Guidelines on the Good Governance of Parastatal Organisations:

An ECSAFA Perspective
Guidelines on the Good
Governance of Parastatal
Organisations
An ECSAFA Perspective

Prepared for the Eastern, Central and Southern African Federation of

Accountants (ECSAFA) by

the Association of Chartered Certified Accountants (ACCA)

with assistance from:

the Society of Accountants in Malawi

the Centre for Corporate Governance, Kenya

and

the African Capacity-Building Foundation Financial Management and

Accountability Technical Advisory Panel and Network.

i
About The Eastern, Central And Southern African Federation Of Accountants
(ECSAFA)

The mission of the organisation is to build and promote the accountancy

profession in the Eastern, Central and Southern regions of Africa in order that it
is, and is perceived by accountants, businesses, financiers and governments to
be, an important factor in the economic development of the region.

ECSAFA Membership
Angola
Botswana
Ethiopia
Kenya
Lesotho
Malawi
Mauritius
Mozambique
Namibia
South Africa
Swaziland
Tanzania
Uganda
Zambia
Zimbabwe

ECSAFA, August 2004

ii
Contents

Preface ...................................................................................... v

Executive Summary................................................................................. ix

Chapter 1: Introduction ....................................................................1

Chapter 2: Standards of Behaviour ...................................................21

Chapter 3: Organisational Structures and Processes ...........................33

Chapter 4: Internal Control ..............................................................53

Chapter 5: External Reporting ..........................................................71

Appendix 1: Good Governance: A Checklist for Governing Bodies

and Chief Executives.......................................................81

Appendix 2: Disclosure .....................................................................89

Appendix 3: Further Information.........................................................97

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iv
Preface

Good corporate governance, or just good governance, is essential for all

successful organisations. The principles of good governance openness,
integrity and accountability are not just optional extras. They are the
fundamental foundations on which effective organisations are built. In the
public sector, governance is as important, or even more important, than in the
private sector. Public services should be just that, services to the public.

These Guidelines aim to provide practical guidance on good governance for all
types of parastatal organisations across the region and so help to improve their
governance processes. Parastatal organisations are taken to include government
business enterprises and state corporations and other organisations, including
boards, agencies and institutions which are established as semi-autonomous
entities with their own governing bodies. In recent years, some state enterprises
which operated on a commercial basis have been privatised, but other
governing bodies and agencies have been established to provide public-sector
services that were previously provided directly by a ministry. Thus this type of
organisation continues to be significant.

Professional accountants in the member bodies of the Eastern, Central and

Southern African Federation of Accountants (ECSAFA) have an interest in the
way that parastatal organisations manage their affairs. They expect these
organisations to uphold the highest standards of accountability, openness and
integrity. For these reasons, ECSAFA is pleased to provide this contribution to
the development and maintenance of good governance in parastatal
organisations. We commend these Guidelines to all those concerned with good
governance of parastatal organisations in Eastern, Central and Southern Africa,
especially the members of their governing bodies, their chief executives and
other senior managers. In addition, the professional advisers of these entities,
especially the audit firms who provide them with external audit and other
services, should find these Guidelines useful. We also hope that the Guidelines
will facilitate co-operation with others in the public and private sectors to
achieve the highest standards of governance.

Between 1996 and 1998, an ECSAFA team, funded by a grant from the
International Federation of Accountants (IFAC), visited those government
officers across the region with responsibility for government accounting services.
The aim was to promote higher standards of accountability in the public sector.

v
The team found that there was mixed understanding of, and little unanimity
about, what constitutes proper accountability and governance. As a result,
ECSAFA Council encouraged the Public Sector Committee of IFAC to produce
guidance on this subject.

ECSAFA is grateful to the IFAC for permission to adapt its publication,

Governance in the Public Sector: A Governing Body Perspective (August
2001), to the prevailing circumstances in ECSAFA member countries. We are
also grateful to the Eastern and Southern African Association of Accountants
General (ESAAG) for permission to reproduce its Internal Auditing Standards
and to the International Organisation of Supreme Audit Institution (INTOSAI) for
permission to reproduce their guidance on public-sector external auditing.

This volume also builds on its companion document, Governance in the Public
Sector: An ECSAFA Perspective, which was published in 2002 as a guide to
governance in government ministries, departments and agencies.

It may be useful for national bodies affiliated to ECSAFA to adapt this guide to
their particular local environments by including references to their national
legislative and regulatory requirements. In some countries there are already
national guidelines, for example, those in Kenya prepared by the Centre for
Corporate Governance. Where possible such guidelines were used to inform the
content of these Guidelines.

Attitudes to governance have changed over time and we expect them to evolve
further in the future. Thus we expect that these Guidelines will have to be
revised and refined to reflect the experience of parastatal governance across the
region and the world. We hope that our members will use these Guidelines to
assist in the further development of effective governance arrangements in their
parastatal organisations. In turn, we hope that this experience can be used to
inform future editions of these Guidelines.

The standard of governance of parastatal organisations across the ECSAFA

region is, of course, variable. The best-governed parastatal organisations will
already apply almost all the aspects of good governance practice outlined in
these Guidelines, but they may find it useful to benchmark their current
practices against such internationals standards. Other parastatal organisations
will find the application of the standards outlined in these Guidelines very
challenging. These organisations should, however, be able to use these
Guidelines to develop an appropriate action plan to introduce these standards
over the next few years.

vi
These Guidelines have been prepared for ECSAFA by the Association of
Chartered Certified Accountants (ACCA), with assistance from the Society of
Accountants in Malawi, the Centre for Corporate Government, Kenya and the
African Capacity-Building Foundation Financial Management and
Accountability Technical Advisory Panel and Network (TAP-NET). ECSAFA
would like to thank them all for their contributions, and particularly ACCA,
which also published and circulated these Guidelines.

Ndung'u Gathinji
Chief Executive, ECSAFA

Hughes Building, Kenyatta Avenue,

PO Box 42423, Nairobi, Kenya.
e-mail: ecsafa@africaonline.co.ke
www.ecsafa.org

June 2004

vii
viii
Executive Summary

Corporate governance is the means by which an organisation is directed and

controlled. In broad terms, corporate governance refers to the processes by
which organisations are directed, controlled and held accountable. Corporate
governance encompasses the authority, accountability, stewardship, leadership,
direction and control exercised in corporations.

Parastatal organisations have been established with financial resources from

tax-payers. This means that the main stakeholders in state-owned enterprises
are members of the public, whose taxes have been invested in these
corporations.

The introduction to these Guidelines sets out the case for having good
governance, and the need for further improvements to the quality of governance
of parastatal organisations in ECSAFA member countries. The term governance
is used, rather than corporate governance, purely because the word corporate
may be interpreted as a private-sector term; no distinction is made between the
two terms.

The Introduction explains the governance framework, including the respective

roles of Parliament, its public accounts and service committees, the parastatal
oversight body, the Ministry of Finance and the relevant line ministry. The three
fundamental principles of corporate governance, openness, integrity and
accountability, are also introduced.

The remaining chapters set out recommendations, derived from these

fundamental principles, on standards of behaviour (chapter 2), organisational
structures and processes (chapter 3), internal control (chapter 4) and external
reporting (chapter 5).

STANDARDS OF BEHAVIOUR

Openness, integrity and accountability are necessary ingredients of effective

governance and should be demanded of all staff working in parastatal
organisations. The governing body, chief executive and other senior managers
should conduct themselves, in accordance with high standards of behaviour, as
role models to others. The governing body and chief executive should also

ix
determine the values and standards that define their organisations culture and
behaviour.

Parastatal organisations may be required to adopt government-wide codes of

conduct, but if not they should adopt their own formal code of conduct defining
the standards of behaviour required. Such a code, or other policy document(s),
should cover such issues as conflicts of interest, political influence, gifts,
hospitality and entertainment, and dealing with suppliers.

All staff are entitled to be treated by their managers and colleagues openly,
honestly and with respect. Trade unions are often a useful means of
communicating the views of staff and representing their interests.

ORGANISATIONAL STRUCTURES AND PROCESSES

Parastatal organisations need effective structures to ensure proper

accountability, clear communication with stakeholders and clarity about roles
and responsibilities. Proper accountability means being accountable for the
management of public money and for the performance of the organisation in
relation to clearly defined objectives.

The appointments to the governing body of a parastatal organisation should be

made by the relevant minister on the advice of the parastatal oversight body.
This process should ensure that appointments are based on merit, as a result of
free and open competition.

The chief executive, senior managers and staff should be held to account for the
extent to which they have achieved their agreed objectives.

Communication with stakeholders (for example, the public, staff, their trade
unions, the sponsoring ministry, suppliers, users of services) should be open,
honest, transparent, timely and relevant to the stakeholders interests. It should
also be adequate and present the information fairly.

There should be clearly defined divisions of responsibility at the head of

parastatal organisations to ensure a balance of power and authority. These
should include the respective roles of the executive and non-executive members
of the governing body, the chairman, the chief executive and other senior
managers.

x
Effective complaints and whistle-blowing procedures are essential for the good
governance of each parastatal organisation. Complaints procedures should
ensure that complaints from users and other external stakeholders are
adequately monitored, investigated, resolved and appropriately reported.
Whistle-blowing procedures should ensure that all significant staff concerns,
especially those concerned with the ethical management of the organisation,
are adequately dealt with.

INTERNAL CONTROL

The governing body and chief executive should ensure that their organisation
has an effective system of internal control. Internal control is effective to the
extent that it provides reasonable assurance that the organisation will achieve
its agreed objectives in the following categories:

effectiveness and efficiency of operations

reliability of financial reporting

and

compliance with applicable laws and regulations.

The governing body and chief executive should ensure that the effectiveness of
internal control is periodically assessed and should report on the results of these
assessments.

Internal control includes, but is not restricted to: budgeting and financial
management, staff competencies, internal audit, risk management, audit
committees, and anti-corruption arrangements, as well as softer personnel
aspects, such as culture, motivation and teamwork.

EXTERNAL REPORTING

Parastatal organisations should publish an annual report, including financial

statements, presenting a balanced and understandable account of the
organisation's financial and non-financial position and performance. The report
should include a statement about how the organisation has applied relevant
codes of governance. The financial and certain other aspects of the report
should be subject to an independent external audit. The Auditor-General should

xi
be responsible directly or indirectly for the quality of this audit. There should be
prompt and effective action taken to correct identified negative audit findings.

xii
1. Introduction

IMPORTANCE OF GOVERNANCE

1.1 Over the last decade or so there has been much debate over the
importance of corporate governance. Broadly speaking, corporate
governance refers to the processes by which organisations are
directed, controlled, and held to account1 and is underpinned by the
principles of openness, integrity and accountability. Governance is
concerned with structures and processes for decision making,
accountability, control and behaviour at the top of organisations. In
some countries, corporate may be interpreted as a private-sector term.
To avoid any possible confusion, the term governance is used in these
Guidelines to describe what is commonly referred to in the private
sector as corporate governance.

