenge Account will reward nations that root out corrup-
tion….” Therefore, a country’s position on corruption will be viewed as a major
factor in determining eligibility for funding. In addition, the program will iden-
tify countries that have demonstrated an abiding commitment to democratic
governance and market oriented economic policies and that can benefit from
support in furthering such endeavors. This initiative is one of the most vision-
ary development initiatives in a long while. It will provide the impetus for
recipient countries to accelerate economic growth to the point where they can
graduate from the group of countries requiring concessional assistance. Since
the passing of the law, the MCA is already impacting on counties that may nar-
rowly miss eligibility. It is encouraging those countries to stimulating reform
efforts that will qualify them in later rounds.
We in USAID consider the issue of fighting corruption central to our develop-
ment mission. Administrator Natsios has commissioned an agency-wide anti-
corruption strategy which will incorporate anti-corruption elements into all
appropriate facets of agency operations. We have supported Transparency
August 2004 23
International, one of the world’s premiere anti-corruption organizations, almost
from its inception, and we fund a host of other NGO’s engaged in the common
fight. The USG supported the Kimberly Process to end the trafficking in “blood
diamonds.” USAID’s field Offices are engaged in legitimizing this industry so
that the revenues derived from it can serve long-term development objectives.
We are proud of our quarter century association with the International
Consortium on Governmental Financial Management and the workshops it
sponsors. Lastly, we continue to support the America’s Accountability and Anti-
Corruption Project, which some of you in the audience are actively involved in.
This increased interest in tackling corruption can be explained by a number
of factors. The end of the Cold War brought an end to ideologically driven for-
eign assistance. In the new era, trade is increasingly seen as key to launching
countries on the path of development but that this can be undermined by cor-
ruption and rent-seeking government officials. With the globalization of trade
and capital markets, businesses have faced ever tougher competition and have
become more reluctant to tolerate the risk and expense associated with the in
genuine practices of the past. At the other end of the trade process, countries
with high levels of corruption find themselves unable to attract the outside
investment their economies so desperately need.
Political changes also enter the equation. The so-called “third wave” of
democracy has brought to increasing numbers of the world’s citizens the power
of the vote and the enjoyment of civil liberties, such as freedom of speech and
the right to assemble. Popular pressure has prompted leaders and opposition
figures to confront corruption and show a strong anti-corruption commitment.
Though the financial costs of corruption cannot be precisely measured, its
significance, by all estimates, is major. How can we put a price tag on the cor-
rupt desires of a Charles Taylor of Liberia and the devastation he brought to his
country? It is equally difficult to calculate the cumulative effects of petty corrup-
tion, the money that is slipped out of sight to a custom officer, bureaucrat, traffic
officer, magistrate, or policeman.
We see corruption as the serious development challenge it is. It can infect all
the institutions of democratic governance and its formal processes. Corruption
in elections and legislative bodies reduces accountability and short-circuits rep-
resentative government. Judicial corruption suspends the rule of law and
undermines the institution uniquely positioned to fight the problem. Corruption
in public administration skews the provision of public services from intended
beneficiaries to the well-connected and influential. It erodes the institutional
capacity of government as formal proceedings are ignored, resources siphoned
off, and officials hired and promoted without regard to competency or perform-
ance. Indeed, the recent gains in democracy are threatened where these govern-
ments do not bring corruption under effective control.
Corruption also generates considerable economic distortions and inefficien-
cies that affect both the public and private sector. In the public sector, it typically
diverts investment from education and projects that hold most development
promise into capital projects that favor bribes and kickbacks. It lowers compli-
ance with regulations. This all too often results in poor quality infrastructure,
unsafe and poor construction, as well as environmental damage. In the short-
term, this puts additional budgetary pressures on the government, while the
long-term effect reduces economic growth. The private sector has to deal with
increased cost of bribes and extortion, the management costs of negotiating with
corrupt officials, and operating in an atmosphere pervaded by risk and fear of
crossing influential figures, not to mention criminal prosecution.

Responding to the development challenges posed by corruption requires an
understanding of its causes. From an institutional perspective, corruption arises
when public authorities have wide discretion, little accountability, and perverse
incentives. This means that the more activities public authorities control or reg-
ulate, the greater the opportunities for corruption. Furthermore, the lower the
probability of detection, the greater the probability that corruption will take
place. In addition, the incentives for pursuing self-serving ends lowers the
rewards for the honest discharge of duties.
This institutional perspective suggests countering corruption through the
following:
1. Reducing the role of government in economic activities;
2. Strengthening transparency, oversight, and sanctions; and
3. Redesigning terms of public employment to improve incentives and increase
professionalism.
To limit official authority and its control over the economy, enlightened pri-
vatization schemes should be pursued, accompanied by adequate measures of
transparency and legal frameworks that guard against merely converting public
monopolies to private ones. State authority can be limited by eliminating tariffs,
exchange rate restrictions, price controls, and permit requirements that encour-
age bribery. Encouraging competitive procurement practices as well as competi-
tion in the provision of public services also has a substantial impact.
Accountability can be enhanced by open budget process and decentraliza-
tion, through freedom of information legislation and financial disclosure
requirements. It is here where organizations like ICGFM are particularly rele-
vant. Measures to modernize and professionalize financial management systems
are key to our anti-corruption efforts. This includes the design of financial soft-
ware, installation of hardware, and the training of professionalized accounting
and auditing staffs. Additionally, hot lines and whistle blowing protections can
be extended to witnesses of corrupt practices. Credible sanctions must be estab-
lished through reform of penal codes and by fortifying the independence of
judicial bodies. We must work to protect the integrity of elections so that we can
effectively remove bad actors when warranted. Offices with a clear anti-corrup-
tion mandate can be established.
We can work to promote ethical behavior in public service by tightening job
requirements, establishing anti-nepotism regulations, and developing codes of
ethics. Ways must be sought to improve compensation systems in order to
attract and retain more qualified personnel. This might be financed through the
elimination of “ghost workers,” redundant staff, and predatory officials in ways
that frees resources while improving morale and professionalism. The experi-
ence of Ghana is a good example in that this Government reformed its critically
important department of revenue through such methods.
We can also work to change general attitudes toward corruption, mobilizing
the political will to combat corruption by monitoring public relations campaigns
and workshops, support civic advocacy organizations such as Transparency
International (TI) and expand its national chapters, train journalists in the skills
of investigative reporting, and bring bilateral and international pressure on the
more serious offenders. I would just like to note that USAID has worked with
many countries to establish “investor roadmaps”—surveys that lay out, step by
step, permit by permit, everything an investor has to do to start a new business.
This has proven to be not only a useful tool in the battle against corruption, but
one increasingly used by donor agencies in broader reform efforts to empower
August 2004 25
economically marginalized populations and improve a country’s business
climate.
I want to emphasize that the inventory of potential responses is large and
varied, and covers reforms directed at government institutions as well as society
at large. But the mix of incentives, the relative emphasis placed on them, and
the sequence in which they should be pursued, will vary from time to time and
from country to country.
In the time remaining, I would like to highlight some of USAID’s anti-
corruption efforts in very different parts of the world.
USAID/Colombia is finishing the first phase of a $6.8 million anti-corruption
activity aimed at increasing transparency and accountability at both the national
and municipal levels. The project has brought internal control mechanisms,
based on international standards, to 21 local governments and 3 of Columbia’s
major cities. Implementation manuals have been published and distributed to
local and national entities. Over 2,000 local and national level controllers have
been trained in the new accounting regulations. In addition, public ethics codes
have been developed and adopted, with the necessary follow-on training.
USAID has worked with a broad array of civil society organizations to enhance
public participation in decision-making and monitoring projects. Over 100 small
grants have been made to citizen groups for this purpose.
USAID helped the Republic of Georgia launch a new administrative law that
brings greater transparency and accountability to government operations, as
well as delineating citizens’ rights as to information and the conduct of admin-
istrative proceedings. Georgia’s law requires government actions to be public
and government information to be freely available. It has been instrumental in
the rise of a more independent and vigorous press and has been called by a
leading Georgian jurist as “the single most important Georgian law, after the
1995 constitution.”
In Bangladesh, USAID has helped establish a local chapter of Transparency
International. It has been engaged in widespread reporting and watchdog activ-
ities as well as general consciousness-raising within the country. School
Management Committees also have been established—in some of the most
underserved regions of the country—to monitor low-level corruption in the
education sector. Illegal sub-contracting of teaching, unauthorized leave, and
illegal payments demanded by teachers or other exploitative practices are all
too common. Mother’s Groups have been formed and issue what is their own
“report card” on the functioning of their children’s schools.
I don’t for a moment want to suggest that corruption is just a concern of the
developing world. In our own Agency, vulnerabilities have greatly increased in
the past two years as we have undertaken major new programs in HIV/AIDS
and, of course, in Iraq and Afghanistan.
USAID funding for HIV/AIDS has increased from $139 million in FY 1999
to more than $700 million in FY 2003. This year, USAID will also be managing
a portion of the President’s Emergency Plan for AIDS Relief, which is projected
to rise to $15 billion. The Office of the Inspector General is working to make
sure that oversight mechanisms are in place, the costs charged are reasonable
in amount, and that the costs incurred are justified.
We are managing ten contracts in Iraq, valued at over $2.2 billion. Our
Inspector General’s office there is conducting performance audits and has
issued 22 concurrent financial audit reports. “Concurrent” means that we aren’t
waiting until the end of the year to do the audit but rather we are beginning the

audit just as the project or activity being audited gets under way, with the audi-
tors maintaining a presence throughout the year at the work sites and in the
office of the grantees and contractor.
The same approach is being used in Afghanistan through a contract with a
public auditing firm supervised by the Inspector General. The Office is also
spending considerable audit resources reviewing our $500 million infrastructure
program, including the Kabul/Kandahar Road.
The USAID Inspector General has also been selected as auditor for the
Millennium Challenge Account. I should point out here that Agency manage-
ment and the Inspector General’s office collaborate on establishing yearly objec-
tives and standards for success that we can achieve together. Among these is
our common endeavor to help improve management so that we can get the best
value for our tax dollar in the service of the people in the developing world.
Let me end with the observation that no country has ever been free totally
free from corruption; however it is a goal that we can all share in trying to
achieve it together.
Thank you.
August 2004 27
Reforming Fiscal Institutions and
Strengthening Government
Accountability: Legislative Budget
Oversight in Emerging Economies
CARLOS SANTISO
Carlos Santiso is a governance adviser to the United Kingdom Department for
International Development in Lima, Peru, and a political economist at the
Johns Hopkins University School of Advanced International Studies in
Washington DC, United States. Email: csantiso@hotmail.com
I. Legislatures and the budget process in presidential systems

Reforming budgetary institutions is a critical task for emerging economies.
Designing feasible fiscal reforms and achieving sustainable impact on fiscal per-
formance require adequately understanding the political economy of the budget
process. The role of legislatures in budget policymaking is a key dimension of
the governance of the budget. Legislatures authorise the executive to raise rev-
enue and manage public expenditures, exercise oversight and ensure accounta-
bility. They help ensure government accountability in the management public
finances, by approving budget allocations, overseeing budget execution and
controlling budget performance.
Enhancing legislative scrutiny of the budget and oversight of its execution is
increasingly considered as a means to strengthen government accountability
and curb corruption (OECD 2001). In many developing countries, however, the
role of parliaments in budgeting is subdued and often dysfunctional, partly as a
result of executive predominance, but also because of legislatures’ own deficien-
cies. The greatest challenge remains to strengthen democratic accountability
while ensuring fiscal discipline. This study briefly reviews recent trends in the
role and performance of parliaments in the budget process in Latin American
emerging economies.
II. Legislative budgeting and government accountability

Legislative budgetary institutions, such as standing committees, legislative
budget offices and general audit offices, have largely been neglected in the first
stage of economic reform and financial administration modernization. They
nevertheless perform critical accountability functions (Morgenstern and Nacif
2002; Mainwaring and Welna 2003). Legislatures constitute central agencies of
state self-restraint and external accountability in public finance management.
They help enforcing the accountability cycle of public budgeting: ex ante
accountability, ensuring that budget allocations adequately reflect policy priori-
ties; concurrent accountability, overseeing the execution of the budget by the exec-
utive; and ex post accountability, holding government to account for performance
and results. In practice, however, legislatures have often failed to adequately
and responsibly perform their accountability functions. What then explains
this disjuncture between the potential contribution of legislatures to public
budgeting and their actual role?

There is great controversy as to what the most appropriate role of parlia-
ments ought to be in public budgeting. The prevailing economic orthodoxy
posits that excessive legislative prerogatives in public budgeting tend to lead to
fiscal disequilibria, greater budget deficits and public debt; overspending and
under-taxation are likely results (Stein 1998; Alesina 1999). It thus warns against
the dysfunctional fiscal effects of unrestrained legislative budgetary powers and
consequently favors the insulation of economic policymaking within the execu-
tive branch. These problems can be minimized by assigning control over the
budget to agents with incentives to internalize the costs of the programs the
state finances. Consequently, it is argued, ’hierarchical’ budget systems that
’concentrate power in the finance minister, vis-à-vis other ministers, and in the
executive vis-à-vis congress’ (Stein 1998:3) tend to provide stronger procedural
incentives for promoting economic prudence. Such views, which have influ-
enced economic policies in Latin America in the 1990s, counsel giving greater
independence to the institutions of economic governance, in particular central
banks, tax authorities and regulatory agencies. The 2000 Law of Fiscal
Responsibility adopted in Brazil constitutes a more recent attempt at
establishing numerical and procedural budget constraints.
Nonetheless, there are important risks associated with hierarchical budgetary
arrangements. They tend to allow for excessive executive discretion in public
budgeting, especially in presidential systems of government. Often, uncon-
strained executives misuse their constitutional authority and delegated powers,
left largely unchecked by amenable parliaments. Unfettered executive discre-
tion, reflected in particular in the extensive and early use of executive decrees to
re-allocate budget appropriations, hampers external scrutiny and hinders exter-
nal accountability in governmental financial management. Henceforth, beyond
weakening the mechanisms of democratic accountability in public finance,
unconstrained executive discretion has often permitted corruption and state
capture.
Finding the most adequate balance between executive and legislative prerog-
atives in budget policymaking is a critical challenge for emerging economies
struggling to consolidate their democratic institutions. Ultimately, the gover-
nance of the budget reflects a delicate balance between executive power and
legislative oversight. A key challenge of the governance of the budget in
emerging economies thus resides in the ability of institutional arrangements
to adequately combine democratic accountability and fiscal prudence.
III. Legislatures and budget policymaking

Strengthening legislative budget oversight is required to re-equilibrate
executive-legislative relations in public finance management, especially in
presidential systems of government characterized by weakly institutionalized
mechanisms of accountability. Legislative budgeting can be defined by the
scope of budget authority and the effectiveness of budget oversight. The legal
framework for legislative budgeting only partly explains the actual performance
of legislatures in the budget process.
In Latin America as elsewhere, there exists an important gap between the
formal powers and actual role of parliament in public budgeting. Legislative budg-
eting is a recent development in the history of Latin American legislatures: the
first budget formally approved by the Argentinean legislature was that of 1990.
The contribution of legislatures to budget oversight remains inhibited by struc-
tural factors related both to the internal organization of parliamentary work and
the broader external context of executive-legislative relations.
August 2004 29
The challenges of legislative budgeting are twofold: those related to the
capacities of legislatures and the organization of parliamentary work, and those
related to their incentives to exercise their budgetary powers effectively and
responsibly. These two sets of factors interact in different ways along the differ-
ent stages of the budget cycle.
• A first set of factors are internal to the legislature itself, related to deficiencies
in the structures, processes and procedures of legislative budgeting, as
defined by constitutional rules, legislative norms and parliament’s internal
rules. They essentially relate to organization, resources and capacity.
• A second set of factors are external to the legislature, linked to the formal and
informal rules shaping executive-legislative relations, the presidential nature
of the political system, the over-reliance of executive decree authority,
skewed electoral incentives, and a fragmented political party system.
IV. Legislative budget authority: legal framework

Four sets of variables are particularly determinant to assess the effective
contribution of parliament to budget policymaking and oversight: whether
parliament is legally empowered to intervene in budgeting, whether it is endowed
with the required technical capacities, whether it possesses the necessary political
will, and whether the governance environment is conducive. Legislative
budgetary powers are different in successive phases of the budget cycle, i.e.
formulation, adoption, execution, and control.
Legislative budgetary powers, contained in the constitution, the organic budget
law and parliaments’ internal rules, are severely limited by the prerogatives of
the executive. Constitutional provisions endow Latin American presidents with
uncommon powers in public budgeting, both in absolute and relative terms,
although important variations between countries. Assessing the budgetary pow-
ers of the executive in 23 presidential systems, Mathew Shugart and Stephan
Haggard (2001) find that in seven of them presidents enjoy exclusive power
over spending legislation and the legislature confronts severe constraints on
emending presidential proposals.
The executive has a predominant role in the drafting and formulation of the
budget. The executive has the exclusive right to initiate the budget process,
draft and propose the budget bill. The central budget offices of the finance min-
istries are responsible for coordinating the budget drafting process within the
executive and overseeing its execution by spending agencies. Once approved by
the government, the budget proposal is submitted for consideration and review
to the legislature, which as a set period of time allocated for that task.
Legislative amendment powers vary between presidential regimes. In five of the
ten cases included in Table 1, the legislature is not allowed to create or increase
public spending, except as it pertains to its own budget. If the budget is not
approved by the set deadline, the current budget remains in effect in only four
cases (Argentina, Costa Rica, Uruguay and Venezuela). In five other cases
(Bolivia, Chile, Colombia, Ecuador, Peru), the executive’s proposal automatical-
ly becomes law, usually by legislative decree. These clauses give the executive
extraordinary leverage over the legislature, as legislative inaction does not pre-
clude the executive proposal from being adopted. They neutralize legislative
obstruction and significantly diminish the leverage of legislatures in the budget
bargaining process, as legislatures have no veto power over the executive’s
budget proposal. While they help avoid deadlock over the budget, these

provisions create a set of incentives that is not conducive to effective scrutiny
and oversight.
Legislative oversight of budget execution Constitutions give parliaments an
important in the scrutiny of budget re-allocation, the oversight of budget execu-
tion, and the review of public accounts. In practice, however, legislative over-
sight of budget execution is still embryonic in most Latin American countries.
Legislatures exercise only a limited monitoring of the government’s compliance
with budget rules and procedures. Largely unable to monitor compliance with
the approved budget, the legislature is even less able to monitor the perform-
ance of public expenditure management and enforce results-based budgeting.
Nevertheless, parliaments possess a potentially powerful instrument to control
budget execution and enforce ex post accountability: the annual certification of
public accounts. The parliament’s public accounts committee informs its opin-
ion with the audited report on public accounts prepared by the general audit
office. The plenary subsequently considers the committee’s opinion and decides
whether to discharge government. The general audit office is generally an
advisory body to parliament, such as in Argentina, an autonomous state
agency, such as in Chile, or an independent institution with quasi-judicial
powers, such as in Brazil. The quality of institutional linkages between public
accounts committees and general audit offices is thus a key determinant to
effective legislative budget oversight.
Accountability is also constrained by the time, timing and sequencing of leg-
islative scrutiny. As Table 2 shows, there is great variation in the time legislatures
have to review the budget, ranging from 30 days in Mexico to up to 120 days in
Honduras. Furthermore, there are important time lags and inconsistencies that
adversely affect the accountability cycle of the budget process. For example, the
review of public accounts and the evaluation of the auditor general’s report
often take place at a time that does not always allow them to adequately feed-
back into the budget process.
V. Legislative budget oversight: actual performance

Recent research on budget transparency in Latin America has revealed the gap
between the quality of the legal framework for public budgeting and adherence
to it (IBP 2003.) According to the survey data reproduced in Tables 3 and 4, while
the quality of the legal framework for public budgeting in Argentina, Brazil,
Chile, Mexico and Peru is generally sound, perceptions of budget transparency
are poor, especially in Peru. Legislative oversight and external auditing are par-
ticularly deficient. Several structural factors explain such shortcomings:
• Budget rigidity and inertia tends to limits the scope for exercising legislative
budget powers. In Brazil, 90 percent of the budget is considered rigid, as a
result of constitutionally mandated expenditures, earmarking of tax revenues
and mandatory expenditures. Hence, the type of public spending on which
parliament could potentially have the greatest influence, capital expenditure,
represents only a small fraction of public expenditures, albeit of strategic
importance for building ad hoc political coalitions, as in the case of Brazilian
system for executing budget appropriations (OECD 2003).
• The gap between the approved and executed budgets further hinders legislative
oversight. Optimistic assumptions on revenues, weak execution capacity of
sector ministries and ad hoc changes in appropriations partly explain
this gap. The resulting instability of budgetary institutions and fiscal rules
hampers the consolidation of credible budget processes with predictable
procedures and enduring structures.
August 2004 31
Internal factors
Legislative budget institutions Deficient internal structures and procedures
weaken the ability of parliaments to effectively and responsibly exercise their
budgetary prerogatives. Three legislative budget institutions are particularly
important.
Legislative standing committees Legislative committees in consolidating democ-
racies are generally weak and unstable and the organization of committee work
lacks the kind of institutionalization that would allow specialized committees to
effectively contribute to the budgetary process. The division of responsibilities
between the different committees dealing with different facets of public finance
(taxation, budgeting, oversight and control) remains unconsolidated. These
shortcomings are particularly detrimental to budgetary work, given its increas-
ing complexity. Furthermore, the internal composition of committees is propor-
tional to that of parliament and chaired by the legislative majority, which sets
their agendas and work-plans. This arrangement tends to lessen the incentives
for legislative oversight of government, as parliaments tend to be dominated by
the same party as government (Messick 2002). In parliamentary systems, public
accounts committees are often chaired by the opposition. Reforms are gradually
being introduced, such as in Chile in 2003 where the Special Joint Budget
Committee has been made a permanent legislative committee.
Legislative advisory capacity is largely inadequate to allow legislatures to
effectively engage in the budget process. The political advisers of the legislators
sitting in the budget and public accounts committees carry out most of the
advisory work. In fact, parliamentary committees, as such are seldom assigned
permanent technical advisers. As a result, technical input in the budget review
process lacks the sufficient technical substantiation required for impartial evalu-
ation. The absence of a tenure-track civil service career for parliamentary staff is
accentuated by the weaknesses of civil service careers in the public sector.
Parliaments can only rely on the limited research and advisory services that are
available to them through incipient legislative research offices and ill-equipped
parliamentary libraries. Such resources exist or have been recently established in
Brazil, Chile, Colombia and Peru.
Technical budget capacity is also insufficient for effective legislative budget
oversight. Budget and public accounts committees rely almost exclusively on
the information that government agencies provide, which significantly con-
strains their ability to carry out independent budget reviews and adequately
oversee budget execution. While financial constrains partly explain the lack of
budget research capacity, there exist political reasons explaining why parlia-
ments have generally not purposefully sought to build their capacities. Timely
access to budget information is strategic in the sense that the opposition has the
greatest incentives for independent budget analysis. This is gradually changing,
however, as the contribution of legislative budget offices is increasingly
acknowledged. Although not as powerful as the US Congressional Budget
Office, incipient legislative budget offices are emerging, such as in Venezuela
since 1997 or Mexico since 1998. It is indeed noticeable that a main impediment
to legislative budgeting often resides in its incapacity to engage with the budget
process, rather than the restraints put on its budgetary powers. Technical capac-
ities are thus important considerations to take into account when assessing the
effective role of legislatures in budget oversight.

External factors
Legislative oversight and external auditing General audit offices provide
critical information and advisory services to parliaments, directly or indirectly,
in the exercise of their accountability functions. The availability of timely and
reliable information on budget performance, generally provided by general
audit offices, is key to the effectiveness of legislative oversight. Improving the
functional linkages between public accounts committees and general audit
offices is critical to anchor accountability in public finance and budget manage-
ment (McGee 2002; SIGMA 2002). In turn, securing the political independence
of general audit offices, which have been significantly undermined by executive
interference and political meddling, is critical to guarantee effective external
auditing of government finances (INTOSAI 2001.) Issues such as criteria guid-
ing the nomination and removal of auditor generals and the length of their term
in office, as well as the procedures regulating recruitment, promotion and dis-
missal of professional staff are critical determinants of the effective independ-
ence of general audit offices. Predictable financial resources are also a necessary,
yet not sufficient for institutionalizing supreme audit institutions and insulating
them from political meddling. Most Latin American countries are indeed seek-
ing to strengthen their external auditing functions, with the support of interna-
tional financial institutions (Santiso 2004). Important reforms have been intro-
duced in recent years. In Mexico, a general audit office, the Auditoría Superior de
la Federación, was established as an advisory body to the lower chamber of par-
liament in 1999 to assist parliament in the oversight of federal public finances.
In 2000, parliament approved law on external accountability.
Economic governance and budgetary decision-making Beyond the constrains
imposed by the current institutional framework for legislative budgeting, the
presidential nature of political systems, coupled with an over-reliance on execu-
tive decrees, has been particularly detrimental to the strengthening of the insti-
tutions of government accountability in public budgeting. The use of executive
decrees in public budgeting is impressive both in absolute and relative terms in
countries such as Argentina, Brazil or Peru. In practice, parliament exercises lit-
tle oversight on presidential decrees. The frequent and early recourse to execu-
tive decrees to re-allocate budget appropriations not only undermines the leg-
islative oversight, but also weakens the credibility of the budget as an instru-
ment of economic governance and strategic planning.
Political governance and legislative budgeting Legislative behavior and execu-
tive-legislative relations in public budgeting are necessarily intermediated by
political parties and electoral rules. Stein et al. (1998) have indeed uncovered a
statistically significant relationship between electoral systems and fiscal per-
formance. Electoral systems characterized by a large degree of proportionality
(i.e. large district magnitude) and political fragmentation (i.e. number of effec-
tive parties represented in parliament) tend to have larger governments, larger
deficits and a more pro-cyclical response to the business cycle. Furthermore,
the fragmentation and volatility of political party systems throughout Latin
America has been detrimental to the effective exercise of legislative budget
oversight, significantly shortening the time horizons of individual legislators.
Parties lack the sort of internal coherence, cohesion and discipline that would
allow them to act purposefully and consistently within parliament. Moreover,
when the ruling party or coalition holds a disciplined majority position in par-
liament, as it is often the case in Latin America, there exists a possibility of con-
trol dilution: in such circumstances, presidential systems tend to have inopera-
tive systems for enforcing government accountability (Messick 2002; Manning
and Stapenhurst 2002).
August 2004 33
VI. The politics of public budgeting
The analysis of legislative budgeting in Latin America illustrates the con-
straints to and conditions for enhancing the contribution of parliaments to
budget oversight in presidential systems of government. The political economy
of the budget process reveals that political and technical aspects interact in
determining the effectiveness of legislative budget oversight. Ultimately, the
effectiveness of the mechanisms of horizontal accountability depends on the
effectiveness of the mechanisms of vertical accountability. The new patterns of
divided government and executive-legislative relations emerging throughout
Latin America are having a significant impact on economic governance and
public budgeting. Legislatures are gradually re-asserting their budgetary
powers, partly as a result of the emergence of more active parliamentary
oppositions.
Parliaments do possess important budgetary powers. However, they seldom
use them effectively or responsibly. While capacity constraints partly explain
why parliaments do not exercise their budgetary powers effectively, governance
constraints explain why they sometimes do not exercise them responsibly.
Parliament’s ability to establish their credibility as institutions of economic gov-
ernance is thus contingent both on the strengthening their technical and adviso-
ry capacities to perform their budget functions, and the existence of an enabling
governance environment that allows them to be exercised effectively and
responsibly. The question of strategy then becomes whether legislative capacity
should be build first, or should it emerge as a result of increased legislative
activism.
Sound public finance management and accountability requires finding an
adequate balance between executive and legislative prerogatives in the different
phases of the budget: While executive dominance in public expenditure man-
agement is more likely to ensure fiscal prudence, legislative oversight is critical
to provide effective checks and balances and enforce accountability in the for-
mulation, execution and control of the budget. Ultimately, the governance of the
budget reflects a delicate balance between executive power and legislative over-
sight. The key challenge of legislative budgeting in Latin American presidential
systems is to retain the advantages of strong executive authority required to
ensure fiscal discipline while providing the institutional checks and balances
that guarantee effective accountability. Strengthening the institutions of legisla-
tive budget oversight and the agencies of public finance integrity is undoubted-
ly a structural challenge for Latin American emerging economies. It is neverthe-
less a critical one.
The views and opinions expressed in this essay are solely those of its author and should not be
interpreted as reflecting those of the aforementioned organizations. This study draws on: Carlos
Santiso (2004) ’Legislatures and Budget Oversight in Latin America: Strengthening Public Finance
Accountability in Emerging Economies,’ OECD Journal on Budgeting (forthcoming).
Further Reading
Alesina, Alberto, Ricardo Hausmann, Rudolf Hommes and Ernesto Stein
(1999) Budget Institutions and Fiscal Performance in Latin America (Washington:
IADB OCE Working Paper 394.)
International Budget Project (IBP) (2003) Index of Budget Transparency in Five
Latin American Countries: Argentina, Brazil, Chile, Mexico and Peru (Washington
DC: IBP).

International Organization of Supreme Audit Institutions (INTOSAI) (2001)
Independence of Supreme Audit Institutions: Final Task Force Report (Vienna: INTO-
SAI General Secretariat.)
Krafchik, Warren, and Joachim Wehner (1998) ’The Role of Parliament in the
Budget Process,’ South African Journal of Economics 66(4):512-541.
Mainwaring, Scott, and Christopher Welna, eds. (2003) Democratic
Accountability in Latin America (Oxford: Oxford University Press.)
Manning, Nick, and Rick Stapenhurst (2002) Strengthening Oversight by
Legislatures (Washington DC: World Bank PREM Note 74.)
McGee, David (2002) The Overseers: Public Accounts Committees and Public
Spending (London: Pluto Press and Commonwealth Parliamentary Association.)
Messick, Richard (2002) Strengthening Legislatures: Implications from Industrial
Countries (Washington, DC: World Bank, PREM Note 63.)
Morgenstern, Scott, and Benito Nacif, eds. (2002) Legislative Politics in Latin
America (Cambridge: Cambridge University Press.)
OECD (2003) Budgeting in Brazil (Paris: OECD Working Party of Senior
Budget Officials GOV/PUMA/SBO(2003)10).
OECD (2001) Budget: Towards a New Role for the Legislature (Paris: OECD.)
Santiso, Carlos (2004) ’Lending to Credibility: The Inter-American
Development Bank and Budget Oversight Institutions in Latin America,’ CEPAL
Review.
Schick, Allen (2002) ’Can National Legislatures Regain an Effective Voice in
Budget Policy,’ OECD Journal on Budgeting 1(3):15-42.
SIGMA (2002) Relations Between Supreme Audit Institutions and
Parliamentary Committees (Paris: OECD SIGMA Paper 33,
CCNM/GOV/SIGMA(2002)1.)
Stein, Ernesto, Erneto Talvi and Alejandro Grisanti (1998) Institutional
Arrangements and Fiscal Performance: The Latin American Experience (Washington:
IADB OCE Working Paper 367.)
Wildavsky, Aaron (1992) “Political Implications of Budget Reform: A
Retrospective,” Public Administration Review 52:594-599 ______________ (1964)
The Politics of the Budgetary Process (Boston: Little, Brown.)
August 2004 35
TABLE 1: Constitutional Restrictions on Legislative Budget
Authority in Latin America
Country Argentina Bolivia Brazil Chile Columbia Costa Rica
Year of constitution1994 1967 1988 1980 1991 1949
(amendment) 1994 1999 1989 1997 1997
Only the President Yes Yes Yes Yes Yes Yes
can propose the Article Article Article Article Article Article
budget 100.6 147 61(1)II 64 364 178
(b)
Congress cannot No No Yes Yes Yes No
increase the budget with with Article
for any item or loop- loop- 351
create new hole hole
budgetary Article Article
categories 166 64
If no new budget is Yes No No No No Yes
passed, current Implicit Implicit
budget remains in
effect
OR
President’s No Yes No Yes Yes No
proposal takes Article Article Article
effect 147 64 348
Country Equador Peru Uruguay Venezuela

Year of constitution 1998 1993 1997 1999
(amendment)
Only the President Yes Yes Yes Yes
can propose the Article Article Article Article
budget 258 78 215 313
Congress cannot No Yes Yes No
increase the budget Article Article
for any item or 79 215
create new
budgetary
categories
If no new budget is No No Yes Yes
passed, current Implicit Article 313
budget remains in
effect
OR
President’s Yes Yes No No
proposal takes Article Article
effect 258 80
Source: Adapted from World Bank (2001) Peru: Institutional and Governance
Review (Washington, DC: World Bank, Report No.22637-PE): 36.

TABLE 2: Time for Budget Review in Latin America
Country Parliamentary Budget approval Number
structure authority of days allocated
for reviewing
budget proposal
Argentina Bicameral Both chambers n.a.
Bolivia Bicameral Both chambers 60
Brazil Bicameral Both chambers 100
Colombia Bicameral Both chambers 90
Chile Bicameral Both chambers 60
Paraguay Bicameral Both chambers 90
Dominican Bicameral Both chambers Max 90
Republic
Uruguay Bicameral Both chambers 90
Venezuela Bicameral Both chambers n.a.
Mexico Bicameral Chamber of Deputies 30
Costa Rica Unicameral Legislative Assembly 90
Ecuador Unicameral National Congress 90
El Salvador Unicameral Legislative Assembly 90
Guatemala Unicameral Congress of the Republic 120
Honduras Unicameral National Congress 105-120
Nicaragua Unicameral National Assembly n.a.
Panama Unicameral Legislative Assembly 90
Peru Unicameral Congress of the Republic 90
Source: Gutiérrez, Gerónomo, Alonso Lujambio and Diego Valadés (2001) El
proceso presupuestario y las relaciones entre los órganos del poder (México: Instituto
de Investigaciones Jurídicas): Chapter III.
TABLE 3: Budget Transparency in Latin America

(Aggregate Index)
Country Assessment of Perceptions Average Index
Legal Framework Index (un-weighted)
Out of 1000 1 to 10 1 to 10 1 to 10
points
Argentina 700 7.0 5.1 6.1
Brazil 636 6.4 5.1 5.8
Chile 733 7.3 5.9 6.6
Mexico 507 5.1 5.0 5.1
Peru 598 6.0 3.7 4.9
Source: IBP 2003:5. Notes: The legal framework score is on a scale of 0 to 1000.
The index of perceptions is an average on a scale of 1 to 10, of not transparent to
transparent.
August 2004 37
TABLE 4: Budget Transparency in Latin America (Disaggregate
Index)
Phases of the budget
Average score of 1 to 5
Most transparent Least transparent
Formulation Chile Mexico Argentina Peru Brazil
Average 3.36 2.67 2.57 2.47 2.47
Approval Chile Argentina Brazil Mexico Peru
Average 2.80 2.79 2.63 2.44 2.39
Execution Chile Argentina Brazil Peru Mexico
Average 3.16 2.71 2.40 2.38 2.36
Oversight
and auditing Chile Brazil Mexico Argentina Peru
Average 3.07 2.31 2.27 2.19 1.89
Economic
Information Chile Argentina Brazil Mexico Peru
Average 3.53 3.15 3.15 2.75 2.66
Source: Based on IBP 2003:3.

August 2004 39
The Challenges of Good Governance:
A View from Bangladesh
Md. Nurul Momen
Lecturer, Department of Public Administration,
University of Rajshahi, Rajshahi-6205, Bangladesh
E-mail: nurulmomen2003@yahoo.com
and
Mst. Marzina Begum
M.Phil Researcher, Institute of Environmental Science
University of Rajshahi, Rajshahi-6205, Bangladesh
E-mail: marzinabegum78@yahoo.com
Abstract
This article focuses on challenges, experiences and strategies for good gover-
nance in Bangladesh. It explores what capacities states need to develop to meet
the demands and how to strengthen governance institutions, including electoral
management bodies, parliaments and judicial systems in Bangladesh.
Introduction
Good Governance is important for countries at all stages of development.
Bangladesh has recently gone through major changes that are conducive to the
development of transparent, accountable governance. These changes were as
follows: well organized and transparent general elections held in October, 2001
with the highest ever turn out of voters; emergence of an independent role for
the Election Commission; adequate access of all candidates to the media during
the election campaign; and the decision by the present government to activate
the parliamentary committees and to broadcast part of the proceedings of the
parliament to promote accountability (G. Shabbir Cheema: 1996).
Despite the above achievement, Bangladesh continues to face major problems
in governance for sustainable growth and equity. There is no tier of elected local
government above the union parishad, which were abolished a few years ago.
The present procedures and processes through which the members of the parlia-
ment work hinder their effective role in ensuring the accountability of the exec-
utive branch. These include non-functioning committees and inadequate facili-
ties for MPs, as well as lack of adequate opportunities for MPs to review and
discuss policy issues and options in a rational manner instead of in an environ-
ment of political polarization. Systems of financial accountability need to be
reformed.
Other immediate issues of governance that require a government response
include the need to enhance the capacity and independence of the Judicial sys-
tem, to improve access to the media, to eradicate corruption, and to develop a
coherent policy formulation process. These would enable the involvement of all
segments of the society leading to consensus building on major issues of nation-
al concern.

Conceptual Framework
Good governance is participatory, transparent and accountable. It is also
effective and efficient. It promotes the rule of law and equal justice under the
law. Good governance ensures that political, social and economic priorities are
based on broad consensus in society and the voices of the poorest and most vul-
nerable are heard in decision-making. We can take it for granted that sustain-
able human development will not be realized without it.
To be sure, we must not forget that Bangladesh accomplished a great deal in
the past few decades, against all odds and ordeals. There have been striking
reductions in fertility and infant morality rates. Gone are the days of routine
famines, with the rise in agricultural productivity and more efficient food pro-
duction. Gone too are the days of massive causalities to cyclones and floods.
More girls are educated, and a great deal more children are enrolled in primary
schools. More children are immunized, and diseases such as polio are banished
from the land. We even see a steady pace of economic growth and a downward
trend in poverty. The poor people of Bangladesh have surely benefited from
these gains.
Good governance means all taxes due are collected and deposited to the
treasury. It means the same amount of Taka (name of Bangladesh currency) goes
much further in financing development projects because public procurement is
transparent and efficient. It means all public spending are accounted for as
intended, and audited currently.
Good governance requires an efficient executive, a functioning legislature, an
independent Judiciary and the effective separation and balance of powers; all
constituent elements of a democratic regime. Consequently, Good governance is
not sustainable without effective democratic institutions. This article explains,
as simply as possible, what “Good governance” in Bangladesh means.
Data Sources
The paper is based on secondary information that includes recent publica-
tions, Journals, books, research reports and other documents. The key elements
of good governance as defined by UNDP are listed below:
Participation: All men and women should have a voice in decision-making
either directly or through legitimate intermediate institutions that represent
their interests. Such broad participation is built on freedom of association and
speech, as will as capacities to participate constructively.
Rule of Law: Legal frameworks should be fair and enforced impartially, par-
ticularly the laws on human rights.
Transparency: Transparency is built on the free flow of information.
Processes, institutions and information are directly accessible to those concerned
with them, and enough information is provided to understand and monitor
them.
Responsiveness: Good governance requires that institutions and processes try
to serve all stakeholders within a reasonable timeframe.
Consensus orientation: There are several actors and as many viewpoints in a
given society. Good governance requires mediation of the different interests in
society to reach a broad consensus in society on what is in the best interest of
the whole community and how this can be achieved.
August 2004 41
Equity: All men and women have opportunities to improve or maintain their
well-being.
Effectiveness and efficiency: Good governance means that processes and
institutions produce results that meet the needs of society while making the best
use of resources at their disposal.
Strategic Vision: Leaders and the public have a broad and long-term perspec-
tive on good governance and human development, along with a sense of what
is needed for such development. There is also an understanding of the histori-
cal, cultural and social complexities in which that perspective is grounded.
(UNDP, 1997)
Political, Social and Economic Dimensions of

Governance in Bangladesh
Democracy as an institution is new and still fragile in Bangladesh. Over the
last three decades since her independence, Bangladesh has witnessed several
political hiccups including assassination of two presidents, two army coups and
two major political movements that caused the downfall of political regimes.
Bangladesh has had three general elections during the past decade, all of which
were believed to have been generally free and fair. Yet democracy seems to be
floundering.
Parliamentary System
An effective parliamentary system is a vital element for improving good gov-
ernance. Parliament is the key institution in the national system of accountabili-
ty. As an elected body, it is the organization that empowers the Government and
grants it legitimacy. Parliament scrutinizes the activities of the executive branch
and holds it accountable to the citizens of the country.
However, in Bangladesh experience of parliamentary government has been
far from satisfactory. The first four parliaments proved to be largely ineffective
due to a prolonged boycott by the main opposition parties; the sixth parliament
merits a mention in the Guinness Book of Records for its unexpectedly short
existence. The eighth parliament is now in session. Both the people of
Bangladesh and the donor community, which are working to improve good
governance in Bangladesh, have high expectations that the current parliament
will be more effective. The need for the parliament to perform its role as speci-
fied in the constitution is recognized. However the performance of MPs is
affected by several factors: The interruption of the democratic process during
the past two decades (1971-1990), non-functioning committees of the parlia-
ment, lack of support facilities and services for MPs, and an environment of
political polarization. As a result, critical issues of public policy are not ade-
quately discussed and the executive branch continues to make major policy
decisions without adequate input from the opposition.
A major achievement of parliament has been to activate its committee struc-
ture. The Government has announced that the parliamentary committees will
not be chaired by ministers as has been the case in the past. A private member
can be the chairman of such a committee, known as the select Committee and
the relevant departmental minister only sits as a member. In addition, a prime
minister’s hour to answer questions has been introduced. The Government has
asked for UNDP Support and donors are happy for UNDP to take a lead in pro-
viding support to the parliament.

Democratization Process
Good Governance is the heart of democratization process. Democratization
has been a rewarding experience for us in Bangladesh. Bangladesh government
has made serious and sincere efforts to strengthen democratic institutions and
promote good governance institutions and promote good governance. They
have, in this, always had peoples support. We have put in place the non-party
caretaker government, unique in the world, which assumes the responsibilities
for holding parliamentary elections on completion of normal tenure of an elect-
ed government. Already successive three changeovers took place under this
system. The present government led by Prime Minister Begum Khaleda Zia was
voted into office through such an election in October 2001. The election was a
celebration of Bangladesh’s democratic values.
Corruption
In Bangladesh corruption has existed a long time. This parasitic problem has
grown distinctly since the independence of Bangladesh. The government cor-
ruption has been ignited in every echelon (either public or private sector).
Corruption has long deteriorated Bangladesh society and caused political tur-
moil. According to a survey (2003) developed by Transparency International,
Bangladesh ranks among the most corrupted nation in the world in the
Corruption Perception Index. Good governance can lessen, if not eliminate, all
forms of corruption and corrupt practices. There is little debate concerning the
negative impact of corruption in Bangladesh. The factors that allow corruption
to take place include: weakness in public financial management; low salaries
and lack of incentive structures in the civil service; complex regulatory rules
and procedures; weak public procurement systems; limits to judicial independ-
ence; closed-door practices in policy development, legislative drafting, and pub-
lic decision-making; and a culture of secrecy in public administration. The gov-
ernment has made progress in some areas including enactment of an Anti
Corruption Commission (ACC) ACT.
Freedom of Expression and Speech

Bangladesh constitution speaks of participatory process and accountability of
government’s actions and transparency of decision-making. Freedom of media
is guaranteed. But Bangladesh has experienced severe discourtesy to freedom of
expression and especially to the print media. No newspaper was banned; yet
government continued to exercise control through distribution and sales quotas
of newsprint and government advertisements to newspapers and periodicals.
The Bangladesh newspapers are enjoying freedom of press; newsprint quotas
and distribution of advertisements apparently controls the freedom of expres-
sion of the print media.
Human Rights and Security

Good governance requires human rights: freedom from discrimination and
violence, equal opportunity, due process, freedom of expression and organiza-
tion, and transparent, accountable government. Fundamental rights are guaran-
teed by the constitution of Bangladesh. Human rights is a much neglected issue
in Bangladesh since the country started its journey in 1971.Violation of human
rights was practiced by the rulers of this country in the past and present and we
August 2004 43
can surely forecast that this situation will remain unchanged if something is not
done about it in the future.
For decades, successive governments in Bangladesh have failed to curb seri-
ous human rights violations arising from the use of legislation and widespread
practices in the law-enforcement and justice systems that violate international
human rights standards.
Hence the government should urgently address factors that contribute to
human rights violations, such as a national human rights commission, to inves-
tigate human rights violations. Civil society in Bangladesh would welcome the
creation of such a body with appropriate power to investigate, and forward
their information to the prosecutors so that they undertake prosecution of
offenders. Such a body should, in collaboration with the Bangladesh law com-
mission, review all laws that allow for impunity.
Law and Order, Safety and Security of the Citizens

What the people of Bangladesh aspire for is nothing but the slightest ray of
hope regarding normal life. But an increasing darkness is still falling all over the
land. Gun battles, murders and acid throwing, robbery, oppression of women,
issuing of fatwa (religious edict), blackmail, campus violence etc, have become
everyday incidents and people have little hope of their ending soon.
Torture remained widespread. At least 13 detainees died in police custody.
Police used unnecessary or disproportionate force against demonstrators, injur-
ing hundreds of people, some critically. Over 130 people were sentenced to
death. Two men were executed. Harassment of human rights defenders contin-
ued. Rape and other violence against women were widely reported (Amnesty
International report, 2004). Police torture is increasing day by day people are
continually being battered by the police and law enforcing agents. The police’s
role in maintaining people’s security is very disheartening. The people’s saviors
have become a reason for terror in the minds of the people. The jail situation in
the country is beyond description. Laws and regulations are violated often. The
jail codes and regulation of the eighteenth century are still in practice. Although
an independent state has emerged, its jail code and regulations have not
changed. Therefore, human rights are frequently violated.
Rule of Law
One of the aspiration of our people, and the major goals of our constitution,
is to secure “a society in which the rule of law, fundamental human rights and
freedom, equality and justice-political, economic and social will be secured for
all citizens.” By upholding the rule of law judiciary protects the rights of indi-
viduals to live, work and enjoy without fear or favor. The promotion of good
governance through judiciary depends on its independence to a great extent.
The people of Bangladesh think that the rule of law is just not in practice in
Bangladesh. Civil society is highlighting in particular its concerns with regard to
two specific laws that facilitate endemic human rights violations in Bangladesh:
the Special Powers Act (SPA) which allows arbitrary detention for long periods
of time without charge, and Section 54 of the Code of Criminal Procedure which
facilitates torture in police or army custody.
Calls for the repeal of the SPA has come from the Bangladesh legal communi-
ty and human rights organizations. It has also come from political parties but
only when they are in opposition. When in government, they have defended the
use of the SPA and maintained it.