1.2 The King Report2 said that corporate governance is essentially about
the following aspects of leadership:

leadership for efficiency

leadership for probity

leadership with responsibility

and

leadership that is both transparent and accountable.

The same principles apply to the governance of parastatal

organisations.

1
Australian National Audit Office (1999). Discussion Paper, Corporate Governance in
Commonwealth Authorities and Companies.
2
The King Report on Corporate Governance for South Africa 2002 (King II Report), Institute of
Directors in Southern Africa.

1
1.3 The authors of a 1999 World Bank working paper concluded that there
is new empirical evidence that governance matters, in the sense that
there is a strong causal relationship from good governance to better
development outcomes such as higher per capita incomes, lower infant
mortality and higher literacy.3

1.4 This type of comment highlights the importance of good governance. In

all countries, the public sector plays an important role in society and
effective governance of the public sector can encourage the efficient use
of resources, strengthen accountability, improve management and
service delivery, and thereby contribute to reducing poverty and
improving peoples lives.

1.5 Despite some privatisation, parastatal organisations remain important

for public-sector delivery across the ECSAFA region. Many governments
consider that the state should retain ownership and control of such
strategic areas as regulation, infrastructure, social services, water
supply and key industries. Effective governance is essential for
maintaining confidence in the parastatal organisations and thus
enabling them to meet the governments objectives in such vital areas.

CURRENT SITUATION

1.6 Most international aid and assistance is now provided on a conditional

basis. Aid agencies and international financial institutions insist on
good governance. In addition, it is no longer easy for governments to
censor or control inflows of information and freedom of expression and
association. Citizens are now informed directly from many sources, for
example, television and the Internet. There is also an increasing social
awareness by many people, which poses new challenges for
governments to be participatory, transparent and accountable in the
conduct of their affairs.

3
Kaufman, D., Kraay, A. and Zoido Lobaton, P. (1999). Governance Matters, Working Paper,
The World Bank.

2
1.7 In many member countries in the ECSAFA region there has been a
significant re-structuring of the public sector in recent years, especially
that part represented by parastatal organisations. Some state-owned
enterprises which operated on a commercial basis have been
privatised. In contrast, other boards and agencies have been
established to provide public-sector services that were previously
provided directly by the relevant ministry. These new entities have often
been established on a quasi-commercial basis, with a governing body
and a chief executive appointed to manage the organisation and to
meet a set of pre-determined objectives. These may be set out in a
contract or agreement between the governing body or the chief
executive and the sponsoring ministry or oversight body. The fees of the
members of the governing body and the chief executive (and their
continued appointment) may be dependent on the extent to which the
organisation achieves its objectives within the available financial
constraints.

1.8 To be successful, these new arrangements require openness, integrity

and accountability. This means:

The appointment, review and remuneration of the governing body

and chief executive should be undertaken openly.

The governing body, chief executive, other senior managers and staff
of the parastatal organisation should be required to work to the
highest levels of integrity.

The lines of accountability between the chief executive and the

governing body and between the governing body, the sponsoring
ministry, the Ministry of Finance and the parastatal oversight body
should be clear and transparent.

1.9 Corruption, abuse of power or public office for private gain, and other
types of financial irregularity are widely recognised as a serious problem
in parastatal organisations and the wider public sector. Financial
irregularity, where it exists, results in a waste of resources; in addition,
it diverts government resources, the energies of public officials and the
press, from the general public interest towards overcoming the activities
of those who fail in the duties of public office.

3
 NECESSARY IMPROVEMENT

1.10 Improvements in the management and administration of many

parastatal organisations are essential. Such improvements are also
necessary to achieve targets for poverty reduction envisaged, for
example, by the United Nations millennial development goals. In some
cases, governments and their development partners may have tended
to devote too much attention to macroeconomic and fiscal issues, to
the detriment of effective risk assessment, financial management,
monitoring, control and evaluation. In some cases, the rules and
systems of financial accountability, record keeping, accounting and
reporting, internal control and internal auditing have not been well
defined. This is being addressed in many ECSAFA countries, with
revised laws on public financial management and audit and refined
financial regulations for public-sector organisations.

1.11 Where suitable rules and systems have been defined, ignorance and/or
non-compliance may be the norm rather than the exception. In other
cases, there may be an inappropriate emphasis on external or
independent auditing of financial statements instead of emphasising
effectiveness of internal control systems. Without an integrated
accountability framework and measurable performance indicators to
determine objectively whether financial records are maintained and
managed effectively, financial and other records may be unreliable,
incomplete and difficult to use. All these weaknesses create
opportunities for fraud, bribery, inefficiency and waste. They may also
lead to loss of revenue and impede effective economic and fiscal
planning.

SCOPE OF THE GUIDE

1.12 A variety of terms are used to describe the head of staff or most senior
manager of a parastatal organisation; these include chief executive
officer, general manager, director, vice chancellor or principal. These
Guidelines uses the term chief executive to describe this person.

1.13 In the interests of good governance, the governing body and chief
executive of each parastatal organisation should ensure that the
recommendations for good governance outlined in these Guidelines are
applied. The parastatal oversight body, sponsoring ministry or Ministry
of Finance may also have to take action to enable such good practice to
be implemented. In any circumstances where these recommendations

4
 cannot be applied directly, the basic principles of governance
openness, integrity and accountability should be followed when
interpreting and applying locally these Guidelines.

1.14 These Guidelines outline the principles of governance and their

application to parastatal organisations in the ECSAFA region.
Governance practices should be tailored according to the specific
circumstances of individual parastatal organisations and the countries
in which they operate. As organisations develop and change over time,
it will be necessary for the governing body and chief executive
responsible for each organisation, to review and amend the governance
practices. In addition, the relevant ministries and other oversight bodies
should regularly review the regulatory and accountability environment
in which their parastatal organisations operate.

INTRODUCTION TO PARASTATAL ORGANISATIONS

1.15 These guidelines are designed to refer to public-sector bodies with their
own governing bodies. These may be termed parastatal organisations,
boards, or state-owned corporations. They may include governmental
organisations (for example, agencies, boards, commissions) and state-
owned enterprises (or public entities). The guidelines will also be
relevant to other independent organisations owned or controlled by the
public sector, such as universities, advisory bodies and other entities
that have a degree of independence from ministries or departments. All
these entities, unlike private companies, are faced with a number of
legal, political and structural complexities that affect the extent to
which good governance, as developed by the private sector, can be
applied.

1.16 These complexities may include:

the elaborate and overlapping relationships between the chief

executive, the governing body, the parastatal oversight body,
ministers and ministerial officials, and Parliament

the need for parastatal organisations to satisfy a complex, and

possibly conflicting, range of political, economic and social
objectives

5
 the diverse nature of stakeholders (including users, staff, suppliers,
government, Parliament and the electorate) with their varied and
contradictory demands

the absence of an annual general meeting at which stakeholders

come together to exercise their authority and influence over the
organisation

the enabling or supporting legislation of parastatal organisations,

which sometimes prescribes triangular rather than linear reporting
arrangements where the chief executive, for example, is responsible
both to the responsible minister(s) and the governing body.

1.17 It is therefore important to provide guidelines that seek to enhance the

implementation of good corporate governance principles and practices
in parastatal organisations in order to make them more effective and to
enable them to contribute to national development and poverty
reduction. Recent reforms in the public sector aimed at improving
efficiency and effectiveness have greatly increased the need for good
corporate governance in parastatal organisations.

BALANCING COMMERCIAL OBJECTIVES AND SOCIAL SERVICE

OBLIGATIONS

1.18 Many parastatal organisations have both commercial and social

objectives. This may produce a conflict which should be addressed
and, if possible, resolved clearly and openly. Thus, it is necessary for
governing bodies to develop flexible approaches that will help these
organisations manage possible conflicts.

1.19 These conflicts may be reduced or managed by:

the commercial and social service objectives of a parastatal

organisation being clearly documented and approved by Parliament,
the parastatal oversight body, the responsible ministers and the
governing body

governing bodies consulting and informing their stakeholders on the

strategies put in place to balance their organisations commercial
and social obligations

6
 and

governing bodies submitting reports to Parliament through the

parastatal oversight body on the extent to which they have achieved
both their commercial and their social objectives.

1.20 Even if a parastatal organisation has been established to fulfil

commercial objectives, there will also be some social objectives which
the organisation should be required to meet. These may include:

establishment of fair, just and equitable employment policies

preservation and protection of the natural environment

balancing gender and ethnic interests and concerns

protecting and promoting the interests and rights of children and

other vulnerable groups

and

promoting the interests and rights of the host communities.

1.21 Thus the governing body of each parastatal organisation should

regularly monitor the extent to which the organisation is meeting its
social responsibilities.

OVERALL RESPONSIBILITY FOR THE GOVERNANCE FRAMEWORK

1.22 In the overall governance framework, the roles of Parliament, ministries

or other oversight bodies and of the parastatal organisations themselves
often overlap. Clarity of roles and responsibilities between these
oversight bodies is essential.

1.23 It is normally the responsibility of the parastatal oversight body (with

assistance from the relevant line ministry and the Ministry of Finance)
to ensure that appropriate governance arrangements are applied in all
parastatal organisations. It is necessary to ensure that mechanisms are

7
 in place to secure adherence to good governance, including the best
practice outlined in these Guidelines. Similarly, governing bodies and
chief executives of parastatal organisations also have a responsibility to
ensure good governance in their own organisations. All these entities
should be held accountable to Parliament for the soundness or
otherwise of the governance practices of each parastatal organisation.

1.24 In this complex regulatory environment, good governance is

synonymous with robust accountability to Parliament for performance.
It is complemented by regular and open communication to Parliament
(or its committees) by the key participants directly responsible for the
performance of the organisation, including the parastatal oversight
body, responsible minister(s), the governing body and the chief
executive.

1.25 An appropriate legal framework is necessary to define the roles of

governing bodies, and chief executives and the related framework of
authorities and responsibilities of each level of corporate governance. In
a number of countries establishing an umbrella legislative framework
for all parastatal organisations would ensure that the legislation was
consistent with current best practice as described in these Guidelines
and would provide a common and consistent environment for better
governance of all parastatal organisations.

1.26 The government, through the relevant ministries and any oversight
bodies, has a responsibility to Parliament and the electorate to protect,
preserve and exercise authority actively over parastatal organisations by
ensuring that:

the legal framework establishing and determining the operations of

the state-owned corporations is clearly defined

the role of Parliament in enacting laws of the state-owned

corporations is effectively undertaken

the authorities of the governing bodies of parastatal organisations are

exercised in accordance with the law and Parliaments objectives

suitable legislation and regulations are in place to ensure that only

competent and reliable persons, who can add value, are appointed
to governing bodies

8
 and

the governing body of each parastatal organisation is held to account

and is held responsible for the sound governance of the organisation.

Figure 1.1: Accountability of a parastatal organisation to Parliament

9
 OVERSIGHT FUNCTION OF PARLIAMENT

1.27 Parliament has the right and responsibility to hold government and its
subsidiary entities (including all parastatal organisations) to account for
the effective management of their financial affairs, the proper and
efficient use of resources entrusted to them and the result achieved.

1.28 Parliament should exercise control over the expenditure of all public
monies. Thus both the planned or expected income and expenditure of
parastatal organisations should be included within the governments
annual budget statements. In addition, the annual investment plans
and borrowing requirements of parastatal organisations should be noted
in the budget. Borrowing undertaken by parastatal organisations and
any financial guarantees which the government provides should be
subject to the same level of parliamentary scrutiny and authorisation as
general government borrowing and other financial commitments.

1.29 Parliament should review the annual reports of parastatal organisations

and evaluate the extent to which they have efficiently achieved their
objectives (usually through a service committee). Parliament should
also review the financial management and control exercised by
parastatal organisations through the use of a parliamentary accounts
committee and reports received from the Auditor-General or the other
external auditors of parastatal organisations.

1.30 Parliament should approve all government appointments to the

governing bodies of parastatal organisations. Each year, Parliament
should also approve the levels of honoraria, sitting allowances and all
other fees and allowances to be paid to members of governing bodies of
parastatal organisations.

1.31 Parliament should retain both residual powers to ensure the enactment
of appropriate regulations and the ultimate supervisory functions over
all parastatal organisations. All questions relating to individual
parastatal organisations should be referred to the relevant
parliamentary committee and should not be dealt with by Parliament as
a whole or by individual members. Contact with the governing bodies,
members of the governing body or managers of parastatal organisations
by members of Parliament should be limited to meetings of
parliamentary committees or questions to ministers.

10
 Service committees

1.32 Parliaments will usually have a series of service committees, which

may have the responsibility to assist Parliament with the monitoring
and accountability of a particular ministry and its related parastatal
organisations. The responsibilities of such a committee with regard to
each parastatal organisation should include:

reviewing its long-term, medium-term and short-term plans

considering and recommending to Parliament the suitability of its

annual budget

reviewing and recommending to Parliament the appropriateness of

its investment plans and borrowing requirements

considering the reports of relevant oversight bodies

monitoring the extent to which plans and investments are

implemented

and

reviewing the annual report.

Public Accounts Committee

1.33 In many countries, a Public Accounts Committee fulfils the

responsibility of reviewing, on behalf of Parliament, the external
auditors reports for each parastatal organisation. In the interest of
transparency, the hearings of such a committee should usually be in
public.

1.34 The work of the Public Accounts Committee should include:

(1) receiving the reports of the Auditor-General (or other auditor)

(2) undertaking hearings, including questioning of the chief executive,

other relevant officers and the auditor

11
 (3) reporting, including recommendations, to the oversight body, the
governing body or the chief executive of the particular parastatal
organisation

(4) receipt of the response of the oversight body and/or of the

governing body and chief executive on the action to be taken in
response to the Committees report

(5) subsequent reports from the external auditor on the extent to

which agreed recommendations have been implemented.

1.35 In many countries parastatal organisations have payment arrears with

each other and with other public-sector organisations. A comprehensive
analysis of this arrears situation should be undertaken. The analysis
should then form the basis of a plan to eliminate, as far as possible,
the stock of arrears and loans between public-sector organisations
within an agreed timescale. Such an exercise would greatly clarify the
financial position of many parastatal organisations.

THE ROLE OF THE PARASTATAL OVERSIGHT BODY

1.36 Parastatal organisations may be responsible to the relevant ministry. In

other countries there may be a central body which is responsible for the
oversight of all parastatal organisations, for example in Malawi this is
the Department of Statutory Corporations, in South Africa the
Department of Public Enterprises and in Kenya the State Corporations
Advisory Committee. Whatever the particular arrangements, it is
important that the parastatal organisation, its governing body and chief
executive have clear lines of accountability, preferably to a single
oversight body.

1.37 The role of a parastatal oversight body should be to monitor the

activities of each parastatal organisation on behalf of Parliament, to
report significant issues to Parliament or its committees and to ensure
that action agreed as a result of parliamentary reports is implemented
within the agreed timescale. Specific responsibilities of the oversight
body should include:

formulating general guidelines on the good governance of parastatal

organisations

12
 establishing and co-ordinating clear, non-conflicting objectives for
each parastatal organisation

ensuring that there is proper and open selection, induction and

development of members of governing bodies of parastatal
organisations

agreeing the medium-term corporate plan for each parastatal

organisation

monitoring the activities of each parastatal organisation and

appraising the extent to which it achieves its objectives

ensuring that each parastatal organisation complies with the

appropriate governmental regulations

advising the Ministry of Finance on the financial affairs of each

parastatal organisation

advising the relevant line ministry on the extent to which each

parastatal organisation is achieving its operational objectives

and

reporting to Parliament, through the responsible minister, on the

performance of each parastatal organisation.

Relationships between a parastatal organisation and the oversight

body

1.38 The accountability relationships between the parastatal organisation

and its oversight body can be problematic. The theory is that the
management of the organisation should be given the incentives to
provide the goods or services required in the most efficient manner.
Thus they should not be unnecessarily constrained by the detailed
regulations which govern the management of the central government
ministries and they should not be subject to detailed day-to-day
management or oversight. Many parastatal organisations, however,
provide key government services, for example, health and education. In
these cases at least, the government and Parliament have an obligation

13
 to ensure that the goods and services are provided equitably and in the
agreed manner.

1.39 One of the problems with giving the managers of parastatal

organisations more discretion over the way they deliver services and
more financial autonomy is that this may provide precisely those
conditions which lead to increased corruption and financial irregularity.

1.40 To strengthen the accountability of parastatal organisations, there

should be a performance agreement between it and its oversight body.
These agreements should identify the key objectives and
accountabilities of the governing body and chief executive.

THE ROLE OF MINISTRIES OF FINANCE AND OTHER LINE

MINISTRIES

1.41 Ministries are usually responsible for the development of government

policy and parastatal organisations are responsible for the day-to-day
management and delivery of government services in the most efficient
manner. The dividing line between these two sets of responsibilities
may in practice be difficult to draw.

1.42 The Ministry of Finance has responsibility for setting and monitoring the
overall financial plans of government. Thus parastatal organisations
should consult with and report to the Ministry of Finance on matters
relating to the control and management of public funds and resources.
They may also be required to manage their affairs in line with financial
regulations set by the Ministry of Finance.

1.43 Line ministries will also have responsibility for co-ordinating the work of
parastatal organisations and other entities working in the same area.
They may also have the responsibility for ensuring that the plans of
parastatal organisations are consistent with poverty reduction plans and
the objectives and requirements of international aid agencies.

1.44 Ministers may be able to dismiss governing bodies and chief executives,
but this will often be subject to the advice and review by the parastatal
oversight body. The members of the governing body and the chief
executive should have the right of appeal against unfair dismissal and
such acts may be subject to a Parliamentary enquiry.

14
1.45 If implementation of any directive from a minister (or other executive
authority) to the governing body or chief executive is likely to result in
non-compliance with legislation or could infringe the requirements of
integrity or objectivity, the governing body and chief executive will be
held responsible unless he or she has informed the minister in writing
of the likelihood of that non-compliance. Any decision of the minister
(or other executive authority) to proceed with the implementation of
such a directive should be in writing and the governing body and chief
executive should file a copy of this decision with the Auditor-General or
equivalent.

INDEPENDENT ASSURANCE FUNCTION OF EXTERNAL AUDITORS

1.46 The financial statements of all parastatal organisations should be

subject to an independent audit. This is usually undertaken by the
Auditor-General or by private-sector auditors working on his or her
behalf. The audit reports should be primarily addressed to Parliament
rather than to the parastatal organisation itself. In addition, the Public
Accounts Committee of Parliament should use the audit reports to
assist with holding the governing body and the chief executive to
account for their decisions and for the management of the organisation.

1.47 The Auditor-General represents the wider public-sector interest in

parastatal organisations and thus has a wider scope compared with an
auditor in the private sector. The audit of parastatal organisations, as
for other public-sector entities, should be of the whole of the financial
management of the organisation, including specific consideration of
probity and regularity, rather than of its accounts alone (see Chapter 5
below for further details).

ROLE AND RESPONSIBILITIES OF THE GOVERNING BODY

1.48 The members of the governing body of a parastatal organisation should

be appointed by the relevant minister on the advice of the parastatal
oversight body. The governing body should oversee the delivery of
specific services with the resources which are allocated by Parliament.

1.49 The governing body of a parastatal organisation is authorised by

Parliament (and/or the oversight body) to spend (within an overall
budget), invest, borrow and administer programmes in accordance with
any laws and regulations that apply. The governing body and chief
executive are also responsible for authorising the acquisition and use of

15
 financial resources, within the authorisation by Parliament, and for
overseeing and monitoring the implementation of the approved budget
or financial plan.

1.50 The governing body should be responsible to the oversight body, to the
relevant ministry and ultimately to Parliament for the regularity, probity
and efficiency with which it achieves its objectives (for more details see
Chapter 3 below).

PRINCIPLES OF GOVERNANCE

1.51 The Report of the Committee on the Financial Aspects of Corporate

Governance4 (the Cadbury Report) defined corporate governance as
the system by which organisations are directed and controlled. It
identified the three fundamental principles of corporate governance as:

openness

integrity

and

accountability.

1.52 These principles are relevant to all parastatal organisations. Parastatal

organisations usually have to satisfy a complex range of political,
financial and social objectives, which subject them to external
constraints and influences. They are also subject to different forms of
accountability to their various stakeholders.

1.53 These three principles have been developed and redefined to reflect the
public-sector context, as shown in figure 1.2 below.

4
Cadbury Committee (UK) (1992). Report of the Committee on the Financial Aspects of
Corporate Governance.

16
 Figure 1.2: Principles of governance in the public-sector context

Openness Openness is required to ensure that stakeholders5 can

have confidence in the decision-making processes and
actions of parastatal organisations, in the management
of their activities, and in the individuals within them.
Being open through meaningful consultation with
stakeholders and communication of full, accurate and
clear information leads to effective and timely action
and stands up to necessary scrutiny.

Integrity Integrity comprises both straightforward dealing and

completeness. It is based upon honesty and
objectivity, and high standards of propriety and probity
in the stewardship of public funds and resources, and
management of an organisations affairs. It is
dependent on the effectiveness of the control
framework and on the personal standards and
professionalism of the individuals within the
organisation. It is reflected both in the organisations
decision-making procedures and in the quality of its
financial and performance reporting.

Accountability Accountability is the process whereby parastatal

organisations, and the individuals within them, are
responsible for their decisions and actions, including
their stewardship of public funds and all aspects of
performance, and submit themselves to appropriate
external scrutiny. It is achieved by all parties having a
clear understanding of those responsibilities, and
having clearly defined roles through a robust structure.
In effect, accountability is the obligation to answer for
a responsibility conferred.

5
Stakeholders will include the electorate, elected representatives (Parliament), providers of
resources (taxpayers, lenders, bondholders and creditors), service providers and partners
(employees and their trade unions, contractors and other government organisations) users of
services (individuals and businesses who benefit from the services that the organisation
provides), interest groups, analysts and other statistics gatherers (policy analysts, economists,
financial analysts, rating agencies), the media and the wider community.