Independence of Judiciary
The constitution of Bangladesh in its original form devised a scheme of a
completely independent Judiciary. Good governance depends on good and effi-
cient judiciary. To attain that, the nation must make due investments in the judi-
ciary. “A sound and independent judiciary is the sine qua non of a healthy soci-
ety” (Halim, 1998). But it should be mentioned that the independent character
of judiciary has been upheld and a bill is underway in the parliament to ensure
its full independence.
Openness and Availability of Information

The free flow of information is crucial for accountability. Transparency is
built on the free flow of information. In Bangladesh the press is enjoying ade-
quate freedom with the establishment of parliamentary democracy. We have
also anti-hopping law under the official secrecy Act 1935; a bureaucrat may con-
ceal any sort of information. Unfortunately in Bangladesh a large number of
activities remain outside public scrutiny. However, secrecy not only reduces the
efficiency and quality of decision making, it also compromises democracy.
A Road to Good Governance

In contemporary Bangladesh anyone who criticizes the government or
indeed the opposition is branded as a political and, even personal, enemy. This
uninterrupted tradition of official hostility to criticism has, however, been of lit-
tle service to the government since it has proved to be seriously detrimental to
good governance in Bangladesh. Successive governments have convinced them-
selves that those who criticize any failings of policy or aspect of governance are
hostiles, even enemies and probably in collusion with their political opponents.
The concept of this objective criticism thus appears to have become unaccept-
able within the prevailing culture and those criticized are always inclined to
pose a question. What is the intent? This question implies that the critic is moti-
vated by some private agenda; searching for career advancement, patronage or
publicity; is in league with one’s political opponents; or is trying to undermine
some particular person for personal and/or political reasons. Everyone knows
that to create a congenial environment an all-out concerted effort of both the
government and the opposition parties is a must.
In Bangladesh, it is designed to conceal information rather than share it. This
lack of transparency in governance does not limit itself to official dealings with
the public but is even more prevalent within the government. Years of conceal-
ing information has meant that mechanisms of information gathering, storage
and retrieval have fallen into disuse so that any effort to access information
devolves into a major administrative exercise. In the absence of any system of
bottom-up reporting from the field and top-down supervision, systems of
accountability within a ministry remain virtually non-existent. As a result, there
is no basis on which to hold anyone accountable if anything goes wrong within
any part of the government. Our crisis of governance is thus inherent in the sys-
tem of non-accountable administration. Such a milieu of information blackout
and lack of accountability is aggravated by the fact that ministers and secre-
taries rarely visit the field to elicit first hand information. Rare field visits tend
to degenerate into ceremonial exercises carefully managed to conceal damaging
information that reflects poorly on the local or project officials. Such
August 2004 45
management of information is, in many cases, designed to conceal serious ineffi-
ciencies as well as corrupt practices of people along the administrative chain.
Within such an administrative culture of concealment, if a government is gen-
uinely committed to good governance, any person who brings to light particular
wrongdoings within the government is doing them an enormous favor. Such
critics may help to reveal information, which has been kept concealed from the
policy makers either by motivated intent or more often because the system is,
itself, designed to conceal such information.
If however, Ministers really want to improve the quality of governance with-
in their domain they should move to view their critics as their allies in the pur-
suit of good governance. To this end every minister should employ a full time
special assistant whose job would be to go through the newspapers, including
those in conspicuous opposition to the government, and to keep track of semi-
nars where papers are presented with a view to take note of comments of the
limitation of governance in particular areas. Obviously some of these criticisms
will be uninformed, misinformed, weakly argued and even downright tenden-
tious, often with political motive. But even such criticisms may carry a kernel of
truth worth retrieving.
Even patently motivated and malicious criticism, originating from known
political enemies, should not be dismissed since such criticisms need not always
be incorrect. More to the point, even criticism can serve to alert a government to
issues that are agitating the minds of their opponents since such issues could
escalate into a political mobilization against the government. Such issues need
to be confronted at an early stage where it is presented as an argument on
paper, either through remedial governance or by political debate.
Such efforts, including criticism of official actions, should be encouraged and
even rewarded. Ministers should invite their academic critics to share their
information and analysis with them so as to test the validity of their facts and
the logic of their criticism. In such an environment a government widens its
knowledge base, often beneficially, because it obtains information not at its dis-
posal and may even derive useful ideas about corrective action. Even where no
such positive outcomes emerges from such exchanges, a government which
exposes itself to public debate, generates confidence in its openness and builds
an image of being receptive to outside ideas. Each minister should thus hold
periodic exchanges with a cross section of their critics rather than to limit them-
selves to token exchanges with their political friends and personal admirers. All
these observations should apply particularly to the highest office of the Prime
Minister and also the leader of the opposition.
Looking at the behavior of Bangladesh politicians, it seems that they consider
the country as just a piece of land. They forget that all their activities are being
reported in the world media and people are watching. They have constantly
failed to understand that the question of survival in politics does not depend on
patronizing criminals. The fundamental aim of politics is to serve the people,
not to victimize them. It is time for our leaders to break out of this protective
circle and throw open their windows to the world by exposing themselves to
independent opinion, including encounters with their harshest critics. Out lead-
ers should publicly face such critics and challenge them either by a superior-
truth or assimilate their criticisms by putting it to positive use in improving the
quality of governance. Acknowledging error is no sign of weakness but a meas-
ure of political strength and maturity.
Such a self-exposure to criticism by our leaders, thus, presumes that they rec-
ognize that their critics could also be their friends and play a politically benefi-

cial role in our system of governance. It is only in such an open environment of
receptivity to criticism that good governance and political statesmanship in
Bangladesh may be expected to flourish.
Concluding Remarks
We would like to conclude by recognizing that improving governance is
challenging because there are powerful vested interests which benefit from the
status quo and resist change. Courageous political leadership and vigilant citi-
zens who demand change are essential. Good governance initiatives need to
recognize the importance of a conducive political economy and domestic own-
ership to sustainable reforms.Bangladesh achieved nothing because of political
instability. The people of Bangladesh, nevertheless, shows a remarkable
resilience in the face of adversity, often live on hopes. No wonder that a suc-
cessful transition to a democratic government on the threshold of third decade
of the nation’s existence in 1991. In this situation the spirit of the concept of
good governance is essential for Bangladesh.Good governance is a fragile plant
that will need sustained nourishing. It will require a fundamental change in
mentality and social expectations that will change only gradually.
References
1. ADB (1995), Governance: Sound Development Management, Asian
Development Bank
2. ADB (1998), Governance in Asia: From Crisis to Opportunity, Asian
Development Bank
3. Aminuzzaman, Salauddin (1993) “Institutional Process and Practices of
Administrative Accountability: Role of Jatiya Sangshad (Parliament) in
Bangladesh” south Asian Studies Vol.10, No.1, 1993
4. Aminzzaman, Salahuddin, (2000) BUILD CAPACITY, Diagnostic Survey,
CARE Bangladesh 2000.
5. Aminuzzaman, Salahuddin and Baldershein. H; Jamil, 1 (2001), “Electoral
Participation in Bangladesh: Explaining Regional variations,” Commonwealth
and Comparative Politics, Vol. 39, No.1, 2001
6. Kamal, Ahmed (2000) Governance-south Asian Perspective, Dhaka: UPL
7. Kamal, Ahmed (2000) Democracy and poverty: a missing link? AAB Paper,
May 2000
8. Landell-Mills, Pierre and Ismail Serageldin, 1992. ’Governance and the
External Factor’ in Summers and Shah (1992:303-20)
9. Islam, Mahmudul, Constitutional Law of Bangladesh, BILIA, 1995
10. Hasanuzzaman, Al Masud, “Parliamentary Committee System in
Bangladesh,” in Regional Studies, Vol. XII, No. 1 Winter 1994-64, pp.31-39
11. The Public Administration Reform Commission, Dhaka 1998
12. www.aedsb.org/RS-critic.htm
13. Hye, Hasnat A. 1998.Concept paper, International seminar on Good
governance, Ministry of local government, rural development and
cooperatives.
14. World Bank (1996). Government that Works: Reforming the Public Sector.
August 2004 47
15. Dubey, Muchkund (1998).”Good governance and economic development”
paper presented at a seminar on “Bangladesh Beyond 2000” organized by the
American chamber of commerce in Bangladesh.
16. Amnesty International report, 2004.
17. The Bangladesh Today, Saturday, May 15, 2005, p, 5.
18. The Daily Star, Dhaka, Saturday, May 22, 2004, p, 5.
19. Siddiqui, Kamal, Local Government in South Asia: A comparative study,
University press limited Dhaka, Bangladesh 1992.
20. Sobhan,Rehman (1993), Rethinking the role of the state in development: Asian
perspectives, University press limited, Dhaka.
21. Sobhan, Rehman, Bangladesh: Problems of Governance. (Dhaka: UPL, 1993).
22. International Federation of Accountants, Public Sector Committee: Governance
in the Public Sector: A Governing Body Perspective (New York: IFAC, August
2001).

August 2004 49
Which Financial Reports in the
Public Sector Should be Subject to
External Attestation
By: Dr. Jesse Hughes, CPA, CIA, CGFM
Professor Emeritus of Accounting
Old Dominion University
Norfolk, VA 23664
Email-jhughes@odu.edu
and
Wayne Cameron, FCPA, FCA, FIPPA
Auditor-General
Victorian Auditor-General’s Office
Melbourne Victoria 3000
Email-wayne.cameron@audit.vic.gov.au
Introduction
The International Auditing and Assurance Standards Board (IAASB)
has been established by the International Federation of Accountants
(IFAC) as the authoritative body to develop international standards on
quality control, auditing, assurance, and related services.1 Included with-
in the Preface referenced in the footnote below, is the structure of the
IAASB’s technical pronouncements.2 An adaptation of this structure is
reflected in Appendix A.
In the application of the international standards for assurance engage-
ments, by and large no distinction is made between the private and pub-
lic sector. “Public sector” refers to national governments, regional (state,
provincial, territorial) governments, local (city, town) governments and
related governmental entities (agencies, boards, commissions and enter-
prises). In circumstances where specific basic principles, essential proce-
dures or guidance contained in an ISA are not applicable in a public
sector environment, or when additional guidance is appropriate in such
an environment the Public Sector Committee (PSC) of IFAC so states in
a Public Sector Perspective (PSP) at the end of the International Standard
on Auditing (ISA), the International Standard on Review Engagements
(ISRE), or the International Standard on Assurance Engagements (ISAE).
When no PSP is added, the ISA, ISRE, or ISAE is to be applied as written
to engagements in the public sector.
The distinction between the private and public sector relative to
accounting standards is that International Accounting Standards (IASs)3
only apply to the private sector. To fill the void in the public sector, the
PSC has been established as the authoritative body to develop
International Public Sector Accounting Standards (IPSASs). The core
set of accrual IPSASs are drawn primarily from the IASs with the IASs

revised by the PSC, where appropriate, for application to the public sector.4
Additional IPSASs are presently being developed that go beyond those IASs
published for the private sector. An example is the Cash Basis IPSAS that is
effective for annual financial statements covering periods beginning on or after
January 1, 2004.5
This paper briefly reviews accounting standards applicable to the public
sector throughout the world. In addition, the types of public sector financial
reports (including budgetary reports) are discussed. Further, guidelines are
suggested for application of the ISAs, ISREs, and ISAEs approved by the IAASB
to the general purpose financial reports prepared by the public sector in accor-
dance with the IASs and IPSASs. In addition, other public sector financial
reports (i.e., budget and statistical reports) not presently required by the
IPSASs are considered in the paper.
Public Sector Financial Reports

The public sector is comprised of a wide range of different entities that apply
the IASs and the IPSASs. It is important to distinguish between Government
Business Enterprises (GBEs) and other public sector entities since IPSASs do
not apply to GBEs as stated below:
“GBEs are required to comply with IASs issued by the International Accounting
Standards Committee. The Public Sector Committee’s Guideline No. 1 ’Financial
Reporting by Government Business Enterprises’ notes that IASs are relevant to all
business enterprises, regardless of whether they are in the private or public sector.
Accordingly, Guideline No. 1 recommends that GBEs should present financial state-
ments that conform, in all material respects, to IASs.”6
A GBE has the following characteristics: has power to contract in their own
name, is assigned financial and operational authority to carry on a business, can
sell goods or services to other entities at a profit or full cost recovery, is not
reliant on continuing government funding to be a going concern, and is con-
trolled by a public sector entity.
The International Accounting Standards Committee referenced earlier has
been renamed the International Accounting Standards Board and the IASs have
been renamed the International Financial Reporting Standards (IFRSs). In accor-
dance with the IFRSs, all GBEs (and all private sector entities) would issue the
following financial statements using the accrual basis of accounting: Balance
Sheet, Income Statement, Statement of Changes in Equity, and Statement of
Cash Flows8 as well as a summary of significant accounting policies and related
notes.
Many public sector entities (other than GBEs) throughout the world will use
a cash basis of accounting to account for government operations at all levels of
government since the cash information is more readily available (and some
would argue, more readily understandable). Further, it is simple to implement
and costs are low due to the lower level of accounting skills required.
Consequently, as mentioned earlier, the PSC has issued a Cash Basis IPSAS that
requires a Statement of Cash Receipts and Payments. In addition, the Cash
Basis IPSAS encourages entities using the cash basis of accounting to disclose
additional information pertaining to assets, liabilities and comparisons to
budgets in the notes to the required statement.
Some public sector entities have implemented the accrual basis of accounting
for application to government operations or are in the process of implementing
the accrual basis. These entities would apply the accrual IPSASs (1 through 20).
August 2004 51
IPSAS 1 stipulates the following financial statements: Statement of Financial
Position, Statement of Financial Performance, Statement of Changes in Net
Assets/Equity, and Cash Flow Statement as well as a summary of significant
accounting policies and related notes.
In addition to the IPSAS approved by the PSC, the International Monetary
Fund (IMF) has published the Government Finance Statistics Manual (GFSM)9
that identifies statements required for statistical reporting purposes. These sta-
tistical statements also require reporting on the accrual basis and are as follows:
Balance Sheet, Statement of Government Operations, Statement of Sources
and Uses of Cash, and Statement of Other Economic Flows. Although there
are some key differences between the IPSASs (e.g. historical cost is encouraged
as the benchmark treatment) and the GFSM (e.g. current cost is required), the
PSC has a project underway to eliminate these differences to the maximum
extent possible.
In addition to the general purpose financial reports required by the IPSASs
and the statistical statements required by the IMF, most governments will issue
budget reports at the beginning of the fiscal period. Many would consider these
budget reports as the most important financial statements issued by govern-
ments since they are usually published and frequently commented upon in the
mass media. In many cases, these budget reports are on a cash basis of account-
ing and would include the legally adopted, annual or biennial budgets and
the three- to five-year prospective budgetary reports. (Some governments do
prepare accrual budgets—but in almost all cases these budgets are prepared on
a GFS, i.e. statistical, basis). These budget reports are referred to as ex-ante
budget reports and are published for transparency purposes to inform the
electorate about the financial plans and policies for government operations.
Although these budget reports are not required by the IPSASs or the IMF,
preparation and publication is highly recommended by the IMF and the World
Bank since they have been provided to Parliament to support Appropriation
Bills.10
In addition to the ex-ante budget reports, most governments will prepare
budget to actual comparative statements at the end of the accounting period.
These are referred to as ex-post budget reports to inform the electorate about
the degree of adherence to the budget for accountability purposes. Although
this comparative report is not required, preparation and publication is encour-
aged by the PSC11, as well as the IMF and the World Bank referenced earlier. If
the budget is on one basis (i.e. cash) and accounting is on another basis (i.e.
accrual), a reconciling statement is sometimes prepared to identify the differ-
ences between the two systems. Budget reports usually only cover the General
Government sector whereas accrual ex-post accounting statements comprise the
consolidated whole-of-government accounting statements. One might have
thought comparison between the two reports would have been made easier
because the latter document will include segment information enabling compar-
isons to be made back to the budget papers; however, comparative analysis is
frequently made difficult with the budget being prepared on a GFS (statistical)
basis and the segmental data derived from GAAP.
Assurance Engagements
To implement the structure of technical pronouncements, the IAASB has
established an International Framework for Assurance Engagements. Critical
definitions from that framework are included below:12

Assurance engagement—an engagement in which a practitioner expresses a
conclusion designed to enhance the degree of confidence of the intended users
other than the responsible party about the outcome of the evaluation or meas-
urement of a subject matter against criteria (p. 4). The elements of an assurance
engagement are as follows: a three party relationship involving a practitioner, a
responsible party, and intended users; appropriate subject matter; suitable crite-
ria (may include International Financial Reporting Standards or International
Public Sector Accounting Standards-p. 12); sufficient appropriate evidence; and
a written assurance report in the form appropriate to a reasonable assurance
engagement or a limited assurance engagement (p. 8).
Reasonable assurance—reduction in risk to an acceptably low level in the
circumstances of the engagement as the basis for a positive form of expression
of the practitioner’s conclusion (p. 5). For reasonable assurance engagements
regarding historical financial information, these engagements are called audits
(Footnote 2, p. 3).
Limited assurance—reduction in risk to a level that is acceptable in the cir-
cumstances of the engagement, but where that risk is greater than a reasonable
assurance engagement, as the basis for a negative form of expression of the
practitioner’s conclusion (p. 5). For limited assurance engagements regarding
historical financial information, these engagements are called reviews
(Footnote 2, p. 3).
In a reasonable assurance engagement (including an audit of historical finan-
cial information), the auditor must accumulate enough evidence to be in a posi-
tion to express a conclusion in the positive form. An example of the positive
form follows: “In our opinion the financial statements are fairly stated, in all
material respects, based on (the criteria used)”. Gathering sufficient appropriate
evidence is part of an iterative, systematic process that involves obtaining an
understanding of internal control and determining the degree of compliance
with laws and regulations as well as evaluating the sufficiency and appropriate-
ness of the evidence. Procedures used would include inspections, observations,
confirmations, analytical procedures and inquiries. Where applicable, substan-
tive procedures would be used to obtain corroborating information from
sources independent of the responsible party. In addition, for most subject mat-
ters, tests of the operating effectiveness of internal controls would be performed
where relied on. For instance, if you can prove a number (e.g. interest) analyti-
cally, one wouldn’t test internal controls in that area. The same is often the case
for Payroll.
In a limited assurance engagement (including a review of historical financial
information), the auditor must accumulate enough evidence to be in a position
to express a conclusion in the negative form. An example of the negative form
follows: “Based on our work described in this report, nothing has come to our
attention that causes us to believe that the financial statements are not fairly
stated, in all material respects, based on (the criteria used).” Sufficient appropri-
ate evidence for reviews of financial statements is obtained primarily through
analytical procedures and inquiries.
An unqualified conclusion is not appropriate for either type of assurance
engagement if there is a material limitation on the scope of the auditor’s work
or if a material error is revealed. In these instances, a qualified or adverse
opinion would be more appropriate or a disclaimer of an opinion might be
warranted.
August 2004 53
As identified in the Structure of the IAASB’s Technical Pronouncements (see
Appendix A), the international framework for assurance engagements compris-
es the following:
(1)Audits and reviews of historical financial information; and
(2)Assurance engagements other than audits or reviews of historical financial
information. ISAs 200-799 will apply to audits and be compiled from current
ISAs 210-799. ISREs 2000-2699 will apply to international standards for
review engagements and be compiled from current ISA 910. A project is
underway to more clearly define the coverage in Special Purpose Audit
Engagements (ISA 800). ISA 800 discusses the following reports:13
1. Reports on Financial Statements Prepared in Accordance with a
Comprehensive Basis of Accounting other than International Accounting
Standards or National Standards. (The cash receipts and disbursements
basis of accounting as well as the financial reporting provisions of a
government regulatory agency are identified as examples for these
financial statements);
2. Reports on a Component of Financial Statements;
3. Reports on Compliance with Contractual Agreements; and
4. Reports on Summarized Financial Statements.
The Structure further specifies Assurance Engagements on Subject Matters
Other than Historical Financial Information. An international standard has been
issued to apply to such assurance reports dated on or after January 1, 2005.14
One aspect of these assurance engagements pertains to the examination of
prospective financial information as spelled out in ISAE 3400.15 When reporting
on the reasonableness of management’s assumptions, the auditor provides only
a limited level of assurance with a conclusion in the negative form. However,
when in the auditor’s judgment, an appropriate level of satisfaction has been
obtained, the auditor is not precluded from expressing a conclusion in the posi-
tive form regarding the assumptions.16
Applicability of Assurance Engagements to Public Sector

Financial Reports
Year End Historical Financial Information:
GBEs. IPSAS 1 clearly specifies that GBEs are to follow the IASs.
Consequently, the audit expectations for GBEs would be the same as those for
the private sector. That is, the annual financial statements published by the
GBEs would be expected to be subject to an audit with a positive form of con-
clusion expressed by the auditor. If interim financial statements are issued, a
review (or audit in some jurisdictions) would be performed by the auditor.
Public Entities using the Accrual IPSASs. General purpose financial state-
ments issued by all levels of government using the accrual IPSASs (1-20) would
be subject to the full range of ISAs 200-720. That is, an audit would be per-
formed and an audit report with a positive form of conclusion would be issued
by the auditor.
Public Entities using the Cash Basis IPSAS. Most governments throughout
the world currently prepare their financial reports on the cash or near cash
basis. Although the current ISA 800 identifies the “cash receipts and disburse-
ments basis of accounting” as other than a comprehensive basis specified by
IASs, the Cash Basis IPSAS identifies these statements as general purpose

financial statements. Thus, financial reports by governments using the Cash
Basis IPSAS would be subject to audit as a regular audit engagement under ISA
200-799 with reasonable assurance expressed by the auditor.
GFS Manual 2001. Although these reports are not considered general pur-
pose financial statements, data is extracted from the general purpose financial
statements prepared by the accounting system and reformatted into the statisti-
cal report format desired by the IMF and the United Nations. Yet, these reports
are not presently subject to external attestation. These reports could be consid-
ered special purpose reports subject to the ISAs. As such, any examination
would include forecast data, non-financial data, and non-complying financial
statements. If such attestation is requested, it should be considered a special
purpose audit engagement (ISA 800) with a positive conclusion expressed by
the auditor. Particular care will be required in preparing an audit report to
ensure that the auditor is not appearing to confirm that both the GAAP based
financial statements and the GFS based financial statements represent fairly the
general purpose financial statements of the entity. However, a review could be
performed under ISRE 2400 if a higher level of risk is acceptable. In that case, a
negative conclusion would be expressed by the auditor.
Comparative Budget to Actual Financial Statement. For accountability pur-
poses, many governments prepare comparative budget to actual financial state-
ments at the end of the fiscal period. Even though these statements are often not
subject to external attestation, the actual data will be audited as part of the gen-
eral purpose financial statement audit since the auditor is required to ensure
financial data elsewhere in the report is not inconsistent with the audited num-
bers. If external attestation is desired, these statements should be subject to
audit as a special purpose audit engagement (ISA 800) with reasonable assur-
ance provided by the auditor. However, a review could apply under ISRE 2400
if substantive tests are not to be performed due to cost constraints. In that case,
a negative conclusion would be expressed by the auditor.
At least one country (United States17) specifies that budgetary comparative
information be presented in schedules as part of required supplemental infor-
mation. Or, if desired, this information could be presented in a budgetary com-
parison statement as part of the basic financial statements. This comparative
information is also required in New Zealand and desired in Australia. When
external attestation is desired, schedules would be subject to a review while
statements would be subject to an audit. The budget data may not be audited,
but the actual data is audited as part of the regular audit of the general purpose
financial statements. That leaves at large the question of consistency of account-
ing policies (i.e. measurement between budget and actual).
Assurance Engagements on Subject Matters Other Than Historical
Financial Information:
Prospective financial information will be based on many assumptions about
future conditions and events that may or may not occur. The quality of the
information will be dependent largely on the appropriateness of these assump-
tions. At least one country (New Zealand18) suggests that an independent third
party should review these assumptions as a valuable aid to reduce internal bias,
and to provide an additional perspective on the validity of the assumptions.
Further, in the State of Victoria in Australia, the Supreme Auditor is required to
examine the compilation of the ex-ante Estimated Financial Statements pub-
lished by the government, the reasonableness of the assumptions applied,
and the consistency of the application of those assumptions with the budget
information.
August 2004 55
Legally Approved Budgets. For transparency purposes, governments are
encouraged to publish their legally approved budgets (generally, one year fore-
casts). Yet, these budgets are not subject to external attestation. If such attesta-
tion is requested by the legislative body to assure that the assumptions are rea-
sonable and the presentation is fair/accurate, these budget reports should be
subject to a review under current ISAE 3400 with limited assurance provided by
the auditor.
Projected Financial Statements or Schedules. Governments are encouraged
to provide budgetary projections (generally for 3-5 years) as a component of the
Medium Term Fiscal Framework or other projected financial requirements. Yet,
these reports are not presently subject to external attestation. If such attestation
is requested, these statements should be subject to a review under ISAE 3400
with limited assurance provided by the auditor.
A breakout, by type of report, on these conclusions is provided below:
Nature of Engagement
Regular Special Review Current
Audit Purpose International
Audit Standards
Government XX ISA 200-799
Business
Enterprises
Government
Operations:
Accrual IPSAS XX ISA 200-799
Cash IPSAS XX ISA 200-799
Budget to Actual XX Or XX ISA 800 or
Comparative ISRE 2400
Statement
Government XX Or XX ISA 800 or
Finance Statistics ISRE 2400
Manual 2001
Legally Approved XX ISAE 3400
Budget
Projected Budget XX ISAE 3400
Conclusion
Many financial reports are prepared and published by public entities. Yet,
only selected year-end historical reports are subject to external attestation. It is
sometimes unclear which level of assurance that an auditor is expected to apply
for financial reports that are not considered general purpose financial state-
ments. This paper has examined the existing ISAs, ISREs, and ISAEs. It has sug-
gested which public sector financial reports should be subject to external attesta-
tion and the level of assurance that should be provided. The table below sum-
marizes the conclusions:

Framework for Assurance Engagements and
Related Services In the Public Sector
Assurance Engagement Related Services
Nature of Historical Financial Other Than Agreed-upon Compilation
Service Information Historical Procedures
(includes year-end) Financial
IPSAS and IMF Information
reports) (includes ex-ante
budget reports
Level of Reasonable or Reasonable or No assurance No assurance
Assurance limited, but not limited, but not
Provided by absolute, assurance absolute, assurance
the Auditor
Report Positive Positive Factual Identification
Provided or negative or negative findings of of information
assurances on assurances on procedures compiled
assertion(s) assertion(s)
As an independent body, the Supreme Audit Institution or other independent

audit body in each country is responsible for the audit or review of public sector
financial reports at the appropriate tier of government. The organization that
represents the Supreme Audit Offices is the International Organization of
Supreme Audit Institutions (INTOSAI). The Ministry of Finance (or equivalent)
in each country is generally responsible for the preparation and publication of
applicable public sector financial reports. The organization that represents the
Ministries of Finance is the International Consortium of Government Financial
Managers (ICGFM).19
The application of the guidelines identified in this paper to the Structure of
IAASB’s Technical Pronouncements is identified in Appendix B. Although these
are not authoritative guidelines, they hopefully will provide a basis for debate
and research to ensure that reliable and verifiable information is provided to the
public in the form of governmental financial reports.
Acronyms
The highly technical nature of this article requires extensive use of acronyms.
Those used are summarized here for ease in reading the article.
Generally Accepted Accounting Principles (GAAP)
Government Business Enterprise (GBE)
Government Finance Statistics (GFS)
Government Finance Statistics Manual (GFSM)
International Accounting Standard (IAS)
International Accounting Standards Board (IASB)
International Auditing and Assurance Standards Board (IAASB)
International Federation of Accountants (IFAC)
International Financial Reporting Standard (IFRS)
International Consortium of Government Financial Managers (ICGFM)
International Monetary Fund (IMF)
August 2004 57
International Organization of Supreme Audit Institutions (INTOSAI)
International Public Sector Accounting Standard (IPSAS)
International Standard on Assurance Engagement (ISAE)
International Standard on Auditing (ISA)
International Standard on Quality Control (ISQC)
International Standard on Review Engagement (ISRE)
International Standard on Related Services (ISRS)
Public Sector Committee (PSC)
Public Sector Perspective (PSP)
End Notes
1. Preface to the International Standards on Quality Control, Auditing, Assurance
and Related Services (IFAC, July 2003).
2. Ibid, p. 12. Although related services (primarily agreed-upon procedures
and compilations) are included in the structure, they are not addressed in this
paper since no external attestation is provided in the auditor’s report.
3. Issued by the International Accounting Standards Board.
4. Handbook of International Public Sector Accounting Standards (IFAC, 2003
Edition).
5. Financial Reporting Under the Cash Basis of Accounting, Cash Basis IPSAS
(IFAC, January 2003).
6. Op. cit., Pg. 29, IPSAS 1-Presentation of Financial Statements.
7. Ibid, p. 32.
8. IAS 1-Presentation of Financial Statements, Handbook of International
Accounting Standards (IASB, 2003 Edition).
9. Government Finance Statistics Manual (IMF, 2001).
10. Public Expenditure Management Handbook (The World Bank, 1998) and the
Code of Good Practices on Fiscal Transparency (IMF, 2003).
11. Para. 22, IPSAS 1 (IFAC, May 2000) and Para. 2.1.36, Cash Basis IPSAS
(IFAC, January 2003).
12. International Framework for Assurance Engagements (IFAC, December 2003).
13. Pp. 551-566, ISA 800, The Auditor’s Report on Special Purpose Audit
Engagements (IFAC Handbook of International Auditing, Assurance, and Ethics
Pronouncements; 2004 Edition).
14. International Standard on Assurance Engagements 3000, “Assurance
Engagements Other Than Audits or Reviews of Historical Financial
Information” (IFAC, December 2003).
15. Pp. 926-935, ISAE 3400, The Examination of Prospective Financial
Information (IFAC Handbook of International Auditing, Assurance, and Ethics
Pronouncements; 2004 Edition).
16. Ibid, p. 928.
17. Budgetary Comparison Schedules-Perspective Differences, Governmental
Accounting Standards Board Statement No. 41, May 2003.

18. Par. 5.18, Financial Reporting Standard No. 29, Prospective Financial
Information (April 1996). This Standard applies to the Crown and all depart-
ments, Offices of Parliament and Crown entities, as well as local authorities.
19. For further information see www.intosai.org or www.icgfm.org.
Structure of Pronouncements Issued by the IAASB
IFAC Code of Ethics for Professional Accountants
ISQCs 1-99 International Standards on Quality Control
Related Services
International Framework for Assurance Engagements
Framework
Audits and Reviews of Historical Assurance Engagements Other Than

Financial Information Audits or Reviews of H istorical Financial Information
ISREs 2000 - 2699 ISAEs 3000 -3699

ISAs 100 -999
International Standards International Standards ISRSs 4000 -4699
International Standards
On Review On Assurance International Standards
On Auditing
Engagements Engagements On Related Services
IAPSs 1000 - 1999 IREPSs 2700 - 2999 IAEPSs 3700 - 3999 IR SPSs 4700 -4999
International Auditing Reserved for Reserved for Reserved for
Practice Statem ents International Review International Assurance International R elated
Engagement Practice Engagement Practice Services Practice
Statements Statements
Structure of Pronouncements Issued by the IAASB

As Applied in the Public Sector
IFAC Code of Ethics for Professional Accountants
ISQCs 1-99 International Standards on Quality Control
Related Services
International Framework for Assurance Engagements
Framework
Aud its and Reviews of Historical Assurance Engagements Other Than

Financial Information Au dits o r Reviews of Historical Financial Information
ISR Es 2000 -2699 ISAEs 3000 -3699

ISAs 100 - 999
International Standar ds International Standards ISRSs 4000 - 4699
International Standards
On Review On Assurance International Standards
On Auditing
Engagem ents Engagem ents On Related Services
IAPSs 1000 -1999 IREPSs 2700 -2999 IAEPSs 3700 -3999 IR SPSs 4700 -4999
International Auditing R eserved for Reserved for Reserved for
Practice Statem ents International Review International Assurance International Related
Engagement Practice Engagement Practice Services Practice
Statements Statements
Accru al IPSA S
Standards Cash Bu dget to Actu al IMF Leg ally Pro jected
( IFRSs & Standard Comp arative Statistical Approved Bud getary
IPSASs) Schedule Statemen ts Bud get Info rmatio n
August 2004 59
Promoting Government Accountability:
Critical Elements in Establishing or
Enhancing Audit Legislation
Linda L. Weeks, CGFM
Executive Director-ICGFM
Email: ICGFM@yahoo.com
“Financial accountability is a necessary condition for efficient public management

and hence for the management of funds in favor of poverty reduction, health and educa-
tion, a clean environment, and peace.”1
James D. Wolfensohn, President, The World Bank Group
Institutions supporting and promoting development initiatives around the

globe are increasingly focusing attention on accountability as an essential ele-
ment for sustainable development, and there is growing recognition that an
effective national audit office is crucial to ensuring accountability. As a conse-
quence, donor organizations are more critically examining national audit offices,
also known as supreme audit institutions (SAIs), in recipient countries. In many
cases, as part of an overall sustainable development strategy, projects have been
initiated to enhance and strengthen SAIs.
Because a carefully crafted audit law is an essential underpinning for an
effective national audit office, many SAI-related projects concentrate on audit
legislation. As new audit laws are being developed and existing audit laws are
being revised, certain critical elements and the general principles and practices
that define them should be considered. This paper was originally developed for
the Inter-American Development Bank in conjunction with a project to revise
the national audit act in the Co-operative Republic of Guyana, but the guiding
tenets cited can be applied in any effort to draft or revise audit legislation.
Independence—The Most Critical Factor

SAI independence, with the challenges related to establishing and maintain-
ing independence, has always been a primary issue for all national audit offices.
The International Organization of Supreme Audit Institutions (INTOSAI) is
the internationally recognized organization of supreme audit institutions in
countries that belong to the United Nations or its specialized agencies. Since its
founding in 1953, INTOSAI has supported its member organizations and their
governments in improving financial management, enhancing good governance,
and ensuring accountability. Through its specialized committees and its regional
working groups, INTOSAI supports its members in establishing standards, shar-
ing expertise, training staff, and developing methodology. SAI independence
has always been a major topic for INTOSAI studies, programs and publications.
INTOSAI’s Lima Declaration
“Independence (of the SAI) is also required to be anchored in the legislation.”2
Dr. Franz Fiedler, Secretary General of INTOSAI

INTOSAI directs significant attention to the issues and challenges influencing
audit office independence. The Lima Declaration of Guidelines on Auditing Precepts,
adopted by INTOSAI in 1977 and republished in 1995, is recognized globally as
the primary document defining an SAI. The basic principles included in the
Lima Declaration are timeless, and they are consistently applied in international
discussions, standards, guidelines, and reports.
The Lima Declaration directs attention to several key elements related to estab-
lishing and maintaining SAI independence. The Lima Declaration states that:
“Supreme Audit Institutions can accomplish their tasks objectively and effec-
tively only if they are independent of the audited entity and are protected
against outside influence.”
“ Although state institutions cannot be absolutely independent because they
are part of the state as a whole, Supreme Audit Institutions shall have the func-
tional and organizational independence required to accomplish their tasks.”
“In particular, adequate legal protection by a Supreme Court against any
interference with a Supreme Audit Institution’s independence and audit man-
date shall be guaranteed.”
“The independence of Supreme Audit Institutions is inseparably linked to
the independence of its members.”
“In their professional careers, audit staff of Supreme Audit Institutions must
not be influenced by the audited organizations and must not be dependent on
such organizations.”
“Supreme Audit Institutions shall be provided with the financial means to
enable them to accomplish their tasks.”
“If required, Supreme Audit Institutions shall be entitled to apply directly
for the necessary financial means to the public body deciding on the national
budget.”
“Supreme Audit Institutions shall be entitled to use the funds allotted to
them under a separate budget heading as they see fit.”
INTOSAI’s Task Force on the Independence of SAIs
“It is also essential that the mandate of SAIs and the authority and protection that
they need to discharge their responsibilities be set out clearly in the constitution and/or
legislation. This is required if SAIs are to be in a position to fulfill their mandate, inde-
pendent from undue direction or interference from government.”3
L. Denis Desautels, FCA, Auditor General of Canada, Chair of the INTOSAI
Task Force on the Independence of SAIs
The INTOSAI Task Force on the Independence of SAIs was established in
1999 to examine the state of independence of member institutions and make rec-
ommendations on ways and means to bring about realistic improvements. They
conducted an extensive survey of SAIs, reviewed current literature, consulted
with selected SAIs, and met with international financial institutions and techni-
cal co-operation agencies. They circulated a draft of their report to the members
of INTOSAI’s Governing Board, modified the draft, and presented their final
report at the INTOSAI Congress in 2001.
Recommendations in the final report identified several “core principles of
SAI independence” generally recognized as “essential requirements of proper
public sector auditing.” These core principles included:
1. The existence of an appropriate and effective constitutional/statutory/legal
framework and of defacto application provisions of this framework.
August 2004 61
2. The independence of the SAI Head and “Members” (in collegial organiza-
tions), including security of tenure and legal immunity in the normal
discharge of duties.
3. A sufficiently broad mandate and full discretion in the discharge of SAI
functions.
4. Unrestricted access to information.
5. The right and obligation to report on their work.
6. The freedom to decide on the content and timing of audit reports and to
publish and disseminate them.
7. The existence of effective follow-up mechanisms on SAI recommendations.
8. Financial and managerial/administrative autonomy and the availability of
appropriate human, material and monetary resources.4
SAI Practices
As international and regional financial institutions and technical cooperation
agencies have studied national audit offices, they too have identified independ-
ence as a critical factor. Jack Titsworth and Rick Stapenhurst published a World
Bank Discussion Note about Supreme Audit Institutions and reported that:
“Independence is a fundamental feature of all advanced countries’ SAIs.
Independence must be clearly enunciated and the personal independence, based upon
appointment and secure tenure of the Auditor General, (sometimes a chair or president)
or Court of Audit members, has to be clearly established in legislation and acknowl-
edged in tradition. The AG’s autonomy is essential, given the need to report directly to
Parliament without interference from other government branches. The SAI and its
leader’s independence are the hallmark of its effectiveness. It must be completely
sovereign to determine what it audits and how to conduct those audits.”5
When INTOSAI’s Committee on EDP/IT Audit published its compendium of
SAI mandates, it organized the document around four major attributes—inde-
pendence and administrative powers were two of them. Within the framework,
independence includes mode of appointment, qualification, tenure, removal and
conditions of service for the auditor general; administrative powers include
budget allocation and appointment of staff.6 An examination of selected SAI
mandates included in the compendium offers an array of strategies that have
been adopted to provide SAIs with the requisite independence in different polit-
ical systems and in diverse social and cultural environments.
Essential Elements in Establishing Independence
To ensure SAI independence, it is clear that at least four essential elements
must be addressed in developing or revising audit legislation.
1. Auditor General: The appointment process, length of term, and conditions
of remuneration and retirement (and/or removal from office) must guarantee
that the head of the audit office is free from political and/or financial pres-
sure and influence.
(a) It is essential that the appointment process be as free as possible from
political influence. This may depend upon identifying candidates through a
collaborative process involving various political groups, professional organi-
zations, and/or governmental entities. Although approaches vary, these sys-
tems generally rely upon one party, organization or entity proposing one or
more candidates and then another party or entity selecting the candidate(s)
for a final review and confirmation process. The intent is to assure that a
well-qualified Auditor General is selected and that this person is not

obligated or beholden to any particular individual, party, or single
governmental entity.
(b) While the length of the Auditor General’s term of office may vary from
country to country, it should be long enough to protect the head of the SAI
from political influence or pressure. A lifetime appointment or an appoint-
ment until a mandatory retirement age is one way to meet this condition.
Another option is to establish a lengthy fixed term, exceeding the terms for
most elected officials, which does not permit a reappointment. For example,
in the U.S., the Comptroller General serves for 15 years—the maximum time
a President could serve is eight years, and although they can be re-elected, a
Senator’s term is six years and a Representative’s term is two years. Other
countries have established “lengthy” terms ranging from seven to 12 years.
The determination of the range for a “long” term must be developed in the
context of the country’s overall government structure.
(c) Salary, benefits, and the retirement allowance must be sufficient to assure
that the Auditor General is reasonably free from personal financial pressure.
The salary and benefits for the Auditor General are often set at a level com-
mensurate with cabinet level positions or Supreme Court justices. In many
cases retirement benefits are also set at a relatively high rate, and in some
instances the head of the audit office may retire at full salary for life. Often
the legislation may place a limitation on future (post-retirement) job
opportunities—i.e, prohibitions against running for political office,
accepting government employment, working on government contracts, etc.
(d) The criteria and process for removing the Auditor General from office
should also be set forth in the audit legislation. Generally these would be
comparable to the conditions and procedures that would be used to remove
Supreme Court justices or the highest elected officials.
2. Budget: Recognizing that the SAI is part of government, it is still important
to establish its financial autonomy. An audit office that audits the ministry
that in turn can control the SAI’s budget is seriously handicapped. The SAI’s
budget approval process should not be subject to review and modification by
any other government entity other than the authority approving the budget.
Likewise, the allocation and disbursement of funds should not require addi-
tional action by an intermediary government agency. The most desirable
approach is to have the budget request go directly from the SAI to the
authorizing authority (usually the legislature). If it is necessary to put the
budget through a finance or treasury ministry so that it can be incorporated
in the larger national budget, there should be stipulation that the request is
“passed through” without any changes to the request. Under no circum-
stances should the treasury or finance departments have an ability to alter,
delay, or amend the request for and disbursement of SAI funds.
3. Staff: The human capital in an SAI is as critical to its effective operations as
the budget, and in establishing or revamping an audit office, it is important
to consider strategies and systems related to SAI personnel. Staff must be
independent; they must be well qualified and well trained; they must be ade-
quately compensated, and they must be held to the highest ethical standards.
They cannot effectively audit a government department that has the authori-
ty to hire, promote, reward, discipline, or dismiss them. Although the provi-
sions of the SAI’s personnel system may almost exactly mirror those of the
rest of government, it is important to recognize that they should be treated
separately from the rest of the civil service. Therefore, a separate human capi-
tal or personnel system should be established in the audit legislation,
August 2004 63
although details of policies and procedures may be handled in subsequent
regulations.
4. Public Reporting: Audit legislation should establish clear procedures and the
timeframes and processes for issuing audit reports to the public. If the SAI is
to be effective in assuring public accountability, its reports cannot languish in
the office of a minister, a legislator, or a committee chair. The SAI, through
the government audit standards, can detail the process for conducting its
work and preparing its reports, but the audit law should specify how reports
should be handled once they are complete. The law should prescribe a rea-
sonable timeframe clearly delineating how long a minister, a committee, or
the legislature may hold a report before it becomes available to the public.
Standards and Audit Responsibilities—Additional Major

Considerations
Adequate attention must be given to the SAI’s role in establishing standards
and the delineation of its audit responsibilities. Although this may be secondary
to the attention devoted to independence issues, they should nonetheless be
considered in preparing audit legislation.
Standards
Recognizing that government is different from the private sector, internation-
al and national private sector standards must be created, or adapted and modi-
fied, to meet the needs of government. The SAI’s responsibility to establish
government auditing standards should be included in audit legislation.
In order to effectively carry out its work, an SAI (and others conducting
audits of government activities) should act in accordance with documented
policies and procedures that are usually described as the “generally accepted
government auditing standards.” These policies and procedures provide the
framework within which audit engagements are planned and implemented, and
they provide the criteria against which the quality of the completed audits may
be measured. INTOSAI and other international and national standard setting
bodies have developed public sector audit standards and guidelines that may
be used in creating specific national standards for government auditing. While
the auditing standards are not generally included in the audit legislation, it is
important to note that the audit law should clearly state that the SAI is the gov-
ernment entity charged with the responsibility for developing, introducing,
applying (or evaluating other’s application of) the government’s auditing stan-
dards.
While other departments, ministries, institutions, or organizations may be
responsible for establishing the standards for government accounting and/or
for conducting government investigations the SAI should also be part of those
developmental processes. Ideally the SAI should be included as these account-
ing and investigative standards are being written—at a minimum the SAI
should be involved in reviewing and commenting on such standards before
they are adopted. This is important because the accounting and investigation
standards will be used in conjunction with the auditing standards. Mention of
the SAI’s role in these activities should be included in the audit law or in other
legislation.
Audit Responsibilities
The audit law should include a statement or statements about the scope of
the SAI’s audit responsibilities.

INTOSAI’s guidelines describe a range of audit activities. The Lima
Declaration and the subsequently issued INTOSAI Auditing Standards discuss the
SAI’s responsibilities for conducting financial and performance audits. The Lima
Declaration also goes on to describe many specific types of audits. The SAI’s
obligation to examine and report on internal (or management) controls is high-
lighted in INTOSAI’s Auditing Standards and its Internal Control Guidelines.
INTOSAI has also issued guidance on conducting audits related to information
systems, public debt, privatization, and the environment. Generally audit legis-
lation includes the SAI’s responsibility for conducting financial, performance,
and internal/management control audits, although some countries do include
language about other more specific types of audits (i.e., information systems).
Some audit laws use very broad principles to describe the audit mandate for
the SAI (and then rely upon the SAI’s auditing standards to provide more spe-
cific descriptions of the work performed) while other audit laws include very
specific requirements. In drafting an audit law it is important to identify the
approach most appropriate to the SAI’s political and cultural environment. For
example, the Budget and Accounting Act of 1921, establishing the U.S. General
Accounting Office, says that “The Comptroller General shall investigate, at the
seat of government or elsewhere, all matters relating to the receipt, disburse-
ment, and application of public funds…” The U.S. Government Auditing
Standards, promulgated by GAO, describe in more detail the types of audit
engagements they perform, but the law and the standards do not include a spe-
cific list of agencies or programs to be audited. This general language enabled
the SAI to easily prioritize, adapt, and modify its work to meet changing needs
and requirements. However, in situations where the concept of government
accountability is less generally accepted or where access to information or
records can be difficult, it may be necessary to specifically identify the areas
subject to SAI oversight.
Increasingly international and regional banks, development agencies and
national governments are advocating the application of INTOSAI principles
and practices in efforts to combat corruption. In an editorial for the INTOSAI
Journal, James Wolfensohn, President of The World Bank wrote about the impor-
tance of battling corruption which, “erodes development assistance to govern-
ments, jeopardizes private sector investment, hinders growth and imposes
heavy burdens on the poor.”7
At the 1998 INTOSAI Congress delegates examined the SAI’s contributions
to improving transparency and accountability and the impact this might have
on limiting opportunities for corruption. During the congress, participants
discussed reporting on fraud and corruption, procedures for referring those
involved to the proper authorities for prosecution, and the role SAIs may play
in preventing fraud by examining and reporting on internal management con-
trols. Clearly, the SAI’s role in combating corruption, conducting investigations,
and reporting fraud should be considered in drafting audit legislation.
Concluding Comments
While this paper captures significant aspects for consideration in crafting an
audit law, it is not all-inclusive. The issues of independence, standards, and
audit roles and responsibilities must be dealt with, but a comprehensive audit
law will also address many other factors. For example, given local circum-
stances and systems, a new or revised audit law may need to focus special
August 2004 65
attention on access to information, follow-up on recommendations, the use of
contractors, or an array of additional areas.
Keeping the political structure, societal attitudes, and size of the country in
mind is crucial to developing effective audit legislation. When examining other
audit laws or “models” it is important to recognize where there are fundamen-
tal differences and where there are similarities, and how these differences and
similarities relate to the audit laws that have been adopted. There can be no
“one-size-fits-all” model, and there is little to be gained from trying to force-fit
audit legislation.8
Crafting “the best” audit law remains a goal that may forever be just over the
horizon. Government priorities change, and practices in national and interna-
tional financial management systems are evolving. In evaluating existing audit
legislation and developing new or revised audit laws, examining the “better
practices” of other SAIs, sharing experiences among colleagues, and co-operat-
ing across borders is necessary to ensure progress toward that “best” audit law.
End Notes
1. James D. Wolfensohn. “Accountability Begins at Home.” International
Journal of Government Auditing. (INTOSAI www.intosai.org, January 2004)
2. Franz Fiedler. “Introduction.” Lima Declaration of Guidelines on Auditing
Precepts. (INTOSAI www.intosai.org, 1998 edition)
3. L. Denis Desautels. “Preamble.” Independence of Supreme Audit Institutions
(SAIS)—Final Task Force Report. (INTOSAI www.intosai.org, March 31, 2001)
4. Independence of Supreme Audit Institutions (SAIS)—Final Task Force Report.
Section 9.04 (INTOSAI www.intosai.org, March 31, 2001)
5. Jack Titsworth and Rick Staphenhurst, with input from Bill Dorotinksy,
David Shand, and Anand Rajaram. A Discussion Note on Supreme Audit
Institutions. (The World Bank. www1.worldbank.org/publicsector/pe/sai.doc)
6. Attributes of SAI Mandates. INTOSAI Standing Committee on EDP Audit.
(2001 update—CD ROM produced by Comptroller and Auditor General of
India. www.intosai.org)
7. James D. Wolfensohn. “Corruption Impedes Development and Hurts the
Poor.” International Journal of Government Auditing. (INTOSAI www.intosai.org,
October 1998)
8. Generic Models for Supreme Audit Institutions—prepared by Jagdish Narang,
Fred Schenkelaars, and Larry D. Wood for the United Nations Development
Program/Programme for Accountability and Transparency, published by the
Office of the Comptroller and Auditor General of India.
Additional Resources and References

International Organization of Supreme Audit Institutions (INTOSAI)
Code of Ethics and Auditing Standards. INTOSAI Auditing Standards
Committee. (2001 edition—prepared by the INTOSAI Auditing Standards
Committee, chaired by the Swedish National Audit Office. www.intosai.org
International Journal of Government Auditing (INTOSAI Journal)—published
for INTOSAI by the U.S. General Accounting Office, and are available at
www.intosai.org