17
1.54 These fundamental principles are reflected in each of the dimensions of
the governance of parastatal organisations:

standards of behaviour how the governing body, chief executive

and senior management of the organisation exercise leadership in
determining the values and standards of the organisation, which in
turn define the culture of the organisation and the behaviour of
everyone within it

organisational structures and processes how the governing body,

chief executive and senior management within organisations are
appointed and organised, how their responsibilities are defined, and
how they are held to account

control the network of various controls established by the

governing body, chief executive and senior management of the
organisation to ensure:

the achievement of the organisation's objectives

the effectiveness and efficiency of operations

the reliability of internal and external reporting

compliance with applicable laws and regulations and internal

policies

and

external reporting how the governing body and chief executive and
senior management of the organisation demonstrate their financial
accountability for the stewardship of public money and the
organisation's use of resources.

1.55 From these fundamental principles of openness, accountability and

integrity it is possible to derive a set of recommendations on
governance.

18
Figure 1.3: Recommendations on governance in the public sector

Standards of behaviour (Chapter 2):

Leadership

Code of conduct & ethics:

openness and objectivity

integrity and honesty
accountability
ethical relationships.

Organisational structures and Internal Control External reporting

processes (Chapter 3): (Chapter 4): (Chapter 5):

Appointment of governing Budgeting & financial Annual reporting

bodies management
Use of appropriate
Accountability for public Staff training accounting standards
money and performance
Internal audit + audit Performance measures
Communication with committees
stakeholders Auditor-General
Risk management
Roles and responsibilities:
governing body Anti-corruption
chairman, chief executive commission
and director of finance
remuneration policy
complaints and whistle-
blowing.

19
20
2. Standards of Behaviour

INTRODUCTION

2.1 The openness, integrity and accountability of individuals within a

parastatal organisation are fundamental to effective governance. The
reputation of the organisation depends on the standards of behaviour of
everyone working within it, whether senior managers, staff or agents
contracted by it.

2.2 Therefore, effective procedures and safeguards should be put in place

to ensure that all management and staff:

are committed to the highest standards of personal behaviour

and

maintain open and honest relationships with the public, with people
from other organisations, and with other employees and officers of
the organisation.

2.3 The IFAC Financial Management and Accounting Committee (FMAC)

published Study 8 Codifying Power and Control: Ethical Codes in
Action in May 1999.6 The study focuses on ethical codes as one way
in which corporations make explicit their values, guide and direct
decision making, and define the ground rules of behaviour.

2.4 Study 8 notes that:

Corporate Codes serve three purposes. First, they are vehicles through
which the power of overarching forms of social morality is drawn on for
use as corporate power. Second, they are vehicles for deploying
corporate power over values, choices and behaviours in ways
designed to induce appropriate responses to contextual requirements.

6
Study 8 Codifying Power and Control: Ethical Codes in Action, published by the IFAC
Financial Management and Accounting Committee in May 1999.

21
 Third, they are vehicles for establishing control over the exercise of
values, choices and behaviours so that appropriate responses to
contextual requirements are induced.

2.5 A suitable standard of behaviour or ethical conduct will probably be one

which would not cause any problems for the individual or his or her
organisation if it were to become public knowledge.

2.6 Complaints and whistle-blowing procedures are essential safety

measures for all organisations. Each parastatal organisation should
ensure that these procedures are formally documented, that there is a
named senior officer who is responsible for monitoring any internal or
external complaints or worries that are received and that there is a
suitable appeal process to ensure that all complaints are adequately
dealt with and appropriate action is taken to address any residual
issues.

LEADERSHIP

2.7 The King Report7 said that corporate governance is essentially about
the following aspects of leadership:

1. Leadership for efficiency in order for companies to compete

efficiently in the global economy, and thereby create jobs

2. Leadership for probity because investors require confidence and

assurance that the management of a company will behave honestly and
with integrity in regard to the companys shareowners and others

3. Leadership with responsibility as companies are increasingly called

upon to address legitimate social concerns relating to their activities

4. Leadership that is both transparent and accountable because

otherwise business leaders cannot be trusted and this will lead to the
decline of companies and the ultimate demise of a countrys economy.

7
The King Report on Corporate Governance for South Africa 2002 (King II Report), Institute of
Directors in Southern Africa.

22
2.8 The highest standards of behaviour should be demanded of all staff of
parastatal organisations. Governing bodies, chief executives and other
senior managers have a special responsibility to demonstrate in
practice the standards they expect of others within the organisation.
They should demand and show through their work that whenever there
is a choice between ethical behaviour and choosing other means to
operate, that their social conscience and the good name of the
organisation always come first.

2.9 The governing body and chief executive of each parastatal organisation
have a leadership role their actions should set high standards:
formally by setting rules and regulations and communicating those
standards, and informally through personal adherence to the highest
standards of behaviour and through the setting of a good example.

2.10 Parliament, or a specific agency, such as the public service

commission, may set codes of conduct which apply to all public service
officials. Governing bodies and chief executives are, however, still
responsible for determining the values and standards which define the
culture of their organisation and govern the behaviour of everyone
within it.

CODES OF CONDUCT AND ETHICS

2.11 In the absence of a government-wide code of conduct, each parastatal

organisation should adopt a formal code of conduct defining the
standards of behaviour that the governing body, chief executive, senior
managers and all other staff are required to follow. Guidance from the
UN on developing such a code is included as Appendix 2 and an
example of such a code is included as Appendix 3 to the companion
volume to this Guide.

2.12 A staff code of conduct and ethics should:

commit staff to the highest standards of ethical behaviour

be developed in a consultative manner and involve the organisations

staff and other stakeholders, including staff trade unions

23
 receive total commitment from the governing body, chief executive
and senior management of the organisation they should set an
example in practice for other employees to follow

be sufficiently detailed, so as to give a clear guide to the standard of

behaviour expected of all employees.

2.13 On appointment, members of the governing body, the chief executive,

senior managers and staff of the organisation should undertake to
uphold and abide by the relevant code of conduct and ethics. They
should be made aware that failure to follow the code may lead to
disciplinary action and in appropriate circumstances could result in
their dismissal.

2.14 Codes of conduct and ethics should reflect the three fundamental
governance principles of openness, integrity and accountability. They
should also address:

objectivity

honesty

and

ethical relationships.

OPENNESS AND OBJECTIVITY

2.15 Openness is more than structures and processes. It is also an attitude

and belief among key players, politicians, staff of parastatal
organisations and other stakeholders that information is to be shared
and is not owned by any particular organisation it is a public
resource.

2.16 Governing bodies and chief executives should establish appropriate

mechanisms to ensure that senior managers and other staff of the
organisation are not influenced by prejudice, bias or conflicts of
interest.

24
2.17 Governing bodies and all staff of parastatal organisations who are
involved in the decision-making process should be, and be seen to be,
objective and should put the interests of the organisation and society
generally above their private interests. This imposes an obligation to be
fair, honest and free of conflicts of interest.

Conflicts of interest

2.18 The governing body, chief executive and employees of parastatal

organisations are required to observe not only the law, but also other
relevant rules on disclosure of personal interests. In disclosing interests,
complete openness should be observed. The appearance of a conflict of
interest could be as damaging as the existence of a real conflict, and
public office holders should do their utmost to ensure that in all their
activities, both professional and private, even the appearance of a
conflict of interest does not arise.

2.19 Avoiding conflicts of interest should mean that governing bodies, chief
executives and other employees do not use their position in the
parastatal organisation for private gain in a social or business
relationship outside the organisation. Such relationships may include:

outside employment, directorships or material shareholding if they

involve any potential links to the organisation or are contrary to the
objectives and interests of the organisation

official decisions or official actions being improperly influenced by

any relationship (e.g. kin, marriage or partnership) or by any
personal or financial consideration

receiving fees for performing services which form part of official

duties (e.g. lecturing); these must be disclosed to the organisation,
which establishes procedures for their treatment

and

political interests that may be related directly or indirectly to the

work of the organisation.

25
2.20 Each parastatal organisation should have a register of interests to
record all the relevant personal and business interests of the members
of the governing body, the chief executive, senior managers and other
staff. This register of interests should be available for public inspection.

2.21 On first appointment and at least once a year thereafter, all members of
the governing body should, in good faith, disclose to the rest of the
governing body and to the relevant oversight body (for recording in the
register of interests) any business or other interest that is likely to form
a potential conflict of interest. This may include, for example:

relevant business or political interests

membership of a trade, business or other economic organisation

significant shareholding, share options and/or other interests in

organisations with which the parastatal organisation may do
business

and

any gifts, monies, commissions, benefits or other favours extended

or received from a party in respect of, or in relation to, any business
dealings with the parastatal organisation.

2.22 In some countries, members of the governing body of a parastatal

organisation and the chief executive of a parastatal organisation may be
required to provide an annual declaration of their assets. Such a
declaration should be provided to the Auditor-General (among others)
and should be available for public inspection. This procedure enables
such individuals to be held to account for any increase in their assets
and may indicate assets which have been obtained as a result of
corruption or other irregularities.

2.23 In addition, in meetings of the governing body or senior managers,

participants should formally declare whenever they have a personal
interest in the subject being discussed. Whenever a conflict of interest
is established, or an interest appears to conflict with public office, the
person concerned should play no further part in the relevant discussion,
decision or action.

26
2.24 Relevant political interests will include, for example, engaging in any
significant political activity, including holding office in a political party,
standing for elected positions, making public appearances or
statements in support of a political party or a candidate in an election,
during the previous five years. Any such activity should be disclosed in
the register of interests.

Gifts, hospitality and entertainment

2.25 Staff of parastatal organisations should never offer or accept any

payment, bribe, favour or inducement. Gifts, hospitality and
entertainment should be offered or accepted only if there is a genuine
need to impart information or represent the organisation and the
hospitality is appropriate. To resolve any doubts about the
appropriateness of offering or accepting hospitality or a gift, the person
concerned should follow the guidelines below.

He or she should consider whether the offering or acceptance of any

such gifts or hospitality could be regarded as normal and reasonable.
Normal and reasonable is defined for this purpose as no more than
the organisation would be prepared to offer in equivalent
circumstances. Organisations should provide guidance as to what
may be considered appropriate. Staff must not exceed such guidance
without the specific and written authority of the governing body,
chief executive or other designated senior manager. Where there is
no guidance, the person should ensure that any hospitality or gift is
not of a level or an amount which would lead any person to believe
that he or she might be influenced by it.

The person should ensure that a full record is kept of all hospitality
or gifts offered, given or accepted above a minimum limit. This
record should be held centrally and be made available to the
organisations auditors and at meetings of the governing body.

The person should decline the gift if there is any doubt as to the
objectivity and openness of making or accepting such an offer.

27
 INTEGRITY AND HONESTY

2.26 All staff of parastatal organisations should conduct themselves in

accordance with the highest standards of behaviour to maintain the
organisation's good reputation. In particular, staff should be trustworthy
in the handling of public funds. They should clearly demonstrate:

integrity and honesty in handling money, assets and resources

entrusted to them

care in safeguarding property, assets and confidential information to

ensure it is not stolen, abused, damaged or destroyed

proper observance of the organisations rules and procedures,

particularly when handling or accounting for its financial affairs

economy to avoid waste and extravagance

and

personal honesty, for example, when making orders or paying for

goods and services, in claiming expenses and ensuring that official
assets and resources are not used for private advantage.

ACCOUNTABILITY

2.27 Accountability can be interpreted as a means of enabling a parastatal

organisation to explain and report to Parliament on the regularity and
efficiency with which it pursues its objectives and the extent to which it
achieves them. This should be distinguished from political
accountability, whereby politicians are accountable directly to the
public (e.g. through an election), and managerial accountability,
whereby officials are accountable to their superiors through the
hierarchy up to the political head or minister.

2.28 Accountability to Parliament should address:

the stewardship of assets and resources

the equitable appointment and treatment of employees

28
 the financial performance, that is, the efficient use of resources in
the delivery of agreed services

and

non-financial aspects of performance, including accountability for the

achievement of the organisations objectives and the quality of
services provided.

ETHICAL RELATIONSHIPS

The public and people from other organisations

2.29 All staff should uphold the reputation of their organisation by treating
the general public and people from other organisations:

in a helpful and courteous manner

on a timely, reliable and, where appropriate, confidential basis

and

in an open, fair and efficient way.

Other staff

2.30 All staff should have a general duty to treat colleagues:

openly, honestly and courteously

with consideration for others health, safety and personal welfare

and

without harassment, discrimination or abuse of any kind.

2.31 The governing body and chief executive should seek to establish an
open climate and culture in which staff can have confidence in the
fairness and impartiality of procedures for registering and dealing with
their interests and concerns. Similarly, it is the responsibility of the

29
 governing body, chief executive and senior management to ensure
equality of opportunity and to establish open and fair procedures for
making appointments and for determining terms and conditions of
service.

2.32 The governing body and chief executive should nominate one of the
most senior managers of the organisation to be responsible for
investigating any concerns raised by members of staff about standards
of conduct (see also paragraphs 3.633.66 below).

Trade unions

2.33 Membership of a trade union should be a democratic right for all

employees. Trade unions can also play a useful role in the management
of all parastatal organisations. This can include:

providing a useful channel of communication between the staff and

the senior management, the chief executive and the governing body

providing the governing body and the chief executive with a formal
means of consulting staff outside the normal management hierarchy

and

providing the governing body and the chief executive and senior
management with early warnings of staff grievances and concerns.

2.34 Arrangements should be put in place to facilitate regular formal

consultation and negotiation between management and trade union
representatives. The trade unions and their representatives should be
given appropriate facilities to enable them to communicate with their
members and to ensure that they are actually representing the
members views. This will include providing trade union representatives
with:

suitable paid time off from their usual work for training, consulting
with their members, preparing for and attending meetings with the
organisations senior management

access to suitable notice boards, the right to distribute information

and other means of communicating with their members

30
 and

the right to organise meetings for union members on the

organisations premises and during work time.

Suppliers

2.35 All staff should take care to maintain the reputation of the parastatal
organisation for honouring contracts and other agreements to which it
is a party. This implies building trust through fair, open and consistent
dealing. Staff involved with suppliers should display high standards of
competence, ethics and integrity.

2.36 Individuals should be aware of the risks involved in contracting and

purchasing relationships. Suppliers should be selected on the basis of
quality, suitability and value for money. Staff should be fair,
straightforward and honest in their dealings with suppliers. They should
take care at all times to avoid becoming, or appearing to become,
obliged to an individual supplier, e.g. by accepting gifts, hospitality,
entertainment or other inducements.

2.37 When dealing with suppliers, staff need to:

ensure that value for money is achieved

comply with the law and the organisations internal rules and
procedures, for example, public procurement legislation and
regulations of the tender board

ensure that the procurement process is operated with due regard to

openness, accountability and integrity

ensure that quality standards are met and procedures followed, and
be diligent in ensuring that suppliers comply with the standards
specified

and

pay for supplies within the time agreed.

31
32
3. Organisational Structures and
Processes
INTRODUCTION

3.1 Parliament should have responsibility for holding a parastatal

organisation to account for the quality of its governance and general
management. It may be aided in this task by a dedicated oversight
body and one or more specific ministries. A parastatal organisation may
have a range of different legal forms. Those parastatal organisations
with commercial objectives should be established as limited companies
to protect the government from inappropriate financial liabilities. The
governing body of a parastatal organisation should usually be appointed
by the relevant minister on the advice of a parastatal oversight body.

3.2 The governing body and the chief executive should also have
responsibility for establishing effective organisational structures and
processes to ensure:

proper accountability for public money and performance

clear communication with stakeholders

and

clarity about roles and responsibilities of key players, and in

particular the relative roles and responsibilities of the governing
body, chief executive and director of finance.

APPOINTMENT OF GOVERNING BODIES

3.3 There should be a formal and transparent process to ensure that

appointments to the governing body of each parastatal organisation are
made in accordance with specified criteria of competence, on the basis
of merit and the individuals ability to carry out a defined role within the
organisation.

33
3.4 The chairman and members of the governing body of each parastatal
organisation should usually be appointed by the relevant minister on
the advice of the parastatal oversight body. In some countries, the
President may be responsible for these appointments; however,
experience has suggested that this may concentrate too much power in
the hands of one person.

3.5 In line with the principles of openness and accountability, such

appointments should be subject to the recommendations of an
independent appointments commission, which may be the same body
as the oversight body for the parastatal organisation. Such a body
should ensure that each appointment is:

publicly advertised, including details of any fees payable and the

conditions associated with the appointment

subject to a pre-determined term of office

and

based on the principles of free and open competition so that

appointments are on the basis of the relative merits of the individual
candidates.

3.6 Where members of governing bodies are chosen as representatives of

stakeholder groups, such as those above, care should be taken to
ensure that the governing body represents the interests of all such
groups and the public in general. The code of conduct for governors of
parastatal organisations should emphasise the requirement to consider
the general public good rather than just the interests of their own
group.

3.7 Members of governing bodies may be chosen to represent different

stakeholder groups, for example:

the government may include officers from the parastatal oversight

body, senior officers from relevant ministries, and/or senior officers
from other parastatal organisations

users, customers or local community

34
 staff and their trade union representatives

representatives of other interest groups, for example civil society,

business people and the trade union movement.

3.8 Methods of nomination and appointment by such groups should be

clearly regulated and documented. If the governing body appoints its
own members it should establish a nomination committee to advise the
governing body on its membership. To preserve the independence of
Parliament and the parastatal organisations which are accountable to
it, no one who is or was a Member of Parliament should be appointed
as a member of the governing body of a parastatal organisation.

3.9 Irrespective of whose responsibility it is to make appointments to the

governing body, the key criterion for an appointment should always be
the skills and experience an individual can contribute to the governing
body. The governing body as a whole needs the right balance and mix
of individuals, representing a range of relevant backgrounds, experience
and professional skills. These should include operational and technical,
financial, legal, governmental and regulatory environments. The
composition of the governing body should also take into consideration
gender balance, geographical distribution and ethnicity.

3.10 Non-executive members of the governing body should be appointed for

a specified term subject to re-selection. Their tenure should be fixed at
three to five years. For the chief executive and other senior officers,
tenure should be five years or until retirement, whichever is earlier.

3.11 Reappointment to the governing body after the end of an initial period
of membership should not be automatic, but subject to a formal
performance appraisal by the chairman and the nomination committee
(and/or the oversight body). Letters of appointment should be provided
to each non-executive governing body member. These should set out
clearly the duties, responsibilities and levels of fee (if applicable) for
members of the governing body.

3.12 The governing body of each parastatal organisation should have a

minimum of seven and a maximum of 15 members. No more than half
the membership should be functional senior officers, including the chief
executive. No director should hold such a position in more than three
organisations concurrently.

35
 ACCOUNTABILITY FOR PUBLIC MONEY AND PERFORMANCE

3.13 The governing body, chief executive and senior managers should
establish effective organisational structures and processes to ensure:

compliance with all applicable statutes and regulations, and other

relevant statements of best practice

proper accountability for public money and performance, especially

to their oversight body, relevant ministries and Parliament

clear communication with all their key stakeholders

and

clarity about roles and responsibilities of key players, and in

particular the relative roles and responsibilities of the governing
body, chief executive and other senior managers.

3.14 Accountability for public money will be secured by having clear

organisational objectives and by the establishment of an effective
framework of internal control, and it will be discharged by means of
timely, objective, balanced and understandable reporting to
stakeholders. Accordingly, the governing body has responsibility for
ensuring that the organisation keeps proper financial records and
accounts, and maintains an effective system of internal control (see
also Chapter 4 below). The governing body also has the responsibility
for:

developing and agreeing the strategic and operational objectives and

plans for the organisation

holding the chief executive and other senior officers to account for
the extent to which the organisation has achieved its objectives and
the efficiency it has displayed

and

the extent to which the organisation complies with relevant laws,

rules and regulations.

36
 COMMUNICATION WITH STAKEHOLDERS

3.15 The governing body and chief executive should each make an explicit
commitment to openness and transparency in all the activities of the
organisation, subject only to the need to preserve confidentiality in
those specific circumstances where it is proper and appropriate to do
so.

3.16 There is a presumption that as much information as possible about the

activities of parastatal organisations, including policy decisions and
actions, should be in the public domain, with information being
withheld only when it falls within strictly defined criteria. Some
countries have legislation designed to improve transparency and protect
the publics right to information. Parastatal organisations should ensure
there are procedures in place to comply with any such legislation and
should aim to provide positive and timely responses to any reasonable
request for information. Nonetheless, the confidentiality of personal and
commercially sensitive information should also be respected at all
times. In some countries the confidentiality of such information is
backed up by data protection legislation.

3.17 In any communication with the stakeholders, the governing body and
chief executive should ask themselves the following five questions.

Is the communication open, honest and transparent?

Is it relevant and substantial or merely a communication of form?

Is the communication prompt and clear?

Does it fairly and comprehensively set out the position?

Are details provided to enable individual stakeholders to obtain

specific additional information?

37
3.18 To ensure openness and transparency, the governing body and chief
executive may also institute periodic external reviews of the
organisation and establish consultative groups with key stakeholders.
To improve effective communication with stakeholders, parastatal
organisations should:

publish formal predetermined standards and measures of

performance, and record actual performance against them in reports
that are public documents these standards of performance usually
relate to key financial and non-financial objectives (also see
paragraphs 5.145.19)

inform stakeholders of their rights to services and information, and

how, if necessary, to complain

and

inform stakeholders of contracting and partnership arrangements and

how to become involved.

ROLES AND RESPONSIBILITIES

Balance of power and authority

3.19 There should be a clearly defined division of responsibilities at the head

of each parastatal organisation to ensure a balance of power and
authority. One way of achieving this is for the governing body to include
a balance of executive and non-executive members (including
independent non-executives), so that no individual or small group of
individuals can dominate the governing body. The governing body
should include non-executive members of sufficient status and number
for their views to carry significant weight in the governing bodys
decisions.