ASOSAI Assembly Addresses Governance Issues. (January 2001).
Auditing in the South Pacific. David Macdonald, Controller and Auditor
General of New Zealand. (April 2000)
Cooperation Produces Results—Theme I: Recommendations on the Role of Supreme
Audit Institutions in the Prevention and Detection of Fraud and Corruption. (January
1999).
Eleventh OLACEFS Assembly Held in Panama—Theme III: Preventing, Identifying,
and Combating Corruption. Linda Sellevaag, U.S. General Accounting Office.
(October 2001).
Fifth Triennial CAROSAI Congress—Theme II: Institutional Strengthening of
Supreme Audit Institutions. (January 2001)
Fourth EUROSAI Congress Examines Independence—Conclusions. (July 1999).
Global Forum on Fighting Corruption and Safeguarding Integrity. Monika
Gonzalez-Koss, Wilhelm Kellner, INTOSAI General Secretariat—Austria.
(January 2002)
The Role of the Auditor in Promoting Good Governance. V.K. Shunglu,
Comptroller and Auditor General—India. (April 1998).
SPASAI Celebrates Silver Jubiliee at Regional Congress (Suva Accords—
Recommendations). Alberta Ellison, US General Accounting Office. (October 1998)
Other Sources
Public Audit Law: Key Developments and Considerations. H. D. Myland, C.B.
Chartered Institute of Public Finance and Accountancy (UK: 1992)
August 2004 67
Current Situation and Perspectives of
Development for Financial Control
In the Republic of Macedonia
Mito Naumoski
Assistant General State Auditor
State Audit Office (SAO)
Republic of Macedonia
I. Short History of the Country and SAO

1. The Republic of Macedonia
The Republic of Macedonia is situated in the central part of the Balkan
Peninsula and covers an area of 25.713 square kilometres. The total population
in the country is about 2 million. Neighbouring countries: Serbia and
Montenegro to the North, Bulgaria to the East, Albania to the West and Greece
to the South. Skopje, population 500,000, is the political, financial and cultural
center of the country.
The roots of the Macedonian state date back to the times of ancient
Macedonia. The territory of Macedonia has witnessed many events and has
been subject to many conquests throughout this period. The new history of
Macedonia begins with the Krushevo Republic from August 1903 and Federal
Republic of Macedonia from August 1944. The Republic of Macedonia was con-
stituted as an independent, sovereign state in 1991, with the September 8
Referendum and the new Constitution of November 17, 1992. Before that period
Macedonia was one of the six constitutional federal republics of the former
Socialist Federal Republic of Yugoslavia.
The Republic of Macedonia is a unitary, civil and democratic state. There are
124 local self-government units.
The state power consist of: Parliament with 120 elected representatives;
President of the Republic; Government of the Republic; and Judiciary and
Public Prosecutor.
2. SAO— Status
The first government auditing bodies were established after the Second
World War. Through the years they have undergone many reforms. Finally the
State Audit Office was established as the Supreme Audit Institution in 1997 by
the Parliament of the Republic of Macedonia, under the State Audit Law (SAL).
Through May 2004 there have been three amendments to the SAL. The last one
encompasses issues relating to the audit mandate over public sector entities and
annual programme audit planning criteria (the potential risk of entities, mode
of publicizing of audit results etc.).
The SAO started its operation in early 1999, with NINE employees, all of
them coming from the Audit Department within the former institution—
Payment Operation Service. The General State Auditor (GSA) and a deputy
manage the State Audit Office. The General State Auditor and the Deputy
are appointed by the Parliament for a period of 10 years. The SAO is a legal,

independent, and professional institution based in Skopje. The SAO is com-
prised of 7 organizational units with 68 employees, as of June 30, 2004. Among
the employees, 95 percent have a university degree, mainly in economics and
law.
3. Subject of Audit
Main audit areas: the budget of the Republic of Macedonia; the budgets of
the units of the local self-government; the budgets of the Funds; budget funds
beneficiaries and their unit beneficiaries; state-owned enterprises; the National
Bank of the Republic of Macedonia; legal entities in which the state is major
shareholder; political parties funded by the budget funds; agencies and other
institutions established by law; other institutions financed from the public
funds; and beneficiaries of the EU funds and other organisations.
State audit, in terms of the law, represents: examination of documents, papers
and reports on performed internal controls and internal audits; accounting and
financial procedures and other records assessing whether the financial state-
ments present truthfully and fairly the financial position and the results of the
financial activities, in accordance with the adopted accounting policies, account-
ing standards and INTOSAI auditing standards; examining the financial trans-
actions, representing government expenditures, regarding their legal and
authorized spending; giving an assessment to what extent the funds are spent
economically, efficiently and effectively.
4. Audit Scope
The audit is carried out according to the SAO annual program, but mandato-
ry at least once a year for: the budgets; beneficiaries of the budget of the
Republic of Macedonia and the budgets of units of the local self-government;
state-owned enterprises founded by the Republic of Macedonia; and political
parties funded by the budget. For the remaining entities according to the SAL,
the audit is carried out in accordance with the annual work program adopted
by GSA. The auditees included in the annual programme have been selected on
the basis of size, amount of public funds engaged, potential risk, assessments of
possible deviations, and request made by Parliament bodies. The total number
of the entities/accounts subject to audit is about 2,000 at all levels. As the SAO
is still in the process of development, it audits an average of less than 10 percent
of the total number of entities it is responsible for. Expressed in monetary units
the percentage of audit coverage is about 40 percent of the total amount of pub-
lic expenditure.
5. How Does the SAO Work
The government auditing is carried out in compliance with the SAL provi-
sions, the INTOSAI auditing standards and other legislation prescribed in the
Republic of Macedonia. During the audit procedure, the auditors have free
access to the official premises and property, to look into all documents and
other records, to demand explanations from representatives of the audited enti-
ties for all important matters, relating to the audit performance. The audits are
carried out by audit teams consisting of different number of auditors (depend-
ing on the size and the complexity of the entities under audit) under the leader-
ship of a team manager who must possess certification as a state auditor.
Upon the completion of the audit, the authorized state auditor issues a pre-
liminary report, which is delivered to the legal representative of the audited
entity and the managing key official of the audited entity for the period being
audited and to the entity’s governing body. The auditee may, within 15 days
from the day of the receipt, submit written comments against the findings of the
August 2004 69
audit. The authorized state auditor issues and signs the final report, which is
delivered to the legal representative of the audited entity, to the ministries or
funds supervising the audited entity operations, and the managing key official
of the audited entity for the period being audited. The legal representative of
the audited entity may lodge a complaint against the final report within 30
days. Upon the complaint, the General State Auditor issues a resolution, stating
the acceptance or the refusal of the complaint. Based on personal judgement,
the authorized state auditor may issue a report to the management of the audit-
ed entity.
The authorized body to supervise the operation of the audited entity is
obliged to notify the SAO for the measures undertaken relating to the findings
in the audit report, no later than 90 days from the receipt of the final report. In
cases, where the authorized state auditor during the course of the audit deter-
mines that there is reasonable ground to believe that an offence or a criminal
act has been committed, the competent authorities are informed in order to ini-
tiate an appropriate procedure.
6. Publicity, Financing, Organizational Structure
The SAO submits an annual report on the conducted audits and its operation
activities to Parliament, no later than seven months after the deadline for sub-
mitting the annual financial statements (September 30 in the current year for
the previous year audits). Audit reports on the Budget of the Republic of
Macedonia, the ministries, the budgets and funds and state owned enterprises
established by law are submitted to the Parliament. The audit reports contain-
ing findings of major irregularities may also be submitted to the Parliament,
prior to the submit ion of the Annual Report.
The General State Auditor also includes all reports on the website of the
State Audit Office. The General State Auditor promulgates the final audit
reports and the written decisions on the complaints against the final audit
reports in the SAO’s Bulletin. The General State Auditor when necessary shall
hold press conferences or otherwise communicate with the media in order to
inform the public about the work of the State Audit Office and the results of
the performed audits.
Funds for financing the SAO operation are provided from the budget of the
Republic (for budget users and beneficiaries of the EU funds and other interna-
tional funds). Charges from the rest of the legal entities where audit is per-
formed, in compliance with the Tariffs of the SAO, as adopted by Parliament.
7. International Cooperation
The State Audit Office is a member of The International Organization of
Supreme Audit Institutions (INTOSAI) since March 29, 2001, (after the Public
Revenue Office withdrew its membership which it had held since 1994) and the
European Organization of Supreme Audit Institutions (EUROSAI) since May
31, 2002. Since joining the above mentioned organizations, representatives from
the SAO have participated in the XVII Congress of INTOSAI in Seoul, Strategic
Planning Workshop—EUROSAI/IDI Long Term Regional Training Programme
(LTRTP) in Zagreb, meeting of the INTOSAI Working Group on Environmental
Auditing in Warsaw, and other seminars organized by these organizations.
The State Audit Office maintains multilateral and bilateral relationships and
co-operation with other SAIs and other international organizations and institu-
tions for the purpose of exchanging experiences and acquiring new knowledge
in the area of public sector auditing. The SAO has made bilateral contacts with

several European SAIs and has signed an agreement on co-operation with some
of them.
II. Current Activity And Main Achievements

The SAO continually tries to increase the number of conducted audits of the
entities subject to audit. Increasing coverage is closely connected with sufficient
staff for the performing the SAO task. The government restriction imposed on
new employment in the public sector represents an obstacle for SAO. Recruiting
professional and highly qualified staff is of great significance for the SAO. Only
60 percent of the assessed SAO staff needs have been meet.
The SAO currently is developing a financial audit manual. The World Bank
SAO development project, funded by Dutch government, is under way.
Realization of the project is carried out according to the plan of activities. The
project includes analysis of organizational issues, training needs analysis, prepa-
ration of performance audit manual, and improving audit reporting. The train-
ing covers areas like financial audit, performance audit, accounting standards,
and audit techniques. The project also funds study tours abroad, where the SAO
staff have the opportunity to exchange experiences with and learn from other
SAI.
Activities also include taking part in courses, seminars, workshops and
working meetings organized by INTOSAI, EUROSAI, other SAIs and other
organizations. Currently, SAO representatives are participating in the IDI-
EUROSAI Course Design and Development Workshop in Sofia as part of the
IDI-EUROSAI Long Term Regional Training Programme.
The cooperation agreements signed with Bulgarian, Romanian and
Hungarian SAIs will promote the exchange of audit experiences, professional
training, joint research and audits and other key audit issues. We had also a
very productive visit to European Court of Auditors where we have exchanged
experiences especially in the context of audits of users of EU funds.
SAO also cooperates with EU organisations and the World Bank concerning
recommendations and commitments resulting from the documents issued by
these organisations (Stabilisation and Association Report of the European
Commission, World Bank Country Financial Accountability Assessment and
Mission Aide Memoire). The SAL was recently amended to respond to some
World Bank recommendation.
III. The Prospects of Further Development of State Financial

Control In The Near Future
Development of financial control in Republic of Macedonia is beginning to
move quickly. During 2004, Parliament passed legislation establishing internal
audit units in most of the Ministries and expanding the central internal audit
unit in the Ministry of Finance. Plans are in the first phase to establish internal
audit capabilities within 18 budget users. In the second phase (to the end of
2005) internal audit shall be included in other government institutions, and in
the third phase (up to 2010) in unit users. To assist in the development of the
internal audit function, the World Bank sponsored a project that resulted in the
development and publication of an internal auditing handbook to guide the
work of internal auditors, supplemented with a two-week training course for
internal auditors.
August 2004 71
The audit work and coverage of the SAO will be greatly facilitated by the
establishment of internal audit offices. Once these offices are fully functioning
and carrying out audit work in accordance with auditing standards, the SAO
can begin to rely on their work. By relying on the work of internal auditors, the
SAO can greatly expand its audit coverage.
The SAO is hiring more staff during 2004 that will enable it to increase its
audit coverage of government activities. Further, as a result of the current World
Bank project, SAO staff will be provided comprehensive training to enhance and
improve their auditing skills. A performance audit manual is currently under
development and SAO staff will be trained in how to conduct performance
auditing. We will initiate pilot performance audits, which will enable the SAO
to further expand its audit activities and address more systemic-type issues
confronting the Government of Macedonia.
The SAO is constantly looking for ways to improve its operations. This year
we plan on developing systems and processes that will enable us to better iden-
tify systemic weaknesses disclosed by SAO audits. Also, we plan to develop a
recommendation tracking system so that we know at any one time what actions
are being taken to implement our recommendations and which entities have not
been responsive. We plan to look into ways to publicize our audit reports. We
will include a list of audit reports on our web page and also a short summary of
the report, noting significant audit findings and recommendations. These
improvements will help the Macedonia public become more aware of the SAO’s
work, put additional pressures on Government organizations to improve their
operations, and allow the SAO to focus its audit efforts on more systemic-type
issues.
As part of the European Commission CARDS—Long-term Indicative
Programme 2005-2006, the SAO intends to emphasize its need for further devel-
opment of government auditing. The SAO plans to address development issues
by working closely (through the Twinning Project) with another EU member
SAI. The main goal of this Project would be to enhance the external audit pro-
vided by the SAO and bring it to the level of the SAI of the EU member states.
The Project would include a wide range of issues like training (variety of issues
relating to financial and performance audit), joint pilot audits, modernising the
methodological approach, improvement of the audit manuals, and guidelines
for conducting audits of different types of auditees and areas. The other issues
will result from the needs and the program of the European Commission in
agreement with the potential SAO partner. Emphasize will be given to the com-
pletion of the tasks, that were initially planned to be covered by the World Bank
SAO Development project (that is under way) and, which due to lack of suffi-
cient funds were dropped, conducting IT audits using auditing software.
The SAO audits will identify areas susceptible to corruption and at the same
time promote and support establishing internal controls. Thus, audits will help
prevent corruption. SAO operations will include analysis of its audit reports in
different audit areas like health, environment, etc. These analyses will identify
the most important trends, recurring problems and changes in these areas and
their cause. The SAO will identify areas that present increased risks of corrup-
tion where, primarily by performing audits that promote and support the opera-
tion of internal control mechanism, these audits will help force back corruption.
Another new task is auditing the reliability of operation of information technol-
ogy systems.

IV. Proposals on the Further Development of International
Cooperation Between SAIs in Europe
The SAO of Macedonia is extremely interested in finding ways to cooperate
and work with other SAIs in Europe. We are looking for opportunities to work
with and learn from other SAIs and, under our current World Bank project, are
considering study tours and exchange programs to other SAIs to learn about
their operations and practices. For example, we consider sending one or more
staff members to another SAI in Europe to learn first hand about that SAI’s
quality assurance program so that the information and practices could be con-
sidered for possible adoption by SAO.
We believe it would be useful if EUROSAI could publish or make known
what expertise or particular specialties may be available in specific European
SAIs. For example, some SAIs in Europe may have a well-developed training
curriculum for their staff and have instructors who could give certain type
training at other SAIs. Knowing what expertise and specialties are available in
other SAIs would help developing SAIs, such as the Macedonia SAO, in finding
expert assistance that they could possibly draw upon to enhance and improve
their operations and practices.
Another area where we could benefit is learning which SAIs may have done
audits in certain areas, such as procurement. Procurement is a particular vulner-
able and high-risk area and it would be good to know the experiences and prac-
tices of other SAIs. We could then either request the assistance of the SAI or
possibly send staff to observe first hand how the SAI goes about conducting a
procurement audit.
We envision future cooperation between the European SAIs (including the
European Court of Auditors) in conducting joint audits on different projects that
are of common interest, audit of the use of the EU funds, etc.
Another aspect of this cooperation would be taking part in congresses, meet-
ings, seminars, and conferences as well as being active in the work of the per-
manent committees and working groups of INTOSAI and EUROSAI. This will
enable efficient transfer of knowledge between SAIs. The substantial support
provided by IDI in supporting the initiatives for professional development and
building the training capabilities of a SAI is deemed especially important. In
order to keep abreast of the latest development in auditing, the SAO plans to be
active in the international audit community.
August 2004 73
Public Financial Management
Performance Measurement Framework
Revised Consultative Draft,
February 12, 2004
[With Amendment Regarding
Procurement1]
1. Introduction and Background
This note presents a preliminary draft Public Financial Management (PFM)
Performance Measurement Framework, on which comments from a wide range
of stakeholders are sought. The framework identifies a set of critical objectives
of a PFM system, and a standard set of high-level PFM indicators to assess per-
formance against those objectives. This note has been prepared following initial
comments received on a preliminary draft of the framework dated October 16,
2003.
The preliminary draft PFM Performance Measurement Framework has been
developed by a working group involving staff from the World Bank, IMF and
the Public Expenditure and Financial Accountability (PEFA2) Secretariat. The
Framework is currently a consultative draft proposal and has not been endorsed
by the World Bank, IMF or PEFA partners. The working group is seeking to
identify and develop approaches to public expenditure and PFM work that sup-
port greater country ownership, reduce transactions costs, improve donor har-
monization, better meet developmental and fiduciary concerns, and lead to
improved impact on the reform of country systems.3 The PFM Performance
Measurement Framework is one element of the proposed new approach, and
specifically is to contribute to an integrated, standard PFM assessment that is
under development. The need for such a framework was also identified in the
OECD-DAC Donor Harmonization Task Force Good Practice Reference Paper on
Measuring Performance in Public Financial Management (2003).
The PFM Performance Measurement Framework is designed to measure
PFM performance of countries across a wide range of development. This incor-
porates systems of fiscal and debt management, budget formulation, budget
execution, internal controls procurement, accounting and reporting, auditing,
transparency and external scrutiny. It draws upon the 16 HIPC expenditure
tracking benchmarks where appropriate,4 while taking a wider perspective
of PFM performance (including, for example, fiscal risk and predictability
of funding).
2. Purpose of the PFM Performance Measurement Framework

The primary purpose of the PFM Performance Measurement Framework is to
provide a standard set of high level indicators that will enable the performance
of country PFM systems to be regularly monitored, by domestic and interna-
tional stakeholders. In so doing it should allow progress over time to be

demonstrated, while noting that a set of high level indicators necessarily will
not be able to detect small improvements in performance.
In addition, the PFM Performance Measurement Framework is intended to
provide a standard set of indicators that is applied in a consistent and objective
manner for all countries assessed, and that can be readily understood by inter-
national and national stakeholders. It is also intended to focus attention on
capacity building in core PFM areas. Cross-country comparison is an additional
expected benefit.
In order to meet these objectives, it is necessary that a standard high level set
of core PFM indicators are monitored over time and across different countries.
The PFM Performance Measurement Framework presents this standard, high
level set, which are considered to be relevant in all country circumstances. In
addition, this Framework recognizes that these may not cover all the core PFM
issues relevant to a particular country. It is understood, therefore, that individ-
ual countries may add some further indicators that meet their specific country
circumstances. The standard set plus the country specific additions would then
provide a high level set of indicators that the government and donors could
agree as the means of measuring overall PFM performance.
The standard set should have wide international acceptability so as to facili-
tate harmonization, and have a clearly defined system of calibration to ensure
consistency over time and across countries. The set should be sufficient to
provide a broad overview of how the PFM system is performing, but should
be limited in number for ease of use and so should not seek to measure the
operation of every individual part of the system or the factors that affect PFM
performance.
The nature of the high level indicators will mean that they can only provide
limited information. The intention is that the high level indicators in this frame-
work will be supplemented by “second level” indicators which support diagno-
sis and detailed analysis of specific areas. An example is the set of procurement
indicators, which is currently being developed by the World Bank and OECD-
DAC.
3. Critical objectives of the PFM system measured by

the framework
A good PFM system is an essential tool of government in the implementation
of policy and achievement of developmental objectives. Specifically, the goal of
a PFM system is to support the achievement of aggregate fiscal discipline,
strategic allocation of funds, value for money, and probity in the use of public
funds. Ultimately, we are concerned as to whether these budgetary outcomes
are achieved, but it has not been possible identify indicators that directly cap-
ture outcomes that are not country specific and that would not require detailed
data analysis.
This set of high level PFM indicators, therefore, focuses on the operational
performance of the systems, processes and institutions of PFM, and seek to
assess these against a set of six critical objectives of a PFM system. The six
critical objectives reflect the requirements of an open and orderly PFM system.
The critical objectives have been determined on the basis of what is desirable
to measure but also what has proved feasible for a standard set of high-level
indicators to address, and are as follows:
August 2004 75
1. Budget Realism: The budget is realistic and implemented as intended in a
predictable manner.
2. Comprehensive, Policy-based Budget: The budget captures relevant fiscal
transactions, and is prepared with due regard to government policy.
3. Fiscal Management: Aggregate fiscal position and risk are monitored and
managed.
4. Information: Adequate fiscal, revenue, expenditure, procurement, and
accounting records and information are produced, maintained and
disseminated to meet decision-making, control, management and reporting
purposes.
5. Control: Arrangements are in place for the exercise of control and steward-
ship in the use of public funds, including on procurement.
6. Accountability and Transparency: Arrangements for external transparency
and scrutiny of public finances (including procurement) are operating.
The indicators do not, therefore, seek to determine whether expenditures
incurred through the budget have their desired effect on reducing poverty or
achieving other policy objectives, or whether there is value for money achieved
in service delivery. In addition, the critical objectives listed above do not include
the results/performance orientation of the PFM system.5
4. Structure and coverage of the indicator set

The indicators are structured into three categories:
A. PFM system out-turns: These are the immediate results of the PFM system
in terms of actual expenditures composition, revenues, and deficit, and are
assessed by comparison to the original approved budget. These provide, in
particular, a measure of the realism of the budget and the extent to which the
budget is an authoritative tool of government policy.
B. Key cross cutting features of the PFM system: This category of indicators
captures two key features of the quality of the PFM system that are important
as they cut across the whole of the cycle:
• Comprehensiveness: This refers to (i) the extent to which the whole of
government (central government, state-owned enterprises and sub-national
governments) is captured in aggregate fiscal oversight, and (ii) the scope,
content and classification of fiscal and budget information produced across
the various stages of the central government budget cycle.
• Transparency: This refers to the extent to which fiscal and budget
information is accessible to the public.6
C. Budget cycle: The third, and largest, category of indicators provides broad
measures of the performance of the key systems, processes and institutions
within the budget cycle of central government; these are planning and budg-
eting, budget execution, accounting and reporting, external scrutiny and
accountability. Procurement has been integrated into each part of the cycle as
it features in all of them. Where possible, an output (such as funds flow to a
spending ministry, or audited financial statements) is measured, in order to
capture the performance of a chain of systems, processes and institutional
interactions.7
The structure and coverage of the set of high level indicators that has been
developed is illustrated in this diagram.