3.20 The majority of non-executive members of the governing body should

be independent of management and free from any business or other
relationship that could materially interfere with the exercise of their
independent judgement. Non-executive members considered by the
governing body to be independent in this sense should be identified in
the annual report.

38
3.21 Other ways of balancing power and authority are the use of the
complementary, but different, roles of the governing body and the chief
executive and in appropriate cases the chief executive and the
chairman of the governing body. It is often considered that the roles of
the chairman and the chief executive should be separated and that the
chairman should be a non-executive member of the governing body.
Others argue that, with parastatal organisations having additional
oversight bodies and considering the role of Parliament, it is more
effective to combine the roles of chairman and chief executive so that
there is clearly one individual who can be held to account for the
success or otherwise of the organisation. Whichever model is adopted,
there should be a strong and independent non-executive element on the
governing body, with a recognised senior member, other than the
chairman, to whom concerns can be conveyed by other members of the
governing body.

3.22 Areas of accountability should be clearly defined. In particular, the roles

and responsibilities of the governing body, the chairman, the non-
executive members of the governing body and executive management
need to be explicitly documented. The information to satisfy this need
for accountability may be substantially derived from the legislation that
established the parastatal organisation. This should require each
parastatal organisation to produce an annual report that includes its
annual financial statements and appropriate non-financial performance
information.

The governing bodys responsibilities

3.23 Every parastatal organisation should be headed by an effective

governing body to lead and control the entity, and monitor the
executive management. Governing bodies should meet regularly. This
should occur at least four times a year and more frequently if
necessary.

3.24 The governing body has responsibility for the stewardship of the entity,
including:

the adoption of a strategic planning process within the policy and

resources framework laid down by Parliament, ministers and/or the
oversight body; this framework should include:

39
 defining and challenging the vision, mission, annual and longer-
term objectives and agreeing plans to achieve them

overseeing the delivery of planned results by monitoring

performance against agreed strategic objectives and targets, and
ensuring corrective action is taken when necessary

and

ensuring that adequate formal reports to the relevant minister,

regulatory body and Parliament are produced when required

at least an oversight of the appointment, remuneration, development

and succession of the senior management, including the chief
executive

confirmation of the appointment and dismissal of the head of

internal audit and, if relevant, the external auditor

the formal approval and adoption of the annual report of the entity,
including its financial statements

the implementation of an effective communications policy

the establishment, monitoring and maintenance of an effective

system of internal control

and

the identification and monitoring of the principal risks and

opportunities the entity faces and assurance that appropriate
systems are in place to manage these risks (this includes
safeguarding the public reputation of the entity).

Training, skills, information and advice

3.25 Members of the governing body should receive appropriate training on

joining the body and subsequently as necessary. On appointment, new
governing body members should make a commitment to undertake
induction training that includes awareness of public-sector values, and

40
 standards of probity and accountability. They should also commit
themselves to undertaking other training as appropriate.

3.26 Each governing body should establish appropriate arrangements to

ensure that it has access to all such relevant information, advice and
resources as are necessary to enable it to carry out its role effectively.
Written information on the entitys aims and objectives, control
environment and control activities, including key policies and
procedures, organisational risks and risk management practices, key
personnel, delegation arrangements, governing body and staff structure,
as well as its budgeting, planning and performance arrangements,
should be supplied to all members of the governing body.

3.27 Management has an obligation to provide the governing body with

appropriate and timely information, but information volunteered by
management is unlikely to be enough in all circumstances and
members should make further enquiries where necessary. They should
question managers about the information provided to ensure that it is
complete and that they clearly understand its implications.

3.28 The agreed procedure for individual members of the governing body to
take professional advice should be laid down formally, for example, in a
governing body resolution, or in the letter of appointment/service
contract. Before seeking such professional advice, however, the
member concerned should normally discuss and clear the matter with
the chairman or compliance officer unless there are particular reasons
why this is not appropriate, for example if it concerns the ethical
behaviour of these officers.

3.29 Training of members of each parastatal organisations governing body

should include a formal programme covering at least the following
aspects:

principles and practice of corporate governance

role and functions of the governing body

legal and regulatory context in which the organisation operates

explanation of financial reports

41
 fiduciary duties and duties of care and skill

internal control and risk management

and

disclosures, monitoring and evaluation.

Delegation and reserved powers

3.30 Where it has power to do so, the governing body may decide to
delegate responsibility for specified matters to individual members or its
own committees. However, there will be matters that the governing
body specifically reserves for its collective decision, to ensure that the
direction and control of the entity remains firmly in the governing
bodys hands and to safeguard against misjudgements and possible
illegal practices. These matters are likely to include issues of strategy,
key strategic objectives and targets, significant decisions involving the
use of financial and other resources, and personnel issues, including
key appointments and standards of conduct.

3.31 Where responsibilities have been delegated by the governing body, it

should ensure that individual responsibility for management decisions
can be established, and that such managers are made properly
accountable. Every employee should be accountable for his or her
expected contribution towards the successful delivery of the parastatal
organisations outputs.

3.32 The governing body should allow managers to manage, but should hold
them to account and ask them to explain their actions. The governing
body should formulate a definition of materiality on matters such as
acquisition and disposal of assets, investments, capital projects,
authority levels, and so clearly specify levels of delegation.

3.33 To ensure that the direction and control of the entity is firmly in their
hands, governing bodies should establish and maintain an up-to-date
framework of delegated or reserved powers that includes a formal
schedule of those matters specifically reserved for their collective
decision.

42
 Procedures

3.34 To support them in carrying out their duties, governing bodies of public-
sector entities should establish clearly documented and understood
management processes for policy development, implementation and
review; decision making, monitoring, control and reporting; and formal
procedural and financial regulations to govern the conduct of their own
operations. This should include a list of matters which must be decided
by the governing body itself and a scheme of delegation of other issues.

3.35 Procedural regulations to govern the conduct of the governing bodys

operations are also needed; these normally include the procedures for:

giving notice of meetings to members of the governing body,

including procedures for non-executive members to call meetings

voting by members

recording attendance

and

recording decisions of the governing body.

Meetings of the governing body

3.36 It is imperative that members of the governing body of each parastatal

organisation devote adequate time to their role. It is, however, often
difficult to find individuals with the necessary knowledge and
experience who are also available for the necessary amount of time.

3.37 Good practice with regard to the meetings of governing bodies includes
the following criteria.

The governing body should meet as regularly as required by needs of

the parastatal organisation, but at least once every three months.

The members of the governing body should be involved in the

development of the agenda for each of their meetings.

43
 Agenda papers for each meeting should be issued to the members of
the governing body at least two weeks before the meeting.

Agenda papers should be tabled at meetings of the governing body

only in exceptional circumstances.

Members of the governing body are expected to prepare themselves

adequately in advance of their meetings.

The governing body should prepare a work plan or calendar as a

guide to its activities.

The minutes of each meeting should be recorded accurately, issued

in draft to the members of the governing body within two weeks of
the meeting date and stored safely.

The chairman of the governing body

3.38 The role of the chairman should include responsibility for providing
effective strategic leadership to the governing body and ensuring that
the governing body successfully discharges the overall responsibility for
the activities of the entity as a whole.

3.39 The role of the chairman should be to:

provide leadership to the governing body, ensuring that the

individual governing body members work together as a cohesive
team to enable it to carry out its responsibilities effectively

enable all governing body members to make a full contribution to the

governing bodys affairs

facilitate training and appraisal of individual governing body

members

ensure that there is an effective process of review regarding the

performance of the governing body as a whole

ensure that key and appropriate issues are discussed by the

governing body in a timely manner

44
 ensure that the governing body, in reaching decisions, takes proper
account of statutory and other requirements

ensure that members of the governing body have access to relevant

information on which to base their decisions

and

ensure that the minutes of meetings of the governing body accurately

record all decisions taken and, where appropriate, the views of
individual governing body members.

Non-executive members of the governing body

3.40 Non-executive members of public-sector governing bodies should

provide an independent judgement on issues of strategy, performance,
resources and standards of conduct. Apart from any fees they may
receive as members of the governing body, it is appropriate that they be
independent of management and free from any other relationships
which may materially interfere with their role. Their duties, terms of
office, remuneration and the review thereof, should be clearly defined
and documented, and publicly recorded.

3.41 In the public-sector context, non-executive governing body members are

those governing body members (including, where relevant, the
chairman) who are independent from management, free of relationships
and other interests which could, or could reasonably be perceived to,
materially interfere with the exercise of judgement that is in the best
interests of the entity.

Executive management

3.42 The chief executive and director of finance are key managers and have
particular responsibilities for which they should be held accountable by
the governing body, the relevant ministries, the oversight body and
Parliament.

45
 The chief executive

3.43 The chief executive should have line responsibility for all aspects of
executive management. He or she should be accountable to the
governing body for the ultimate performance of the organisation and
implementation of the governing bodys policy. Even if the chief
executive is not a member of the governing body, he or she should
attend all its meetings, although he or she may be excluded for certain
items which the governing body wishes to discuss in private.

3.44 The chief executive should also be responsible to the governing body for
ensuring that the governing bodys procedures are followed, and that all
applicable statutes and regulations and other relevant statements of
best practice are complied with. The chief executive should be
appointed by the public service commission or the parastatal oversight
body.

3.45 The chief executive should be responsible for:

providing leadership to senior managers and other employees and

planning, directing and controlling day-to-day operations

interpreting and implementing government policy and the decisions

of the governing body

ensuring the development of suitable business plans, operational

plans and budgets for approval by the governing body

ensuring that procedures are followed, and that all applicable

statutes and regulations and other relevant statements of best
practice are complied with

the appointment, development and succession of senior managers,

or at least for providing appropriate advice on these issues to the
public service commission

developing and recommending the human resource policies and

plans for the governing bodys approval

46
 ensuring that senior managers have access to all relevant
information and that there is effective communication between them
and the governing body

ensuring that key and appropriate issues are discussed by senior

managers in a timely manner

ensuring that there is an effective process of review of the

performance of senior managers and, if necessary, that appropriate
disciplinary action is taken

ensuring that the organisation has and maintains an effective,

efficient and transparent system of internal control, including internal
audit and risk management

and

ensuring that the quality of services provided by the organisation is

appropriate.

3.46 Personal responsibility for internal control and wider governance may
be given to the chief executive as the executive head of the parastatal
organisation. The chief executive may be designated as the accounting
officer to indicate that he or she will be held to account in this way.

3.47 There are instances where the lines of responsibility and accountability
can become blurred, however, particularly where legislation requires
the chief executive to be accountable both to the responsible
minister(s) and the governing body. In such instances, the governing
body should develop and implement appropriate arrangements,
relevant to the specific circumstances, to manage this issue. One
approach may be to issue a set of formal directions to the chief
executive, reinforcing his or her statutory responsibility and clarifying
the role of the governing body.