Aspects of the PFM system measured by the indicators
C. Budget
Cycle A. PFM Out-turns
Planning
and
Budgeting
Revenues
Revenues
B. Key cross-cutting
features
External Budget Expenditures
Expenditures
Scrutiny and Comprehensiveness Execution
Accountability Transparency
Deficit
Deficit
Accounting
and
Reporting
The indicator set is not intended to be fully comprehensive, so as to keep it to

a manageable size. Revenue administration, and PFM systems of sub-national
government and of the parastatals and state-owned enterprise sector are impor-
tant dimensions of national PFM systems, but are covered only to a very limited
degree.8 As mentioned in section 2 above, within the new approach to PE/PFM
work under development, consideration will be given to the addressing these
areas through separate, “second level” indicator sets.
5. The selection criteria

Drawing on the OECD-DAC Good Practices Reference Paper and other rele-
vant sources, the criteria identified for selecting individual indicators are shown
in Box 1 below. Some indicators initially identified have been removed on the
basis of these criteria, such as those related to the performance orientation of the
system.
Box 1: Criteria for PFM performance indicators

• Relevant and necessary to measure performance of the PFM system
against the six critical PFM objectives
• Observable and verifiable
• Avoids major data collection/analysis requirement
• Avoids overlap between indicators
• Capable of calibration to cover different stages of development
and capture progress over time
6. The preliminary draft standard set of high level PFM indicators

On the basis of the rationale outlined above and of the selection criteria
applied to test the robustness of individual indicators described in section 6
below, the Public Expenditure Working Group has developed a standard set of
August 2004 77
high-level indicators for testing and for consultation. These are organized in the
structure shown in Diagram 1, and are listed in the Table 1 below.
Table 1: A revised set of high-level PFM performance indicators

A. PFM OUT-TURNS
1. Aggregate fiscal deficit compared to the original approved budget.
2. Composition of budget expenditure out-turn compared to the original
approved budget.
3. Aggregate revenue out-turn compared to the original approved budget.
4. Stock of expenditure arrears; accumulation of new arrears over past year.
B. KEY CROSS-CUTTING FEATURES : COMPREHENSIVENESS AND
TRANSPARENCY
5. Comprehensiveness of aggregate fiscal risk oversight.
6. Extent to which budget reports include all significant expenditures on central
government activities, including those funded by donors.
7. Adequacy of information on fiscal projections, budget and out-turn provided
in budget documentation
8. Administrative, economic, functional and programmatic classification of the
budget.
9. Identification of poverty related expenditure in the budget.
10. Publication and public accessibility of key fiscal information, procurement
information and audit reports.
C. BUDGET CYCLE
C(i) Medium term planning and budget formulation
11. Extent of multi-year perspective in fiscal planning, expenditure policy-
making and budgeting.
12. Orderliness and participation in the budget formulation process.
13. Coordination of the budgeting of recurrent and investment expenditures.
14. Legislative scrutiny of the annual budget law.
C(ii) Budget execution
15. Effectiveness of cash flow planning, management and monitoring
16. Procedures in operation for the management and recording of debt and
guarantees.
17. Extent to which spending ministries and agencies are able to plan and
commit expenditures in accordance with original/revised budgets.
18. Evidence available that budgeted resources reach spending units in a
timely and transparent manner.
19. Effectiveness of internal controls.
20. Effectiveness of internal audit.
21. Effectiveness of payroll controls.
22. The existence of a transparent procurement system as an integral part of the
overall PFM system which is supported by a clear regulatory framework that
provides for competition, value for money and effective controls.

C(iii) Accounting and reporting
23. Timeliness and regularity of data reconciliation.
24. Timeliness, quality and dissemination of in-year budget execution reports.
25. Timeliness and quality of the audited financial statements submitted to the
legislature.
C(iv) External accountability, audit and scrutiny
26. The scope and nature of external audit.
27. Follow up of audit reports by the executive or audited entity.
28. Legislative scrutiny of external audit reports.
In addition to indicators of country PFM performance, this Framework also
includes two indicators of donor practices which impact country PFM systems.
Through these indicators it is proposed that donor performance, and the extent
of the negative impact of donor practices, are also measured.
Indicators of donor practices
Donor 1. Completeness of donor information provided on aid flows, and
comparison of actual donor flows with donor forecasts.
Donor 2. Proportion of aid that is managed using national procedures.
7. Calibration of the individual indicators

The calibration of the high level indicators is related to the six critical PFM
objectives, of budget realism, comprehensive and policy-based budget, fiscal
management, information, control, and accountability and transparency, as
these have been defined in section 3 above. Together these objectives define the
nature and quality of the core elements of a PFM system that are necessary to
achieve open and orderly management of public finances.
Each indicator seeks to measure performance of a core PFM element, against
the critical PFM objective relevant to that core PFM element. Each indicator is
measured against a four point ordinal scale A-D.9 Standard levels have been
applied across the indicators as far as possible. A score of A. is warranted for an
individual indicator if the core PFM element meets the relevant objective in a
complete, orderly (predictable, authorized, in accordance with procedures),
accurate, timely and coordinated way.10
Guidance has been developed on what performance would meet each score,
for each of the indicators. This is shown at Annex 1. In addition, intermediate
scores will be allowed (designated by C+, for example).11 Consideration is also
being given to adding an arrow to the score to allow direction of change to be
captured. The four point ordinal scale was selected to allow a greater range of
performance to be differentiated than the HIPC expenditure tracking bench-
marks were designed to do, while at the same time being sufficiently limited in
number to allow clear and specific guidance to be assigned to each score.
In addition to the A-D ordinal scoring of the high level indicators, additional
quantified data that can be utilized to support or supplement those scores will
also be recorded and monitored within the PFM Performance Measurement
Framework. This additional data is identified alongside the list of indicators in
Annex 1.
August 2004 79
8. Testing and applying the new framework
The next step in developing the indicators involves pilot testing. Pilot tests
are planned to determine the relevance of the indicators in specific country cir-
cumstances. PEFA funding is being used to support the process of testing the
indicators in Cambodia, Madagascar, Uganda and Chad.
How the scores from the indicators are interpreted is an important considera-
tion. The PFM Performance Measurement Framework has been designed as a
contribution to a fuller, standard PFM diagnostic assessment, that is currently
under development as part of the new approach to PE/PFM work. The indica-
tors feed into the fuller analysis but, given the limitations of what the indicators
are able to measure, cannot alone provide the whole picture. They require care-
ful interpretation on a country-by-country basis. The standard assessment is the
subject of a separate working group paper and this will address, inter alia,
issues such as how the standard assessment, incorporating the indicators, will
be applied (by whom, how data will be collected, how frequent etc).
The manner in which the indicators are recorded can also help to avoid over-
interpretation of the scores. In addition to the scores themselves, the reporting
should including explanatory information and a justification of the score, specif-
ic reference to the evidence used to determine the score, and the cardinal data
available to support or supplement the score. A standard format in which to
record the scores and the supporting information, such as that indicated in the
table below, will also help to ensure accessibility to different stakeholders and
allow different users greater assurance about the basis on which scores were
determined.
Indicator Score Given Commentary Justification/ Cardinal data
Evidence used
8. Consultation
A major process of consultation regarding the strengthened approach to
PE/PFM work is in process by the working group, involving stakeholders from
developing countries, the donor community, academics and practitioners. This
revised note has been prepared to facilitate the consultation on the PFM per-
formance measurement framework component of the strengthened approach.
Key considerations during consultation include:
• The purpose and rationale that underpin the indicator set.
• The structure and scope of the indicator set.
• The requirement for a limited number of indicators.
• The inherent limitations of a set of high-level indicators.
The working group invites comments on this revised draft PFM Performance
Measurement Framework.
Public Expenditure Working Group
February 12, 2004
Nicola Smithers
Public Expenditure and Financial Accountability Secretariat
Room MC4-579, World Bank offices
1818 H Street, NW
Washington, DC 20433, USA
Tel: +(1) 202 473 1912 • Fax: +(1) 202 522 7132 • nsmithers@worldbank.org

Consultative Draft—PFM Performance Indicators
ANNEX 1
A. PFM OUT-TURNS
Indicator
1. Aggregate fiscal deficit compared to original approved budget.
Cardinal data:
i. Deviation from budgeted aggregate fiscal deficit as percent of budgeted expenditure.
ii. Deviation from budgeted primary fiscal balance (before interest) as percent of
budgeted expenditure.
Guidance
The aggregate fiscal deficit is a “bottom line” measure of budget out-turn. If the deficit
out-turn exceeds the budgeted deficit this may indicate that the PFM system is not
delivering effective fiscal discipline or is unable to respond to changes in macroeconomic
situations. [The appropriate definition of the deficit for each country will depend on the
IMF article IV consultation reports].
Good budgetary practice includes budget monitoring and review processes. A mid-year
review process will involve updating the revenue forecast and making an adjustment to
expenditure to maintain the balance target.
The specific measure is:
a. In no more than one out of the last three years has the actual deficit exceeded the bud-
geted deficit by an amount equivalent to more than 2% of total budgeted expenditure,
and in that one year the excess was less than 5 % of total budgeted expenditure.
b. In no more than one out of the last three years has the actual deficit exceeded the bud-
geted deficit by an amount equivalent to more than 5 % of total budgeted expenditure.
c. In no more than two of the last three years has the actual deficit exceeded the budgeted
deficit by more than an amount equivalent to 5% of total budgeted expenditure.
d. Meets neither a, b or c
Indicator
2. Composition of expenditure out-turn compared to original approved budget
Cardinal data:
i. Average deviation between actual and budgeted expenditure by functional classification
ii. Average deviation between actual and budgeted expenditure by economic classification
iii. Average deviation between actual and budgeted expenditure on administrative basis
iv. Budget volatility (median of year-to-year policy changes in each functional or administrative
classification over the preceding four years: policy change is reflected by change in percentage
share in the budget) Where the composition of expenditure regularly varies considerably from
the original budget, that budget will not be a useful ex ante statement of intent.
Guidance
Measurement against this indicator requires an empirical assessment of expenditure
out-turns (excluding expenditures on donor-funded projects) against budget at a sub-
aggregate level. As budgets are usually adopted and managed on an administrative
(ministry/agency) basis, then the administrative basis is preferred for assessment. A
functional basis is also acceptable. In addition, consideration should be given to the
economic composition.
a. The composition of expenditures is close to budget,- an average of no more than 10
percent variance at administrative or functional level in at least two of the three years.
August 2004 81
(excluding interest on debt), and no more than 10 percent variance on an economic
basis in at least two of the last three years would indicate a composition close to
budget.
b. An average of no more than 15% variance at administrative or functional level in at
least two of the three years (excluding interest on debt), and no more than 15% vari-
ance on an economic basis in at least two of the last three years.
c. An average of no more than 20% variance at the administrative or functional level in
at least two of the last three years (excluding interest on debt).
d. An average of more than 20% variance at the administrative or functional level in
at least two of the last three years (excluding interest on debt).
Indicator
3. Aggregate revenue out-turn compared to original approved budget.
Cardinal data:
Actual revenue minus budgeted revenue as a percent of budget
Guidance
Accurate forecasting of domestic revenue is a critical factor in determining budget
performance, since budgeted expenditure allocations are based upon it. A comparison of
budgeted and actual revenue provides an overall indication of the quality of forecasting
and revenue administration. External shocks may however occur, that could not have
been forecast and do not reflect inadequacies in administration, and the variance noted
below should exclude those that IMF recognizes as arising from external shocks.
The specific measure is:
a. In no more than one out of the last three years has domestic revenue out-turn been
below 95% of total budgeted domestic revenue.
b. In no more than one out of the three years has domestic revenue out-turn been below
92% of total budgeted domestic revenues.
c. In no more than two out of the last three years has domestic revenue out-turn been
below 92% of total budget domestic revenue.
d. Meets neither a, b, or c
Indicator
4. Small stock of expenditure arrears; little accumulation of new arrears over past year.
Cardinal data:
Level of expenditure arrears as a percentage of total expenditures
Guidance
Arrears are expenditures that have been incurred by government, for which payment of
the employee, supplier, contractor or creditor is overdue, and are a form of non-transpar-
ent financing. A high level of arrears can indicate a number of different problems such as
inadequate commitment controls, cash rationing, inadequate budgeting for contracts,
under-budgeting of specific items and lack of information.
This indicator is concerned with measuring the extent to which there is a stock of
arrears, and the extent to which the systemic problem is being brought under control and
addressed. While special exercises to identify and payoff old arrears may be necessary,
this will not be effective if new arrears continue to be created.
a. There are very few or no expenditure arrears.
b. There is a stock of some expenditure arrears (up to 5% of total expenditure), the
accumulation of new arrears is low and the net stock level declined in the last year.

c. It is estimated that there is a significant stock of expenditure arrears (5%-10% of total
expenditure), though the information available may be incomplete. The accumulation
of new arrears slowed down in the last year. This score will also apply if the estimated
expenditure arrears are between 10% and 15%, but there has been a significant reduc-
tion in the level in the last year, and the accumulation of new arrears has slowed down
in the last year.
d. It is estimated that the stock of expenditure arrears exceed 10% of total expenditures,
and/or no information on arrears is available. The stock of arrears has not been
reduced significantly, and/or the accumulation of new arrears is continuing at a
significant rate.
B. KEY CROSS-CUTTING FEATURES: COMPREHENSIVENESS AND
TRANSPARENCY
Indicator
5. Comprehensiveness of aggregate fiscal risk oversight.
Guidance
Central government should monitor and manage fiscal risks arising from its own activi-
ties, and fiscal risks that will impact nationally that arise from activities of parastatals and
state-owned enterprises (SOEs), including state -owned commercial banks, and from
activities of sub-national levels of government.
(i) Central government should require and receive quarterly financial statements and
audited year end statements from parastatals and SOEs, and monitor performance against
financial targets. (ii) Where sub-national governments can generate fiscal liabilities for
central government, their fiscal position should be monitored, at least on an annual basis.
(iii) Central government should have mechanisms that enable it to take corrective action
to manage fiscal risks arising from the actions of parastatals, SOEs and sub-national gov-
ernments, in a manner consistent with transparency, governance and accountability
arrangements, and the relative responsibilities of government and the rest of the public
sector.
a. (i) Well-established procedures are in operation for monitoring all major parastatals
and SOEs on a quarterly basis, and reports are published on the full aggregate fiscal
position annually (ii) Either sub-national governments cannot generate fiscal liabilities
for central government, or where they can central government monitors the net fiscal
positions of sub-national governments on an annual basis (iii) The central government
takes corrective action to manage fiscal risks if these arise from actions of parastatals,
SOEs and sub-national governments, in an appropriate manner, and reports the fiscal
risks annually.
b. (i) Procedures are in place for monitoring parastatals and SOEs on a quarterly basis,
and these are largely complied with by central government and by the parastatals and
SOEs. (ii) Central government monitors the net fiscal positions of the major tier of sub-
national government on an annual basis (where they can generate liabilities for central
government), (iii) Some mechanisms are available to central government to take correc-
tive action to manage fiscal risks arising from actions of parastatals, SOEs and sub-
national governments, and these are utilized from time to time. Government provides
reports including major fiscal risks arising from parastatals/SOEs and sub-national
government.
c. (i) Parastatals and SOEs are monitored on an annual basis. (ii) Major fiscal risks arising
from sub-national governments are monitored.
d. The fiscal risks arising from parastatals, SOEs and sub-national governments are not
routinely monitored.
August 2004 83
Indicator
6. Extent to which budget reports include all significant expenditures on central
government activities, including those funded by donors.
Guidance
Budget reports (annual budget documentation, year end financial statements and other
fiscal reports for the public) should cover all budgetary and extra-budgetary activities of
central government to allow a complete picture of central government revenue, expendi-
tures across all categories, and financing. This will be the case if extra-budgetary activities
(central government activities which are not included in the annual budget law), such as
those funded through extra-budgetary funds, are insignificant. However, even if there are
significant, it is still possible to obtain a complete picture if the expenditures on extra-
budgetary activities are included in fiscal reports. This guidance has drawn from the
IMF’s Code of Good Practices on Fiscal Transparency—section 2.1.1.
a. The level of extra-budgetary activities of central government is not significant (below
1% of total spending). Alternatively, the level is somewhat higher (up to 10% of total
spending) but fiscal reports include complete information on these expenditures. All
major donor-funded expenditures on government activities are captured in annual
budget documents.
b. The level of extra-budgetary activities of central government is below 10% to total
spending and some fiscal reports cover the majority of these expenditures; alternative-
ly extra-budgetary activities may be as high as 15%, but fiscal reports provide complete
information on these expenditures. The majority of donor-funded expenditures on gov-
ernment activities are captured in the annual budget documents.
c. The level of extra-budgetary activities of central government is less than 10% of total
spending, but fiscal reports provide limited or no information on these expenditures;
alternatively, extra-budgetary activities are higher than 10% and the majority of these
expenditures are reported. Some donor-funded expenditures on government activities
are captured in annual budget documents.
d. The level of extra-budgetary activities of central government is more than 10% of total
spending and fiscal reports provide limited or no information on these expenditures.
Little or no donor-funded expenditures on government activities are captured in annu-
al budget documents.
Indicator
7. Adequacy of information on fiscal projections, budget and out-turns provided in budget
documentation
Guidance
Annual budget documentation, (the annual budget and budget supporting documents)
should allow a complete picture of central government fiscal forecasts, budget and out-
turns. As well as revenues, expenditures, financing, it should include debt level and com-
position, financial assets, and the fiscal impact of contingent liabilities. It should also pro-
vide information comparable to the budget for the out-turns for the two preceding fiscal
years, and forecasts of the main budget aggregates for the two years following the budget.
This guidance has drawn from the IMF’s Code of Good Practice on Fiscal Transparency—
sections 2.1.3 and 2.1.4.
a. Annual budget documentation includes complete information on debt and financial
assets, some information on contingent liabilities, and comparable information on prior
year out-turns and future year projections.
b. Annual budget documentation includes information on the debt level and comparable
information to the out-turn of the prior year.

c. Annual budget documentation provides either information on the level of debt, or
provides comparable information of the prior year.
d. Annual budget documentation provides information on neither debt nor comparable
information of the prior year.
Indicator
8. Administrative, economic, functional and programmatic classification of the budget.
Guidance
A robust classification system allows the tracking of spending on the following dimen-
sions: administrative unit, economic, functional and program. Where standard interna-
tional classification practices are applied, then the tracking of poverty-reducing and
other spending can be facilitated.
Under the UN-supported Classification of Functions of Government (COFOG), which
is the functional classification applied in GFS, there are ten main functions at the highest
level and 69 functions at the second level.
The Budget and Budget expenditures are classified:
a. On an administrative, economic, functional, programmatic basis.
b. On an administrative, economic, and functional (to sub-functional level) or
administrative, economic and programmatic basis
c. On an administrative, economic and functional level (10 main COFOG functions)
basis.
d. On another basis.
Indicator
9. Identification of poverty related expenditure in the budget
Guidance
The ability to clearly identify poverty-reducing spending is an important element of
implementing government poverty reduction strategies through the budget and in
reallocating resources.
Ideally, the classification system will be sufficiently comprehensive to identify poverty
reducing expenditures. If not, specific appropriations in the budget can be tagged as
poverty reduction—this has been named a “virtual fund” as it involves no separate insti-
tutional, governance, or execution devises from those used generally. They may involve
the application of a special poverty-reducing code within a consolidated and reliably
depicted line item budget. The use of institutional poverty funds is generally considered
to be poor practice as it tends to reflect considerable weaknesses in current classification
and recording, and leads to fragmentation in the budget process.
The identification and tracking of poverty-reducing spending is undertaken
a. Through the existing budgetary classification system, either through a pre-existing
comprehensive system or by adding a special, virtual fund code.
b. By the prior identification of poverty reducing expenditure items in the budget and
by reporting on those items (without the addition of a special code to the classification
of expenditures).
c. Through the use of a separate institution/fund.
d. Poverty reducing spending is not identified.
Indicator
10. Publication and public accessibility of key fiscal information, procurement
information and audit reports.
August 2004 85
Cardinal data:
i. Number of days after quarter end that quarterly budget report made public
Guidance
This indicator measures the general level of transparency that exists regarding the fiscal
plans, position and performance of the government. The key fiscal information provided
by government includes:
• Budget reports (as defined in indicator 6.)
• Annual budget documentation (as defined in indicator 7.)
• Within year budget execution reports
• Year end financial statements
• Public procurement information (eg. on major contracts)
Additional important sources of information on the financial position and performance
of the government are the external audit reports, provided by the Supreme Audit
Institution.
Transparency will depend on whether key fiscal information and external audit reports
are published in a timely manner, can be accessed by the public (eg. whether information
is provided on websites which the public is able to access, or in mainstream press), and it
is in a clear, readable format (eg. understandable structure/layout, appropriately
summarized).
a. There is comprehensive, timely publication of key fiscal information and external audit
reports, these are readily accessible to the general public, and are provided in a clear,
readable format.
b. Most key fiscal information and all external audit reports are published without major
delays, and the format is understandable.
c. Some key fiscal information and external audit reports are published, but not on a
timely basis. The format/presentation makes it very difficult for non-experts to
understand.
d. Either little fiscal information or no audit reports are published.
C. BUDGET CYCLE
Medium term planning and budget formulation
Indicator
11. Extent of multi-year perspective in fiscal planning, expenditure policy-making and
budgeting.
Guidance
Policy decisions have multi-year implications, and therefore multi-year fiscal forecasts and
estimates of forward expenditures (including expenditures both of a recurring nature and
those involving multi-year investment commitments) are required to determine whether
current and new policies are affordable, within aggregate fiscal targets. At the same time,
national and sectoral strategies are needed to guide the development of forward esti-
mates. The extent to which forward estimates are integrated into the annual budget
formulation process will then complete the policy-budget link.
a. Multi-year aggregate fiscal forecasts and forward expenditure estimates (based on eco-
nomic and sectoral breakdown) are prepared on a rolling annual basis, costed state-
ments of national and major sector strategies exist, and there is a strong direction pro-
vided in the budget circular (or equivalent) regarding the multi-year forecasts to be
adhered to in budget submissions.

b. Multi-year aggregate fiscal forecasts and forward expenditure estimates (based on an
economic breakdown) are prepared on a rolling annual basis, statements of national
strategy and sectoral strategy exist, and the budget circular (or equivalent) makes a
link between the annual and multi-year forecasts and the national strategy.
c. Multi-year aggregate fiscal forecasts are updated annually but no forward estimates of
expenditure other than at the aggregate level, a statement of national strategy exists,
and there is reference to the multi-year fiscal forecasts in the budget circular (or equiv-
alent). Alternatively, fiscal forecasts cover the budget year only but the budget circular
makes clear reference to national strategy.
d. The fiscal forecasts cover the budget year only. No linkage is made between the annual
budget and national strategy in the budget circular.
Indicator
12. Orderliness and participation in the annual budget process.
Guidance
Effective participation in the annual budget process impacts the extent to which the budg-
et reflects fiscal and sectoral policies. This requires an integrated top-down and bottom-up
budgeting process, involving central agencies, spending agencies and political leadership
in an orderly and timely manner, in accordance with a pre-determined budget formula-
tion calendar. Clear guidance on the budget process should be provided in the budget cir-
cular and budget formulation manual. Negotiations on allocations should be transparent
and systematic.
a. Spending ministries are given clear guidance for the preparation of budget submis-
sions, including indicative ceilings that are informed by specific agreement at the polit-
ical level on the relative spending priorities across sectors. Ministries adhere to the
budget calendar and are generally able to fulfill the requirements of the budget calen-
dar, including ceilings and data submissions. Negotiations with ministry of finance are
open and transparent; line ministries know their final allocation at the conclusion of
such negotiations.
b. Spending ministries are given clear guidance for the preparation of budget submis-
sions, and indicative ceilings are informed by general guidance from the political level
concerning relative spending priorities. Ministries adhere to the budget calendar and
circular requirements in most cases. Negotiations between ministry of finance and line
ministries are rather opaque, and there may be a delay in line ministries learning the
outcome of negotiations.
c. There are occasional delays in the budget calendar and budget submissions from line
ministries may be incomplete or lack the detail requested by ministry of finance. The
political level is involved in reviewing and approving the estimates only after they
have been prepared by ministry of finance, thereby constraining their ability to make
adjustments. Budget conferences between ministry of finance and line ministries are
highly restricted, with final outcomes reflecting the will of ministry of finance.
d. Although a budget calendar and budget instructions may exist, they are generally not
adhered to. Budget submissions are often late and if indicative ceilings are given, they
are normally exceeded by line ministries. The political leadership generally only gets
involved prior to the budget being submitted to the legislature, at which time little
opportunity for adjustment exists. Ministry of finance prepares the budget with little
input from line ministries, and the latter may only learn of their budget allocations
when the budget is submitted to the legislature.
August 2004 87
Indicator
13. Coordination of the budgeting of recurrent and investment expenditures.
Guidance
A common problem is the separation of budgeting for expenditures that are of a recurring
nature and budgeting for multi-year investment projects. This means that decisions about
the investment and recurrent funding for a particular sector or ministry are taken inde-
pendently and may be inconsistent. In addition, the recurrent implications of investment
expenditure are not considered when making the decision to invest.
a. There is a single budget process, based on a single calendar and circular, that fully
coordinates the budgeting for investment and recurrent expenditures at the central,
ministry/agency and sub-functional/program levels. Recurrent implications of invest-
ment decisions are budgeted.
b. Linkages between the processes for budgeting for investment and for recurrent expen-
ditures are made at key points, for the central and ministry/agency levels. The budgets
are documented together at the central and ministry/agency levels.
c. The budgets for investment and recurrent expenditure are only brought together
towards the end of the budget process.
d. The budgeting for investment and recurrent expenditures are separate processes and
produce separate documents.
Indicator
14. Legislative scrutiny of the annual budget law.
Cardinal data
i. Number of days the legislature has to review the budget.
Guidance
The power to give the government authority to spend rests with the legislature, and is
exercised through the passing of the annual budget law. If the legislature does not rigor-
ously examine and debate the law, that power is not being effectively exercised and will
undermine the accountability of the government to the electorate.
Assessing the legislative scrutiny and debate of the annual budget law will be
informed by consideration of several factors :
I. (i) The scope of the legislature’s review in particular the extent to which it covers fiscal
policies and medium term fiscal framework, in advance of the review of details of
expenditure and revenue.
(ii) The extent to which the legislature’s procedures are well-established, provide
adequate time, and involves scrutiny of the budget by specialized committee(s)
(iii) The adequacy and user-friendliness of the information received by the legislature.
II. Whether the budget is generally passed before the beginning of the financial year.
Delays in passing the budget may create uncertainty about the level of approved
expenditures and delays in some government activities including major contracts.
Adequate performance on both I and II is required to receive a, b or c score.
a. I. Legislative scrutiny is comprehensive, well-informed by summary and detailed
information, and involves in-depth review by specialized committee. II. The budget
is passed before the financial year commences.
b. I. Legislative scrutiny covers aggregates and detailed estimates of expenditure and
revenue, is informed by user-friendly information, and involves some review by
specialized committees. II. The budget is generally passed before the financial year
commences.

c. I. Legislative scrutiny covers the details of expenditure and revenue, only budget esti-
mates are provided, some procedures exist and are partially followed. II. The budget is
generally passed within two months of the start of the financial year.
d. I. Legislative scrutiny is extremely limited and procedures are generally not followed.
II. The budget is not generally passed within two months of the start of the financial
year.
Budget execution
Indicator
15. Effectiveness of cash flow planning, management and monitoring. The objectives of
cash flow planning, monitoring and management are (i) orderly execution of the budget,
(ii) borrowing synchronized with cash inflows and outflows, (iii) avoidance of idle cash
balances resulting in unnecessary interest payments. This requires regular calculation and
consolidation of cash balances (including those for extra-budgetary funds), and regular
and reliable forecasts of cash inflows and outflows which are linked to the budget imple-
mentation and procurement plan, and borrowing plan.
Guidance
Calculation and consolidation is facilitated where there exists a single Treasury account or
where all accounts are centralized. In order to achieve regular consolidation of multiple
bank accounts not held centrally, timely electronic clearing and payment banking arrange-
ments will generally be required.
a. There is daily calculation and consolidation of all the government’s cash balances.
Forecasts of all cash inflows and outflows are prepared for the fiscal year and updated
monthly, based on revenue forecasts and budget implementation and procurement
plans. Borrowing is planned on the basis of cash flow forecasts.
b. There is daily calculation and consolidation of government cash balances, though some
transactions such as those from extra-budgetary funds may remain outside the cash
planning and consolidation arrangements. Cash flow forecasts are prepared for the fis-
cal year and updated monthly.
c. The calculation of most government cash balances takes place regularly, though some
accounts are not included in the cash planning arrangements. The system used does
not allow for daily consolidation of bank accounts. Cash flow forecasts are updated
periodically.
d. The calculation of cash balances takes place irregularly, or cash flow planning is not
undertaken.
Indicator
16. Procedures in operation for the management and recording of debt and guarantees.
Guidance
Debt management, in terms of contracting, servicing and repayment, and the provision of
government guarantees are often major elements of overall fiscal management. Poor man-
agement of debt and guarantees can create unnecessarily high debt service costs and can
create significant fiscal risks.
Critical aspects of debt management performance include the proper recording and
reporting of debt and guarantees, the approval of all guarantees by the ministry of
finance, and regular analysis of debt sustainability.
a. Domestic and foreign debt records are maintained on an single computerized debt
management system and produce comprehensive reports for government routinely.
Debt sustainability analysis is undertaken regularly. The issue of government
August 2004 89
guarantees is made against transparent criteria and fiscal targets, and approved by
the ministry of finance.
b. Regular reports on domestic and foreign debt are recorded on computerized debt man-
agement systems, or, in cases where debt levels are low, using spreadsheet records
which have been demonstrated to be accurate and robust. These produce regular
reports. Debt sustainability analysis is undertaken from time to time. All guarantees
are approved by the ministry of finance, and a limit is placed on the total that may be
issued.
c. Spreadsheet or manual records are maintained on debt, and reports on debt stock and
service are prepared periodically. Debt sustainability is undertaken only infrequently.
Some guarantees may be issued without ministry of finance approval.
d. Debt records are incomplete or inaccurate to a significant degree. Government
guarantees are issued on an adhoc basis in an opaque manner.
Indicator
17. Extent to which spending ministries and agencies are able to plan and commit expen-
ditures in accordance with original/revised budgets.
Guidance
Efficient use of resources requires that managers know the level of resources they can uti-
lize (meaning here the point at which they can incur expenditure commitments) and the
timing, and that the timing meets the operational requirements of the ministries This is
particularly so for seasonal expenditures and major procurement contracts. In some sys-
tems, funds (or authority to spend) are released by the ministry of finance within the
budget year. In others, the passing of the annual budget law grants the full authority to
spend at the beginning of the year, but the ministry of finance (or other central agency)
may in practice impose delays on ministries in incurring new commitments when cash
flow problems arising.
Poor predictability in being able to utilize funds prevents managers from planning and
may mean that funds are available at the wrong time.
Governments often need to make within-year adjustments to allocations in the light of
unanticipated events impacting revenues and/or expenditures. The impact on predictabil-
ity and on the integrity of original budget allocations is minimized by specifying, in
advance, an adjustment mechanism that relates adjustment to the budget priorities in a
systematic and transparent manner. In contrast, adjustments can take place without clear
rules/guidelines or can be undertaken informally (eg. through imposing delays on new
commitments).
a. Spending ministries and agencies are able to commit expenditures (eg. sign contracts
with contractors and suppliers) in an orderly manner throughout the year, broadly in
accordance with cash flow forecasts (agreed with finance ministry) and with the budg-
et. Adjustment to the allocations takes place only once during the year and is done in a
predictable, transparent way.
b. Spending ministries and agencies have reliable information about the resources avail-
able/to be provided for a given quarter, and adjustments to budget allocations are
transparent and occur only a limited number of times each year.
c. Spending ministries and agencies have reliable information about the resources avail-
able/to be provided for a given quarter or more, but adjustments are not undertaken
in a systematic and transparent manner. Alternatively, spending ministries and agen-
cies have reliable information about the resources available/ to be provided for a given
month, and the variation in the non-salary resources available to individual line min-
istries on a month-to- month basis is limited.

d. Spending ministries and agencies have information about resources available for a
month or less, and there is significant variation in the non-salary resources available to
individual line ministries on a month-to-month basis.
Indicator
18. Evidence available that budgeted resources reach spending units in a timely and
transparent manner.
Cardinal data:
i. Percentage of intended resources that reach front-line service delivery units
Guidance
Problems frequently arise in front-line service delivery units providing services at the
community level in obtaining resources that were intended for their use (as reflected in
the original or revised approved budgets/estimates), or in obtaining the delegation to
commit expenditures (in the Francophone system). Leakages may arise in respect of funds
and in respect of the procurement and distribution of goods, at different levels within the
system, and there may be significant delays.
Information about the receipt of resources by service units is often lacking. The
accounting system, if sufficiently extensive, reliable and timely, should provide this but
frequently information on expenditures in the field is incomplete and unreliable. Public
Expenditure Tracking Surveys, audits (either by the external auditor or by donor-funded
consultants) or other assessments, may provide alternative sources. In addition, availabili-
ty of this information to the local community provides a means for ensuring that the funds
received are used as intended.
a. There is reliable accounting and/or survey information available periodically, and this
demonstrates that service delivery units obtain the vast majority of resources intended,
in a timely manner. Communities have routine access to information about resources
received by local service units.
b. Information is available from time to time, and this indicates that service delivery units
receive, on average, at least 80% of resources intended and that the delays are limited.
Communities have information about the resources received by service units in several
key sectors.
c. Only limited information is available and this indicates that some leakages exist and
that delays can be significant. There is a system, partially operating, to make informa-
tion available to communities about receipts.
d. The information available provides an indication that leakages can exceed 50% of
intended resources, and that there are major delays in receipt of resources by service
delivery units. Alternatively, very little or no information is available regarding the
resources reaching service units.
Indicator
19. Effectiveness of internal controls
Cardinal data:
i. Error rates in routine financial transactions
Guidance
Internal control has a number of dimensions. An effective internal control system is one
that is relevant (ie based on an assessment of risks and the controls required to manage
the risks), incorporates a comprehensive and generally cost effective set of controls (which
address compliance with rules in procurement and other expenditure processes, preven-
tion and detection of mistakes and fraud, safeguard of information and assets, and quality
and timeliness of accounting and reporting) which are widely understood and complied
August 2004 91
with, is circumvented only for genuine emergency reasons, and for which top manage-
ment takes full responsibility. Evidence of the effectiveness of the internal control system
should come from regular audits.
a. The internal control system is relevant, incorporates a comprehensive and generally
cost effective set of controls which are widely understood, the rate at which rules are
not complied with is very low (no more that 3% error rate in routine financial proce-
dures, as demonstrated by audit), the controls are only rarely bypassed, and top man-
agement takes clear and full responsibility for the effective operation of the system.
b. The internal control system has a comprehensive set of controls, which are generally
understood and which audit indicates are complied with (no more than 5% error rate
in routine financial procedures). Emergency procedures are utilized on occasion, but in
a deliberate and controlled manner.
c. The internal control system consists of a basic set of rules for the processing and
recording of transactions, which are well understood by those directly involved in their
application, and which audit indicates are observed in a significant majority of transac-
tions. Emergency procedures are utilized in non-emergency situations from time to
time.
d. The core set of rules is not complied with on a routine and widespread basis due to
direct breach of rules or routine use of emergency procedures.
Indicator
20. The effectiveness of internal audit
Guidance
Regular and adequate feedback to management is required on the performance of the
internal control systems, through an internal audit function (or other systems monitoring
function) that is appropriately structured, has adequate independence, breadth of the
mandate, and power to report, utilizes appropriate professional standards, and reports on
significant systemic issues. Specific evidence of an effective internal audit (or systems
monitoring) function would also include assessment and monitoring of error rates in pro-
curement and expenditure transactions, a focus on high risk areas, reporting on correction
rates, use by the SAI of the internal audit reports, and action by management on internal
audit findings.
a. An effective internal audit (or systems monitoring) function, as defined above, is in
operation.
b. The internal audit (or systems monitoring) function is in operation, and provides
regular reports to top management on systemic issues which are widely disseminated.
Its mandate and access may not fully meet professional standards.
c. The internal audit (or systems monitoring) function exists and undertakes some
systems review. Reports are often not disseminated and little evidence is available of
follow up action by management.
d. There is little or no internal audit or systems monitoring.
Indicator
21. Effectiveness of payroll controls
Guidance
The wagebill is usually one of the biggest items of government expenditure and suscepti-
ble to weak control and corruption. The payroll is underpinned by the “nominal roll,”
which is a list of all staff who should be paid every month and which can be verified
against the approved establishment list. The link between the payroll and the nominal roll
is a key control. Any amendments required to the nominal roll should be processed in a
timely manner through a change report, and should result in an audit trail. Payroll audits

should be undertaken regularly, and may include audits to identify ghosts workers, and
control weaknesses. In addition, in order that the wagebill is adequately monitored, the
ministry of finance should have full access to payroll information
a. Payroll records and nominal roll are directly linked through a computerized informa-
tion system to which the ministry of finance has easy access, authority to change the
payroll is restricted, and changes result in an computerized audit trail being created.
Changes required to the nominal roll and pay requirements are updated in a timely
way. There is a strong system of payroll audit to identify control weaknesses and/or
ghost workers.
b. Payroll data is supported by the nominal roll records. The authority and basis for
changes to the payroll database are clear. Some delays exist in processing changes to
the nominal roll and payroll database. The routine controls are complemented, from
time to time, by payroll audits to identify weaknesses and/or ghost workers. Payroll
information is regularly provided to the ministry of finance.
c. The nominal roll, which supports the payroll data, is not fully maintained. Controls
exist over changes to the nominal roll and payroll database but these are not adequate
to ensure full integrity of the system. There may be significant delays in processing of
payroll changes. Aggregate payroll information only is provided to the ministry of
finance.
d. The lack of controls significantly undermines the integrity of the payroll database.
Indicator
22. The existence of a transparent procurement system as an integral part of the overall
PFM system which is supported by a clear regulatory framework that provides for com-
petition, value for money and effective controls.
Cardinal data:
Prices paid by public sector for goods, works and services is comparable to prices paid by the
private sector for similar items.
Guidance
Public procurement is a major component of the PFM system which directly impacts effi-
ciency and economy of expenditures and also contributes to the budget formulation and
expenditure management process. Assessment against this indicator will depend on the
adequacy of the regulatory framework in promoting competition, transparency and value
for money and the extent to which the system has effective control, remedy and feedback
mechanisms. Evidence of the performance of the system against these requirements
include the percentage of contracts subject to competitive bidding, the regular publication
of opportunities and outcomes of public contracts, the absence of major delays in the pro-
cessing and payment of contracts, the comparability of prices paid by the public sector to
pricing of items available in the marketplace and the ability of the system to provide
timely information on the cost of goods, works and services to support budget formula-
tion, execution and expenditure management.
a. The system is defined by a clear regulatory framework which is consistently imple-
mented under the oversight of both internal and external control systems. Contracts
are awarded on the basis of competition, in accordance with rules, or justified when
other methods are employed. There is regular advertisement of opportunities and pub-
lication of data on public contracts. There are few unexplained delays in awarding
contracts and in making payments. The system provides for timely feedback of cost
data and execution against plans to support the PFM process.
b. The system is defined by a regulatory framework which is consistently implemented.
The majority of contracts are awarded on the basis of competitive procedures. There is
regular advertisement of opportunities but little publication of information on public
August 2004 93
contracts. Control mechanisms and linkages to the overall PFM system are not well
established leading to budgeting issues and delays in contract award and payments.
c. The system is defined by an outdated regulatory framework which enables inconsis-
tent and poorly controlled implementation. Lack of competition as the basis for con-
tract awards is evidenced by poor comparison between prices paid in the public sector
when compared to market prices. Delays in award of contracts and payments are fre-
quent. Disclosure of information is poor leading to a lack of transparency and confi-
dence in the system.
d. There is a lack of definition and clarity in the regulatory framework with inconsistent
implementation evidenced by a lack of competition in the award of contracts and little
disclosure of information. Control systems are weak or non-existent. Delays in awards
and in payments are common and contribute to overall lack of efficiency in the system
and consistent over payment by the public sector.
Accounting and reporting
Indicator
23. Timeliness and regularity of data reconciliation.
Guidance
Reliable reporting of financial information requires constant checking and verification of
the recording practices of accountants—this is an important part of internal control and a
foundation for good quality information for management and for external reports. Timely
and frequent reconciliation of data from different sources is fundamental for data reliabili-
ty. Two critical types of reconciliation are (i) reconciliation of fiscal data, held in the gov-
ernment’s books, with government bank account data held by central and commercial
banks. High quality bank reconciliation requires that large differences are not left unex-
plained (ii) reconciliation of suspense accounts, and advances. In addition, balance should
be cleared out of suspense and advance accounts on a regular basis.
a. High quality bank reconciliation is undertaken at aggregated and detailed levels at
least monthly, with very little backlog. Suspense accounts are routinely reconciled and
cleared quarterly, and advances accounts are reconciled quarterly. Few suspense and
advance accounts have old, brought-forward balances.
b. High quality bank reconciliation is undertaken monthly for bank accounts through
which revenues are collected and expenditures made, with no major backlog. There is
no major backlog in the annual reconciliation of suspense and advances accounts, and
in the annual clearing of the suspense account balances. There are old, brought-for-
ward balances in some suspense and advances accounts.
c. Bank reconciliation is undertaken quarterly for bank accounts through which revenues
are collected and expenditures made, with no major backlog. Not all differences are
explained. Reconciliation of suspense and advances accounts generally takes place
annually, though there are a significant number of accounts with old, brought-forward
balances.
d. There is a major backlog in quarterly bank reconciliation, and in annual reconciliation
of suspense and advances.
Indicator
24. Timeliness, quality and dissemination of in-year budget reports.
Cardinal data:
Number of days following end of quarter that quarterly budget report is disseminated within the
government

Guidance
The ability to “bring in” the budget requires timely and regular information on actual
budget performance to be available both to the ministry of finance, to monitor perform-
ance and if necessary to identify new actions to get the budget back on track, and to the
line ministries for managing their own affairs for which they are accountable.
The division of responsibility between the ministry of finance and line ministries in the
preparation of the reports will depend on the type of accounting and payment system in
operation. The role of the ministry of finance may simply to consolidate reports provided
by line ministries from their accounting records; in other cases the ministry of finance may
undertake the data entry and accounting for transactions in which case the role of the line
ministry is reduced, perhaps to reconciling ministry of finance data with their own
records. The important requirement is that there be a two way flow of information
between the ministry of finance and the line ministries.
a. Budget reports, with classification that allows direct comparison to the budget and
which incorporate expenditure, revenue and debt information, are disseminated within
government within four weeks of month and quarter end. There are no material con-
cerns about the quality of the information.
b. Budget reports, with classification that allows comparison to the budget at some levels
and which incorporate expenditure and revenue information, are disseminated within
government within four weeks of quarter end. Where there is some information that is
lacking this is recognized and adequately reflected in the reports, and there may be
some limited concerns about accuracy, but these shortcomings do not fundamentally
compromise the overall consistency and usefulness of the reports.
c. Budget reports are prepared within six weeks of quarter end, but major gaps exist in
the information and the manner of compilation allows for a significant level of inaccu-
racy. Dissemination to line ministries is limited.
d. Budget reports are not prepared within six weeks of the quarter end.
Indicator
25. Timeliness and quality of audited financial statements submitted to the legislature
Cardinal data:
i. Number of months after year end that financial statements presented to legislative
Guidance
The consolidated year end financial statements are a critical element of transparency in the
system. In addition, the ability to prepare year end financial statements in a timely fashion
is a key indicator of how well the accounting system is operating, and the quality of
records maintained. Validation is required through certification of the financial statements
by the external auditor.
In addition, in order to be useful and to contribute to transparency, financial statements
must be understandable to the reader, and deal with transactions, assets and liabilities in a
transparent, consistent manner. This is the purpose of financial reporting standards. Some
countries have their own public sector financial reporting standards, set by government or
another authorized body. In addition, there are the Government Finance Statistics (GFS)
standards, and the International Federation of Accountants’ International Public Sector
Accounting Standards (IPSASs), some relevant for countries that adopt accrual based
accounting, and others relevant for cash-based systems.
For the most recent financial statements:
a. The complete set of financial statements, certified by the external auditor, are
presented to the legislature within 12 months of the year end. The financial statements
are presented in accordance with IPSASs, GFS or an acceptable national standard.
August 2004 95
b. A complete set of financial statements was presented to the legislature within 12
months of year end. The financial statements are presented in accordance with IPSASs,
GFS or an acceptable national standard.
c. Financial statements were presented to the legislature within 12 months of year end.
The financial statements are presented in a consistent manner over time and there is
some disclosure of accounting policies applied.
d. Financial statements were not to the legislature within 12 months of year end.
External accountability, audit and scrutiny
Indicator
26. The scope and nature of external audit.
Guidance
A high quality external audit is an essential requirement for creating transparency in the
use of public funds. Key elements of quality include whether external audit (i) is ade-
quately empowered—ie authority exists to obtain necessary information and the scope
covers the full public sector, (ii) adheres to appropriate auditing standards (INTOSAI,
IFAC) and focuses on significant and systemic PFM issues in its reports, and (iii) covers
the full range of financial audit—reliability of financial statements, regularity of transac-
tions and functioning of internal control and procurement systems.
a. The external audit is adequately empowered, covers all major entities in the public
sector and the full range of financial audit, focuses on significant and systemic issues in
its reports, and generally adheres to auditing standards.
b. All central government expenditures and revenues are covered by the external audit.
Audit work includes assessment of internal control systems, and reports identify sys-
temic issues as well as irregular transactions.
c. 80% or more of central government expenditures are covered by the external audit. The
SAI has authority to obtain information and reports identify significant issues. Audit
work is predominantly transaction level testing.
d. Less than 80% of central government expenditures are covered by external audit,
and/or external audit has very weak authority and so is unable to obtain the basic
information required.
Indicator
27. Follow up of audit reports by the executive or audited entity.
Guidance
While the exact process will depend to some degree on the system of government, in gen-
eral there should be direct follow up of the audit findings by the executive, which may
include follow up by the ministry of finance and follow by the individual audited entity.
Evidence of effective follow up of the audit findings includes the timely reduction in
uncleared findings, and the provision by the executive or audited entity a formal written
response to the audit findings indicating how these have and are being addressed.
[Another important aspect of audit follow up in this system is that undertaken by the
legislature and this is addressed in a separate indicator].
a. There is evidence of effective follow up being taken to audit findings, in a timely
manner.
b. There is a formal response to audit findings, provided in a timely manner, but the
follow up is not taken systematically.
c. There is a formal response to audit findings, though delayed. Little follow up takes
place.
d. These is little evidence of response or follow up taken to audit findings.

Indicator
28.. Legislative scrutiny of external audit reports.
Cardinal data:
i. Number of months following external audit report before specialized legislative committee
completes examination of the report
Guidance
The legislature has a key role in exercising scrutiny over the execution of the budget that
it approved.
A common way in which this is done is through a legislative committee/commission
that examines the external audit reports and questions responsible parties about the find-
ings of the reports. The operation of the committee will depend on adequate financial and
technical resources, and on adequate time being allocated to keep up-to-date on reviewing
audit reports. The committee may also recommend actions and sanctions by the executive.
a. A committee examines the external audit reports and completes in-depth hearings on
key findings within one year of the report’s issue and within two years of the end of
the relevant period. Follow up actions are recommended to the executive, and are gen-
erally acted upon.
b. A committee examines the external audit reports and completes hearings within 18
months of the report’s issue, and within three years of the end of the relevant period.
Follow up actions are recommended to the executive, some of which are acted upon.
c. A committee examines the external audit reports but this is not completed within 30
months of the report’s issue. Follow up actions may be recommended but are rarely
acted upon.
d. There has been no examination of the external audit reports within the last three years,
or the examinations are for periods ended 5 years or earlier.
INDICATOR OF DONOR PRACTICES

Donor 1. Actual donor flows are close to donor forecasts, and donor information provided
to government on forecasts and actual expenditures are largely complete.
Cardinal data:
i. Actual donor flows minus forecast, as percentage of forecast.
ii. Percentage of donor flows for which timely information is provided
Donor practices can support or hinder PFM in partner countries. This indicator captures
two key aspects of donor practices: (i) the extent to which donors provide adequate infor-
mation to the government about the funds that are to be provided, and on the funds or
other forms of development assistance that have been provided, and (ii) how close the
actual funds/resources provided are to the forecasts given by donors.
a. Financial information is provided by donors on all significant funding/assistance in a
timely manner. Actual funds provided by donors in the last two years are within 90%
of forecasts provided.
b. Financial information is provided by donors on at least 80% of funding/assistance pro-
vided. Actual funds provided by donors in the last two years have been within 75% of
forecasts provided.
c. Financial information is given by donors for the majority of funds/resources provided.
August 2004 97
d. The financial information provided on actual funds provided is substantially incom-
plete. Actual funds provided by donors bear little relation to the forecasts provided, or
no forecasts are provided.
Donor 2. Proportion of aid that is managed using national procedures.
Cardinal data:
i. Percentage of aid funds to government that are managed using national procedures.
The requirement that national authorities use different procedures for the management of
aid funds diverts capacity away from managing the national systems. This is compound-
ed when different donors have different requirements. Conversely, the use of national sys-
tems by donors can help to focus effort on strengthening, and complying with, the nation-
al procedures. The use of national procedures need not mean that donor funds cannot be
kept separate from government funds, but that the banking, authorization, procurement,
accounting, disbursement and reporting arrangements are the same as those used for
government funds.
a. 90% or more of aid funds to central government are managed through national
procedures.
b. 75% or more of aid funds to central government are managed through national
procedures.
c. 50% or more of aid funds to central government are managed through national
procedures. Of the balance, a material part is managed through common donor
arrangements.
d. Less than 50% of aid funds to central government are managed through national
procedures.
End Notes
1. Amendment dated May 6, 2004. This document is the same as that issued on
February 12, 2004, except that the procurement indicator (no.22) has been amended and
procurement issues has been better reflected in the other indicators. This document does
not represent a full revision of the document issued on February 12; other comments that
has been received in respect of the document issued on February 12 will be fed into the
next full revision that is to take place following further consultation and testing of the
indicators.
2. PEFA is a partnership program of the European Commission, World Bank, the IMF
and the governments of France, Switzerland, Norway and UK. The Secretariat is located
in the World Bank offices in Washington.
3. The new approach is consistent with the principles contained in the paper Bank/Fund
Collaboration on Public Expenditure Issues, (Washington, DC: The World Bank
and International Monetary Fund, February 14, 2003). See
www.imf.org/external/np/fad/pubexpen/2003/021403.htm.
4. See Actions to Strengthen the Tracking of Poverty-Reducing Public Spending in Heavily
Indebted Poor Countries (HIPCs), (Washington, DC: The World Bank and International
Monetary Fund, March 22, 2002). See www.worldbank.org/hipc/hipc-review/tracking.pdf. Since
that paper was prepared, a benchmark capturing performance of the procurement system
has been added to the original 15.
5. That said, the indicators do capture the extent to which the budget cycle is
implemented in a predictable and orderly manner, which is an essential pre-requisite
for efficient use of resources.