The director of finance

3.48 A senior executive, whether a member of the governing body or not,

should be made responsible for ensuring that appropriate advice is
given to the governing body on all financial matters. This officer should
also be responsible for the financial management of the organisation.

47
 This director of finance should be a fully qualified professional
accountant and a member of a recognised accountancy body.
Membership of such a body will require compliance with professional
(that is ethical and technical) standards over and above any
requirements imposed by statute and regulations, and other relevant
statements of best practice.

3.49 The director of finance should also be responsible for:

keeping proper and accurate financial records and accounts,

including selecting and applying appropriate accounting policies

ensuring the effective, efficient, economical and transparent use of

the financial and other resources of the organisation concerned

ensuring arrangements for safeguarding assets, and the management

of the liabilities of the organisation

taking effective and appropriate steps to:

collect all revenue due to the organisation concerned

and

prevent wasteful expenditure, losses resulting from criminal conduct,

and expenditure not complying with legislation.

REMUNERATION POLICY

3.50 In many countries, the salaries of chief executives, senior managers and
other staff of parastatal organisations are set centrally by the public
service commission or equivalent. This should help to ensure objectivity
and consistency across the public service.

3.51 Some parastatal organisations may, however, be authorised to set the

salaries of their own staff. In this case, parastatal organisations should
establish a formal and transparent procedure for developing their staff
remuneration policy. No staff should be involved in deciding their own
remuneration. To avoid potential conflicts of interest, governing bodies
should establish remuneration committees with responsibility to give
independent advice. Such committees should make recommendations

48
 to the governing body and chief executive, within agreed terms of
reference, on the remuneration for senior managers; and determine on
their behalf specific remuneration packages for each senior manager,
including pension rights and any compensation payments.

3.52 Where a parastatal organisation has the power to determine the

salaries of its staff, these should be negotiated between the chief
executive (and/or other senior managers) and the relevant trade
union(s). Any changes to salary scales and salary increases should be
subject to ratification by the governing body.

DISCLOSURE

3.53 Governing bodies of public-sector entities need to report publicly the

processes for making appointments to the governing body, and need to
make publicly available the names of all governing body members,
together with their relevant other interests. If public-sector entities are
to be accountable to their stakeholders it is important that the identity
of the members of the governing body be publicised, together with
information about both how and why they came to be appointed.

3.54 The annual report of a parastatal organisation should contain a

statement on the remuneration policy and details of the remuneration
and all benefits of each of the members of the board and senior
managers.

3.55 The governing body should report to its minister (or oversight body) and
to Parliament each year on the organisations policy on staff
remuneration. The report should form part of, or be annexed to, the
organisations annual report.

3.56 Separate and full disclosure should be made in the annual report of:

the names and brief background details of the Chairman, chief

executive and other members of the governing body

the total fees or remuneration paid to each member of the governing

body, including the chief executive, including, for example, any
house, car, health, education or pension contributions

49
 details of all expenses paid to each member of the governing body,
and any car, office, computer or mobile telephones, etc. made
available to any member of the governing body or senior manager

and

the total remuneration package of the senior managers within the

organisation.

3.57 Separate figures should be shown for salary, fees, other benefits and
other performance-related elements. The basis on which performance is
measured (for performance-related remuneration) should also be
explained.

3.58 Recently, good practice has increased the level of detail about salary
and other remuneration that is disclosed. It is now considered good
practice for the organisation's annual report to contain details of the
total remuneration of each member of the governing body, the chief
executive and each of the organisation's senior managers.

COMPLAINTS AND WHISTLE-BLOWING PROCEDURES

3.59 Complaints and whistle-blowing procedures are essential for the good
governance of all organisations. Complaints procedures should ensure
that complaints from users and other stakeholders external to the
organisation are adequately monitored, investigated, resolved and
appropriately reported. Whistle-blowing procedures aim to ensure that
all significant staff concerns over the management of the parastatal
organisation are adequately dealt with by the organisation, to minimise
the need for staff to report their concerns to anyone outside the
organisation, including the media.

Complaints

3.60 All parastatal organisations should have a formal complaints procedure

with the objective that all complaints are dealt with promptly and
effectively and, where possible, to the satisfaction of all concerned.
Such a complaints procedure should include the following aspects:

50
 the complaints procedure should be published, with copies made
available on request and reference made to it in the organisations
annual report

the existence of the complaints procedure should be advertised at

each of the organisations public enquiry points, with the name and
contact details of the person to whom complaints should be raised

where possible, any complaint should be dealt with, as soon as it is

raised, by the person who receives the complaint

where this is not possible, the complaint should be referred to the

head of department or dedicated complaints officer, and this officer
should investigate the complaint and provide a response as promptly
as possible

if the person raising the complaint is still not satisfied he or she

should be provided with the contact details of a director or the chief
executive, who will consider the complaint

if the complaint is still not resolved the opportunity should be

provided for the complaint to be considered by the governing body or
its complaints panel

and

the internal complaints procedure should not prevent complaints

being referred to the relevant oversight body, ombudsman, Member
of Parliament, minister or other relevant official, and details should
be provided of how to make such external complaints.

3.61 Complaints should be used as a method of identifying aspects of the

service provided by the parastatal organisation which need to be
improved. A regular report should be provided (at least annually) to the
governing body giving the number of complaints received and an
outline of how each was ultimately resolved.

3.62 A complaints register should be maintained, which records each formal

complaint received by the organisation. This should include all written
complaints and any complaints which are not resolved by the person

51
 who first receives the complaint. The complaints register should be
available for inspection at all meetings of the governing body.

Whistle-blowing procedure

3.63 Each parastatal organisation should develop clear procedures for staff
to voice concerns or complaints about maladministration, breaches of
the law or ethical concerns, in an environment where they will be
supported and protected from reprisals (whistle-blowing policy, for
example, see the Annex to Appendix 3 of the companion volume to
these Guidelines).

3.64 Staff should normally be expected to raise such concerns with their
supervisor or manager. If this is not appropriate, however, staff should
be provided with the contact details of a senior manager or the chief
executive to whom they can provide details of their concerns in
confidence. They may also raise appropriate concerns with internal
audit or the fraud investigation officer. This officer should investigate
the case and provide an indication of his or her response and the action
planned, which should be taken within a fixed period of time.

3.65 Such concerns should be treated confidentially and staff should be

provided with the assurance that they will not penalised if they raise
concerns in good faith through the appropriate channels. If there is a
need to break this confidentiality, the person who raised the concern
should be consulted.

3.66 This whistle-blowing procedure should ensure that in most cases

concerns are dealt with within the organisation. There will be cases,
however, when it would be appropriate for concerns to be raised
externally, for example, with the external auditor, the Auditor-General,
the anti-corruption commission or the police.

52
4. Internal Control

INTRODUCTION

4.1 The governing body and chief executive of a parastatal organisation

should ensure that a sound framework of internal control is established,
and operates in practice, and that a statement on its effectiveness is
included in the organisations annual report.

4.2 Internal control has been broadly defined by the Committee of

Sponsoring Organisations of the Treadway Commission (COSO) in
Internal Control Integrated Framework, as:

a process, effected by an organisations Governing Body of

directors, management and other personnel, designed to provide
reasonable assurance regarding the achievement of objectives in the
following categories:

effectiveness and efficiency of operations

reliability of financial reporting

and

compliance with applicable laws and regulations.

4.3 The Criteria on Control Governing Body of the Canadian Institute of

Chartered Accountants (CoCo) and the Internal Control Working Party
of the UK Institute of Chartered Accountants (Turnbull) have similar
definitions of internal control. Both refer to internal and external
reporting, rather than just financial reporting, however, and to
compliance with internal policies as well as with laws and regulations.

4.4 While internal control is a process, its effectiveness is a state or

condition of the process at one or more points in time. Internal control
systems operate at different levels of effectiveness. Control is effective
to the extent that it provides reasonable assurance that the organisation
will achieve its objectives reliably. Internal control can be judged

53
 effective in each of the above three categories respectively, if the
governing body, chief executive and senior managers have reasonable
assurance that:

they understand and can predict the extent to which the

organisations agreed operational objectives are being achieved and
that all its resources are being used for these purposes

published and internal financial statements and reports are reliable

and are produced regularly

and

applicable laws and regulations are being complied with.

4.5 In reporting on the effectiveness of the organisations framework of

internal control, governing bodies and chief executives should include,
in the annual report, a statement to the effect that the framework of
internal control that they have established is both appropriate to the
nature of the organisation and effective in practice. The statement
should outline the arrangements that they have established to enable
them to make the required statement. These may take the form of a
review of the various systems, risks and opportunities, and of the
monitoring of the key control processes and procedures. The criteria
against which the system is measured are thus identified, as well as
the date on which the conclusion is made.

4.6 Care should be taken to provide staff with the skills required to
implement and maintain an adequate internal control process, and to
ensure that staff responsible for securing significant changes in the
process are suitably experienced (see also paragraphs 4.234.27
below).

4.7 Objectives change over time and therefore management should assess
periodically the effectiveness of control in the organisation and
communicate the results to the governing body and chief executive.
Procedures and control activities should be revised from time to time to
ensure their continuing relevance and reliability, especially at times of
significant change. The effectiveness of internal control should be
reviewed and tested regularly. These reviews should cover all control
activities, including those related to finance, operations, budgetary
control, compliance and risk management, and governance. They may

54
 be undertaken by the organisation's Internal Audit section (see
paragraphs 4.284.34 below). Responsibility for ensuring sound
internal control should, however, remain with management, specifically
with the governing body and chief executive.

BUDGETING AND FINANCIAL MANAGEMENT

4.8 Governing bodies and chief executives should ensure that that effective
and efficient budgeting and financial management procedures are in
place.

Budgeting

4.9 Budgeting is an essential element of the financial planning, control and

evaluation processes of parastatal organisations. By its nature it is a
means of allocating resources to achieve objectives. It is a management
tool for planning, as well as a means of controlling funds to ensure that,
as far as possible, the stated objectives can be met. Plans are
inevitably not implemented exactly as intended, and any material
differences should be clearly explained to the governing body.
Whenever possible, the governing body should give prior approval for
significant departures from their agreed budget.

4.10 Parliament is responsible for sanctioning the overall public-sector

budget and for authorising the executive to incur expenditure (see also
paragraph 1.29 above). The income and expenditure of all parastatal
organisations should be included within the budget approved by
parliament. The budget should also include all loans to parastatal
organisations and a note of any financial guarantees which have been
provided. The governing body of a parastatal organisation should also
approve the annual budget or financial plan, within the overall level of
expenditure approved by Parliament. It is also responsible for
overseeing and monitoring the implementation of this budget.

4.11 Budgeting will be more successful if it is linked to a medium-term

framework (a plan that usually covers a period of three to five years)
containing measurable statements of the objectives of the parastatal
organisation, policies and priorities, strategies for achieving the
objectives, and a resource framework (projections of revenues and
ceilings) to plan for the period. It is often impossible to achieve the
objectives within one year, thus it is necessary to plan ahead to ensure
that the best use is made of resources.