6. While accountability may also be viewed as cross-cutting feature, it was felt that the
processes involved in exercising external accountability could be more adequately cap-
tured as a distinct component of the budget cycle.
7. The set does not include indicators of factors impacting good or bad performance,
such as staffing or the legal framework, but rather the performance itself.
8. Revenue is included only insofar as it is adequately forecast and monitored so as to
support orderly cash flow management and budget execution. Coverage of the sub-
national government and the parastatal/SOE sectors are limited to the monitoring of and
reporting on the impact of these sectors on aggregate fiscal position and risk.
9. This is compatible with the IDA Country Policy and Institutional Assessment rating
system, which includes an indicator on budgetary management.
10. A score of B. indicates that the core PFM element is generally operating in an order-
ly and timely manner but lacks completeness, coordination, compliance and/or accuracy
in some limited respects. C. indicates the core PFM element is working at a rudimentary
level, but there are some significant weaknesses in terms of completeness, coordination,
compliance, accuracy, and/or timeliness. D. indicates there are very substantial weakness-
es in the operation of the relevant core PFM element.
11. A score of C+ will be justified if a country has all the attributes of a C score, and
some of those specified for a B score.
August 2004 99
Public Sector Committee Update 12
Introduction
The Public Sector Committee (PSC) met in New York, USA on July 5-7, 2004.
This update summarizes the major features of the meeting. Agenda papers for
PSC meetings are made available on the PSC page of the IFAC web site before
the meeting. In conjunction with this meeting, the PSC met with members of its
Consultative Group and held a round table meeting with representatives from
the United Nations on International Public Sector Accounting Standards
(IPSASs) and reform of financial reporting in the United Nations. The Chair of
the US Governmental Accounting Standards Board (GASB) also joined the PSC
for discussion of certain items.
IPSAS Approved: Impairment of Non-Cash-Generating Assets

The PSC reviewed a draft IPSAS that was prepared after consideration of the
responses to ED 23 Impairment of Assets. The PSC approved the draft as IPSAS
21 Impairment of Non-Cash-Generating Asset, subject to final review of editorial
revisions by a sub-committee of the PSC and approval by the Chair, and confir-
mation of the application date of this IPSAS. Because of the linkages between
this IPSAS and the IPSASs being revised as part of the PSC’s improvements
project (see below), the PSC intends to co-ordinate the application date of this
IPSAS and the improved IPSASs. The PSC noted that respondents to ED 23 had
agreed that the impairment of cash-generating assets should be dealt with in
accordance with IAS 36 Impairment of Assets. Accordingly, the PSC agreed to
develop an IPSAS Impairment of Cash-Generating Assets reflecting the require-
ments of IAS 36 without change, but with the inclusion of public sector
examples. The PSC appointed a sub-committee to develop a draft document
for consideration at the next PSC meeting in November 2004.
PSC External Review

The PSC received and discussed the Report of the Externally Chaired Review
Panel on the Governance, Role and Organisation of the IFAC-PSC. The Panel was
chaired by Sir Andrew Likierman, former Head of the UK Accountancy Service
of HM Treasury. Members discussed each recommendation in detail, noting
that: they supported the majority of recommendations and were of the view
that the report was comprehensive and balanced; and that the survey results
generated as part of the review process were very supportive of the PSC’s stan-
dards setting activities. Members also discussed the PSC’s work program and
agreed that the PSC should address the public sector specific issues on its work
program as its first priority, that convergence with IFRSs/IASs would be its sec-
ond priority and convergence with statistical reporting models its third priority.
The Chair attended the IFAC Board meeting following the PSC meeting and
presented the PSC views on each recommendation. It is anticipated that the
IFAC Board will consider an action plan for implementing the Panel’s
Recommendations at its next meeting in November 2004.

PSC Consultative Group
PSC met with Consultative Group members from Canada, the Association of
Accounting Bodies of West Africa (AABWA), the North Atlantic Treaty
Organization (NATO) and USA, including the Executive Director of the
Financial Accounting Standards Advisory Board (FASAB) in the USA. The
Consultative Group noted the PSC’s proposed work program, noting that guid-
ance on key public sector issues should be a priority but that there was also a
need to keep existing IPSASs up to date and that it was important for the PSC,
and IFAC generally, to support initiatives for the education of public sector
accountants in developing countries. The Consultative Group then discussed:
• the PSC’s strategy for convergence of IPSASs with IASs/IFRSs where appro-
priate, noting that the convergence strategy agreed at this meeting appeared
appropriate (see below for a discussion of that strategy); and
• the Research Report Budget Reporting, noting support for the development of
an IPSAS on the comparisons of actual to budget as a priority. The
Consultative Group also noted that developing an IPSAS on ex-ante report-
ing of budget information was a longer term project which could benefit
from further research including consideration of the role of a management
discussion and analysis in communicating budget information.
Written submissions from Consultative Group members on these topics were
also considered.
Work Program
Budget Reporting
The Research Report Budget Reporting was published in May 2004. The
Report which can be downloaded free of charge from the PSC page of the IFAC
web site represents the views of Dr. Jesse Hughes, the consultant who had pre-
pared the Report, and not necessarily the PSC. The PSC discussed the process
for the ongoing development of this project and agreed that it should be devel-
oped in two components as follows:
• The development of an IPSAS on the comparison of budget and actual (“ex-
post” budget reporting) should be actioned as a priority project. A first draft
of an Exposure Draft (ED) is to be prepared for consideration by the PSC at
its next meeting; and
• The development of an ED on the “ex-ante” reporting of budget information
at the time the budget is approved is a longer term project and should be
progressed after the PSC has considered a detailed project brief which out-
lines specific matters to be addressed. It is anticipated that project brief will
be prepared for consideration at the PSC’s first meeting in 2005.
Accounting for Development Assistance Under the Cash Basis of Accounting
Mr. Ian Mackintosh, Chair of the Project Advisory Panel (PAP) and Mr.
Charles Coe, consultant, were present at the meeting and advised the PSC that
the draft ED had been circulated to PAP members, that responses received to
date were included in the PSC’s Agenda and identified key issues raised in
those and an additional response. Members reviewed the draft ED focusing on
issues raised by the PAP, particularly in respect of: key definitions; whether the
scope of the project should be extended to deal with external assistance, what
separate disclosures should be required; and practical issues related to the avail-
ability of information to satisfy the disclosure requirements. Members noted
August 2004 101

that Mr. Coe would make a presentation on the draft ED to a meeting of the
OECD Joint Venture on Public Financial Management, which comprises all
OECD countries, developing countries, and the Multi-lateral Development
Banks (MDBs). Mr. Coe advised that the ED would be further developed fol-
lowing input from that meeting and ongoing consultation with the PAP, and
an updated draft ED would be presented to the PSC for approval to issue at
the PSC’s next meeting.
Convergence with International Financial Reporting Standards (IFRSs) issued
by the IASB
The PSC considered a staff paper on a proposed strategy for the PSC’s
IAS/IFRS convergence program. Major features of the proposed strategy
included establishment of a stable platform of IPSASs for the medium term,
adopting without change key IASs/IFRSs for which there were no public sector
reasons to depart, developing new IPSASs where the requirements of an
IAS/IFRS needed amendment for application to the public sector, and issuing
English, French and Spanish versions of the second generation IPSASs at the
same time. To ensure the PSC’s due process was complied with, and that link-
ages with the PSC’s public sector specific projects were recognized, the paper
proposed that the full suite of “second generation” IPSASs would not be on
issue until January 2008, for application on January 2009.
Convergence of IPSASs with GFS and ESA 95
The PSC considered a project brief for the development of an IPSAS encour-
aging disclosure of information about the General Government Sector in whole-
of-government general purpose financial statements. The PSC discussed key
features of the project brief and directed staff to further develop the project brief
following input from the Project Advisory Panel. An updated project brief is to
be presented to the PSC’s next meeting. The PSC noted that staff was develop-
ing a project brief for the development of an IPSAS on a comprehensive report
of financial performance that distinguished between transactions and other eco-
nomic flows. The PSC confirmed that the project brief should be developed
after consultation with the IASB on their project on reporting financial
performance/comprehensive income.
PSC MEMBERS 2004

FRANCE—Philippe Adhémar (Chair), Conseiller Maître à la Cour des
Comptes. UNITED KINGDOM—Mike Hathorn (Vice Chair), Partner, Moore
Stephens, United Kingdom. ARGENTINA—Carmen Palladino, Consultant
InterAmerican Development Bank. AUSTRALIA—Wayne Cameron, Auditor-
General, State of Victoria. CANADA—Rick Neville, Vice-President and Chief
Financial Officer, Royal Canadian Mint. GERMANY—Norbert Vogelpoth,
Partner, PwC Deutsche. ISRAEL- Zvi Chalamish, Deputy Accountant General,
Ministry of Finance. JAPAN—Ryoko Shimizu, Partner, PwC Japan.
MALAYSIA—Mohd. Salleh
Mahmud, Deputy Accountant-General, Malaysia. MEXICO—Javier Pérez
Saavedra, Subdirector de control de Calidad, Petroleos Mexicano. NETHER-
LANDS—Peter Bartholomeus, Director, Government Audit Policy Department,
Ministry of Finance. NEW ZEALAND—Greg Schollum, Chief Financial Officer,
Greater Wellington Regional Council. NORWAY—Tom Olsen, Partner, PwC
Norway. SOUTH AFRICA—Terence Nombembe, Deputy Auditor-General of
South Africa and CEO of the Office of the Auditor-General of South Africa.

UNITED STATES OF AMERICA—Ron Points, Manager, Financial
Management for East Asia and Pacific Region, World Bank.
PSC OBSERVERS 2004

Asian Development Bank (ADB), European Union (EU), International
Accounting Standards Board (IASB), International Monetary Fund (IMF),
International Organisation Of Supreme Audit Institutions—Committee on
Accounting Standards (INTOSAI-CAS), Organisation For Economic Co-
Operation And Development (OECD), United Nations/United Nations
Development Programme (UN/UNDP) and the World Bank.
INTERNATIONAL PUBLIC SECTOR ACCOUNTING STANDARDS

(IPSASs—Accrual Basis)
IPSAS 1 Presentation of Financial Statements sets out the overall considera-
tions for the presentation of financial statements, guidance for the structure of
those statements and minimum requirements for their content under the accrual
basis of accounting.
IPSAS 2 Cash Flow Statements requires the provision of information about the
changes in cash and cash equivalents during the period from operating, invest-
ing and financing activities.
IPSAS 3 Net Surplus or Deficit for the Period, Fundamental Errors and Changes
in Accounting Policies specifies the accounting treatment for changes in
accounting estimates, changes in accounting policies and the correction of fun-
damental errors, defines extraordinary items and requires the separate disclo-
sure of certain items in the financial statements.
IPSAS 4 The Effects of Changes in Foreign Exchange Rates deals with account-
ing for foreign currency transactions and foreign operations. IPSAS 4 sets out
the requirements for determining which exchange rate to use for the recognition
of certain transactions and balances and how to recognize in the financial state-
ments the financial effect of changes in exchange rates.
IPSAS 5 Borrowing Costs prescribes the accounting treatment for borrowing
costs and requires either the immediate expensing of borrowing costs or, as an
allowed alternative treatment, the capitalization of borrowing costs that are
directly attributable to the acquisition, construction or production of a qualify-
ing asset.
IPSAS 6 Consolidated Financial Statements and Accounting for Controlled
Entities requires all controlling entities to prepare consolidated financial state-
ments which consolidate all controlled entities on a line by line basis. The
Standard also contains a detailed discussion of the concept of control as it
applies in the public sector and guidance on determining whether control exists
for financial reporting purposes.
IPSAS 7 Accounting for Investments in Associates requires all investments in
associates to be accounted for in the consolidated financial statements using the
equity method of accounting, except when the investment is acquired and held
exclusively with a view to its disposal in the near future in which case the cost
method is required.
IPSAS 8 Financial Reporting of Interests in Joint Ventures requires proportion-
ate consolidation to be adopted as the benchmark treatment for accounting for
such joint venturers entered into by public sector entities. However, IPSAS 8
August 2004 103

also permits—as an allowed alternative—joint ventures to be accounted for
using the equity method of accounting.
IPSAS 9 Revenue from Exchange Transactions establishes the conditions for the
recognition of revenue arising from exchange transactions, requires such rev-
enue to be measured at the fair value of the consideration received or receivable
and includes disclosure requirements.
IPSAS 10 Financial Reporting in Hyperinflationary Economies describes the
characteristics of a hyperinflationary economy and requires financial statements
of entities which operate in such economies to be restated.
IPSAS 11 Construction Contracts defines construction contracts, establishes
requirements for the recognition of revenues and expenses arising from such
contracts and identifies certain disclosure requirements.
IPSAS 12 Inventories defines inventories, establishes measurement require-
ments for inventories (including those inventories which are held for distribu-
tion at no or nominal charge) under the historical cost system and includes dis-
closure requirements.
IPSAS 13 Leases establishes requirements for the accounting treatment of
operating and finance leasing transactions by lessees and lessors.
IPSAS 14 Events After the Reporting Date establishes requirements for the
treatment of certain events that occur after the reporting date, and distinguishes
between adjusting and non-adjusting events.
IPSAS 15 Financial Instruments: Disclosure and Presentation establishes
requirements for the presentation of on-balance-sheet financial instruments and
identifies the information that should be disclosed about both on-balance-sheet
(recognized) and offbalance-sheet (unrecognized) financial instruments.
IPSAS 16 Investment Property establishes the accounting treatment, and related
disclosures, for investment property. It provides for application of either a fair
value or historical cost model.
IPSAS 17 Property, Plant and Equipment establishes the accounting treatment
for property, plant and equipment, including the basis and timing of their initial
recognition, and the determination of their ongoing carrying amounts and relat-
ed depreciation. It does not require or prohibit the recognition of heritage assets.
IPSAS 18 Segment Reporting establishes requirements for the disclosure of
financial statement information about distinguishable activities of reporting
entities.
IPSAS 19 Provisions, Contingent Liabilities and Contingent Assets establishes
requirements for the recognition of provisions, and the disclosure of contingent
liabilities and contingent assets.
IPSAS 20 Related Party Disclosures establishes requirements for the disclosure
of transactions with parties that are related to the reporting entity including
Ministers, senior management, and their close family members.
IPSAS 21 Impairment of Non-Cash-Generating Assets establishes requirements
for determining whether an asset is impaired, for the recognition and reversal of
impairment losses, and for the disclosures to be made in respect of impaired
assets. (The application date is still to be finalized)
Glossary of Defined Terms (IPSAS 1-IPSAS 20) identifies the terms defined in
IPSASs on issue at 31 December 2003.

CASH BASIS IPSAS AND TRANSITIONAL GUIDANCE
CASH BASIS IPSAS Financial Reporting Under the Cash Basis of Accounting
is a comprehensive IPSAS on financial reporting under the cash basis. It estab-
lishes requirements for the preparation and presentation of a statement of cash
receipts and payments and supporting accounting policy notes. It also includes
encouraged disclosures which enhance the cash basis report.
IFAC PSC Study 14 Transition to the Accrual Basis of Accounting: Guidance
for Governments and Government Entities 2nd Edition (December 2003): identi-
fies key issues to be addressed and alternate approaches that can be adopted
in implementing the accrual basis of accounting in an efficient and effective
manner in the public sector.
INVITATIONS TO COMMENT (Issued January 2004)

ITC Accounting for Social Policies of Governments deals with accounting for
social policies of governments. The ITC proposes a conceptual model for the
recognition and measurement of social policy obligations derived from concepts
implicit in existing IPSASs, particularly IPSAS 19. This conceptual model is then
applied to a variety of social policy obligations, including the provision of
health care, education, social welfare benefits and aged pensions. The ITC also
proposes disclosure requirements for social policy obligations. The comment
period closed 30 June 2004.
ITC Revenue from Non-Exchange Transactions (Including Taxes and Transfers)
deals with the recognition and measurement of revenue from non-exchange
transactions including taxes of various kinds, and transfers including grants,
appropriations, gifts, bequests and fines. The ITC proposes an “assets and liabil-
ities” model for the recognition of revenue from non-exchange transactions
based on the definition of revenue already provided in IPSASs. The ITC
demonstrates the application of this model to different classes of revenue.
The comment period closed 30 June 2004.
RESEARCH REPORT (Issued May 2004)

Budget Reporting (May 2004). The primary objective of this Research Report is
to determine if an IPSAS should be issued on budget reporting.
The PSC Update is prepared by staff after each meeting of the PSC with the
aim of providing a timely report on the progress of PSC projects. The views
expressed in this document may not necessarily reflect the final views of the
Committee or of individual members.
Next PSC Meeting: New Delhi, India, November 1–4, 2004. For further infor-
mation please contact: Paul Sutcliffe, PSC Technical Director, psutcliffe@ifac.org
or Matthew Bohun, PSC Technical Manager, matthewbohun@ifac.org.
August 2004 105

International Consortium on Governmental Financial Management
Membership Application
Working globally with governments, organizations, and individuals, the International
Consortium on Governmental Financial Management is dedicated to improving financial
management by providing opportunities for professional development and information
exchange.
1. Enclosed are dues for calendar year _______. These dues are in payment for member-
ship as a (please check appropriate category):
_____Sustaining Member ($1,000)
_____ Organization Member ($250)
_____ Organization Member* (150)
_____ Individual Member ($100)
_____ Individual Member* ($50)
2. Organization:
3. Name and Title (individual member/contact person for sustaining and organization
member):
4. Mailing Address:
Street/Post Box
City
Province/State
Postal/Zip Code and COUNTRY
5. Telephone: Fax:
6. E-mail/Internet:
* A special discount is offered to developing countries, countries with economies in transi-

tion and regional groups/organizations in such countries to encourage their participation.
This discount is available to all countries other than Australia, Canada, China, Egypt,
European countries (except transition economies) India, Iran, Israel, Japan, Kuwait,
Libya, Mexico, New Zealand, Nigeria, Oman, Saudi Arabia, United Arab Emirates, USA,
Russia, and Venezuela.
Return this form and a check or money order in the appropriate amount to the
International Consortium on Governmental Financial Management
444 North Capitol Street-Suite 234
Washington, DC 20001 USA
If you have questions, please call the ICGFM at +202.624.5451, or fax +202.624.5473.
Additional information is also available on the website: www.icgfm.org.

ICGFM Officers and Directors
Members of the Board of Directors

Members for the ICGFM Board of Directors serve a two-year term. Each
Sustaining Organization is represented on the Board. The Nominating
Committee solicits nominations to select six Organization Members and six
Individual Members to fill remaining Board seats.
ICGFM Board of Directors as of July 31, 2004

Sustaining Members:
Association of Government Accountants (USA)
Casals and Associates
CPA Australia
Free Balance
Graduate School, USDA-Government Audit Training Institute (GATI)
Grant Thornton
Inter-American Development Bank—Auditor General
International Business and Technical Consultants, Inc
Institute of Internal Auditors
National Association of State Auditors, Comptrollers and Treasurers (USA)
Organization of American States—Inspector General
US Agency for International Development—Inspector General
US General Accounting Office
The World Bank—Auditor General
Organization Members
Cameroon—State Audit Office
Hungary—State Audit Office
India - Office of the Comptroller and Auditor General
International Monetary Fund
Pakistan—Office of the Auditor General
VACANT
Individual Members
Dr. Mort Dittenhoffer (USA)
Mr. James Hamilton (USA)
Dr. Jesse Hughes (USA)
Ms. Blandina Nyoni (Tanzania)
Ms. Virginia Robinson (USA)
Mrs. Linda Weeks (USA)
August 2004 107

ICGFM Officers (Executive Committee)
ICGFM officers must be members of the Board of Directors, and they are
elected for a two-year term. Officers may be re-elected to the same position or
a new one. Officers are nominated by the Nominating Committee based on
input from the ICGFM members.
ICGFM Officers as of July 31, 2004

President: Relmond Van Daniker (AGA)
Past President: J. Graham Joscelyne (formerly w/The World Bank)
Vice President: Jacquie Williams-Bridgers (USGAO)
Vice President: (vacant)
Vice President: Bill Taylor (IIA)
Treasurer: Peter Aliferis (GATI)
Secretary: Dick Willett (Grant Thornton)

August 2004 109
August 2004 111
The International Consortium on
444 North Capitol Street, Suite 234
Washington, DC 20001 USA
www.icgfm.org

2004 Public Fund Digest Vol4 No2

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The International Consortium on

Governmental Financial Management

Public Fund Digest

Telephone 202 624-5451 • Fax 202 624 5473

Copyright 2004 by the International Consortium on Governmental Financial Management.

Jesse W. Hughes Relmond Van Daniker

9. Timelines for Transitioning to Accrual Accounting

10. The Millennium Challenge Corporation

22. U.S. Agency for International Development

28. Reforming Fiscal Institutions and Strengthening Government

40. The Challenges of Good Governance: A View from Bangladesh

50. Which Financial Reports In The Public Sector Should Be

60. Promoting Government Accountability: Critical Elements in

68. Current Situation and Perspectives of Development for

74. Public Financial Management Performance Measurement

100. Public Sector Committee Update 12

OECD/World Bank 2003 Survey of Current Budgetary Practices for 30 OECD

International Consortium of Government Financial Managers (www.icgfm.org)

8 Public Fund Digest

Cash Basis Budget/Actual All 20

For Each Government Business Entity (GBE)

IAS 7 on AP and Long Term AR and Fixed Equity All

All Pertinent IASs

For Consolidated Government Entities For Consolidated Government Business

Consolidated Consolidated Consolidated

For Whole-of-Government Financial Statements

Consolidated Central Government

10 Public Fund Digest

The Millennium Challenge Corporation

12 Public Fund Digest

Country Driven Programs

Millennium Challenge Corporation

14 Public Fund Digest

Abstract of Remarks by President George W. Bush at Ceremony

16 Public Fund Digest

Report on Countries That Are Candidates for Millennium

1. Afghanistan 24. Guinea 48. Pakistan

18 Public Fund Digest

20 Public Fund Digest

22 Public Fund Digest

24 Public Fund Digest

26 Public Fund Digest

I. Legislatures and the budget process in presidential systems

II. Legislative budgeting and government accountability

28 Public Fund Digest

III. Legislatures and budget policymaking

IV. Legislative budget authority: legal framework

30 Public Fund Digest

V. Legislative budget oversight: actual performance

32 Public Fund Digest

34 Public Fund Digest

Country Equador Peru Uruguay Venezuela

36 Public Fund Digest

TABLE 3: Budget Transparency in Latin America

38 Public Fund Digest

40 Public Fund Digest

Political, Social and Economic Dimensions of

42 Public Fund Digest

Freedom of Expression and Speech

Human Rights and Security

Law and Order, Safety and Security of the Citizens

44 Public Fund Digest

Openness and Availability of Information

A Road to Good Governance