55
4.12 Emphasis should be placed on identifying objectives, priorities and
activities (or outputs and outcomes). The format of the budget
documents should provide a clear explanation of the rationale for the
proposed allocation of resources. Where possible, public feedback
should be taken into account in the formulation of the budget.

4.13 To be effective, budgeting should be integrated with accounting. If a

similar basis of accounting is adopted for budgeting purposes and
financial reporting, it will provide a framework of accounting
information to provide a more rational basis for planning and controlling
expenditure and for decisions about financing. Cash-flow budgeting is
an essential element of effective cash management, and therefore a
forecast of the timing of cash inflows and outflows will always be
needed.

4.14 Regular monitoring of actual financial performance against the budget

is vital. The figures for revenue or expenditure reported against budgets
should be reliable and readily available for discussion and management
action, and projections revised where necessary. The governing body
should receive, at least quarterly, budget reports comparing actual
payments and receipts with the agreed budget. Such reports should be
issued within a month of the end of each quarter and contain
explanations of any material divergences from the agreed budget.

Financial management

4.15 The objectives of financial management in the public sector should be

to:

support senior management in the allocation of financial resources in

line with strategic policy objectives

facilitate and ensure the regularity and propriety of the organisations

financial affairs

minimise and detect fraud, irregularity and corruption

and

56
 encourage value for money by monitoring the extent to which the
organisations outputs are provided economically, efficiently and
effectively.

4.16 Financial management should include cash and treasury management

as well as the formulation of medium-term and long-term financial
objectives, policies and strategies, in support of the operational plan of
the organisation. It includes the planning and control of capital
expenditure, working capital management, and funding and
performance decisions. It includes financial and management
accounting functions, and the internal control environment, as well as
supporting financial information systems.

4.17 Financial management will be more effective if it has strong high-level

support that is complemented by:

medium-term contracts, supported by performance agreements, for

members of the governing body, the chief executive and other senior
managers

clearly defined objectives and specified outputs for each department

clearly defined responsibility for the governing body, chief executive

and other senior managers for resources committed and outputs
produced

strategic planning and operational plans

and

non-financial measures for outputs in terms of quantity, quality and

timeliness being introduced and used, together with financial
measures in the evaluation of performance.

57
4.18 The governing body and chief executive should have:

flexibility in the use of resources within clearly defined limits

discretion to determine cost allocations

and

full responsibility to determine staffing requirements and

remuneration.

4.19 A sound financial management system should be supported by

appropriate legislation, regulations, instructions and systems. Trained
and competent staff are essential, informed by an efficient, preferably
computerised, management information system. There should be
guidelines, manuals or instructions setting out the procedures and
regulations with which public-sector financial management and
reporting must comply. These documents should be reviewed every two
or three years (or when significant change has occurred) and updated
accordingly.

4.20 The governing body, chief executive and other senior managers should
receive sufficient relevant and reliable information to enable them to
monitor the operations of the organisation. The information system and
its operators should ensure that full and proper records are kept of the
affairs of the parastatal organisation. Information systems should be
designed in such a way as to measure costs and the key performance
indicators considered essential by the governing body, chief executive
and other senior managers, in their assessment of the organisations
success or failure. The accounting system that produces the financial
statements should be integrated with other management systems (e.g.
cash and debt management, and budgeting).

4.21 The governing bodys ability to manage the financial affairs of the
organisation will be improved if:

periodic financial reports include year-to-date actual and budget

figures, full-year budget figures and full-year forecasts

there is a detailed analysis of any variances, and a written

explanation where any of these are material

58
 the director of finance is a member of the top management team
and attends all meetings of the governing body

it has assurance over the accuracy of the organisations financial

records through, for example, the undertaking of regular
reconciliations between the cash book and the bank statements

and

it is able to monitor the extent to which the organisation complies

with statutory and regulatory requirements and appropriate
accounting standards.

OPERATIONAL REPORTING

4.22 The objectives of most parastatal organisations are to provide non-

financial goods and services. Thus the management of these
organisations operations is vital to the efficient achievement of their
objectives. For this reason:

the governing body should be provided with regular reports on the

extent to which its operational objectives are being achieved

appropriately defined non-financial performance indicators should be

established so as to facilitate effective assessment of the
corporations performance

reporting of these performance indicators should be tailored to the

particular levels of responsibility so that the governing body
members are provided with high-level summary reports for decision-
making purposes and operational managers are provided with
greater details appropriate to their managerial responsibilities

and

implementation status reports should be included to enable the

monitoring of progress, with all significant initiatives approved by the
governing body.

59
 STAFF TRAINING

4.23 The governing body and chief executive should ensure that training
programmes are in place so that all staff are competent to perform their
work.

4.24 Sound recruitment policies, acceptable conditions of employment and

appropriate training programmes can contribute to the competence of
staff. The quality of management in a parastatal organisation is directly
related to its ability to obtain and retain experienced managers,
accountants and other specialist staff. Salary levels in parastatal
organisations should be sufficient to attract and retain staff of the right
calibre.

4.25 Public-sector managers should be proficient in the following areas:

strategic planning

formulation of output objectives, performance measures and

operational plans

organisation (people and structure, operational processes and

technology)

performance measurement, financial and performance reporting

management of funds, working capital and other assets

managing reliable and relevant accounting and information systems

procurement and contracting for goods and services

and

management and motivation of staff.

4.26 An assessment of the performance of staff should ensure that individual

performance is linked to the operational plan of the parastatal
organisation. Incentives should be given for good performance to ensure

60
 continued improved efficiency, and sanctions should be instituted for
non-performance or sub-standard performance.

4.27 Staff should be appropriately supervised and their performance

evaluated against an appropriate profile. Training should be tailored to
fit the immediate requirements and career aspirations of staff. The
training programme should integrate formal training with on-the-job
training. Management training opportunities should be provided to all
staff to ensure that they perform competently. Staff with specialised
responsibilities require appropriate additional training.

INTERNAL AUDIT

4.28 Internal auditing is an independent objective assurance and consulting

activity designed to add value and improve an organisation's operations.
It helps an organisation accomplish its objectives by bringing a
systematic, disciplined approach to evaluate and improve the
effectiveness of risk management, control and governance processes.

4.29 The governing body and chief executive should ensure that an effective
internal audit function is established and maintained as part of the
organisation's framework of internal control.

4.30 Acceptable standards should be applied by the internal audit function,

in particular relating to independence, professional proficiency and
audit approach. The Standards for the Professional Practice of Internal
Auditing issued by the Institute of Internal Auditors are the most
authoritative international standards for internal auditing
(http://www.theiia.org/iia/index.cfm?doc_id=1499). The Eastern and
Southern African Association of Accountants General (ESAAG) has
developed Guidelines on Internal Auditing with an associated
commentary and explanatory notes. The Guidelines are reproduced as
Appendix 4 in the companion volume to these Guidelines

4.31 The head of Internal Audit should gain the respect and co-operation of
the governing body, chief executive, other senior managers and the
audit committee (see also paragraphs 4.354.39 below). The Internal
Audit section should have unrestricted rights of access to all personnel,
records (both electronic or otherwise) and assets, and be able to obtain
such information and explanations as the head of Internal Audit
considers necessary for the proper fulfilment of its responsibilities.

61
4.32 Internal Audit should be objective, and, as far as possible, operationally
independent of the organisation's management. It is the responsibility
of the audit committee to ensure that conflicts of interests do not arise
and that its objectivity and independence are not compromised. The
head of Internal Audit should report directly to a senior manager,
preferably the chief executive, with direct access, as necessary, to the
governing body, chief executive and chair of the audit committee (or
equivalent).

4.33 An effective internal audit function should include the systematic

review, appraisal and reporting of the adequacy of the systems of
managerial, financial, operational and budgetary control and their
effectiveness in practice, including, at a minimum:

the adequacy of established regulations, guidance, policies, plans

and procedures

the appropriateness of organisational, personnel and supervision

arrangements

the extent of compliance with the above

the adequacy of accounting for assets and interests and the extent
that these are safeguarded from losses of all kinds arising from
waste, extravagance, inefficient administration, poor value for
money, fraud or other cause

the appropriateness, reliability and integrity of financial and other

management information and the means used to identify, measure,
classify, report and act upon that information

the economy and efficiency with which resources are employed

the integrity of computer systems, including systems under

development

the adequacy and effectiveness of risk management and governance

processes

and

62
 the follow-up action taken to remedy previously identified
weaknesses.

4.34 The Internal Audit section should have relevant documented procedures
(e.g. an audit charter and manuals) and other guidelines.

4.35 In some countries, Internal Audit has a direct role to play in the
checking and authorisation of payment vouchers through the pre-audit
process. The governing body and chief executive may consider that this
is a necessary role for Internal Audit. However, Internal Audit will often
be more effective in a wider role. This would include the following
changes:

Internal Audit should undertake independent reviews of internal

controls (rather then just the transactions) under the direction of an
audit committee

there should be management support for Internal Audit and the

creation of a climate where managers and those responsible for
Internal Audit co-operate for their mutual benefit

and

Internal Audit should develop a constructive role: as an aid to risk

assessment and a proactive approach to contributing to good
management and effective internal control.

AUDIT COMMITTEES

4.36 The governing body should establish an audit committee, with the
responsibility for independently reviewing, on behalf of the governing
body, the organisations framework of control and its internal and
external audit processes.

4.37 To be effective, the audit committee should be independent of the

organisation's senior management. To achieve this:

it should be established as a high-level committee, and its members

should be given written terms of reference that deal adequately with
their membership, authority and duties

63
 the terms of reference of the audit committee should be agreed by
the full governing body (or may be provided by the oversight body);
they should be reviewed and revised as necessary every three years

the majority of members of the committee should not be employed

by the organisation; they may include senior managers from other
parastatal organisations or from the private sector

the governing body, chief executive, director of finance, the head of

Internal Audit and the external auditor should normally attend
meetings of the audit committee and have direct access to the
chairman as they require; other relevant senior managers should also
attend as necessary

the head of Internal Audit and the Auditor-General should bring all
their significant findings to the attention of the audit committee

to ensure that there are no unresolved issues of concern, the audit

committee should have private discussions with the head of Internal
Audit and the external auditor at least once a year, without the chief
executive and other senior managers being present

and

the committee should have explicit authority to investigate any

matters within its terms of reference, the resources it needs to do so,
and full access to any information it deems necessary. The
committee should be able to obtain outside professional advice and,
if necessary, invite outsiders with relevant experience to attend its
meetings.

4.38 The effectiveness of the audit committee will largely depend on its
having a capable chairman who has the confidence of the governing
body, chief executive, the organisation's head of Internal Audit and the
external auditor. The chairman of the audit committee should be
independent of the senior management of the organisation. The
chairman of the audit committee should not be the chief executive and
should neither fulfil a management role within the organisation nor any
other role that may conflict with his or her role as chairman of the audit
committee.

64
4.39 Members of the audit committee should be appropriately qualified, and
receive sufficient information, advice and training to enable them to
carry out their roles effectively. Members should have experience of
managing organisations of a similar size and complexity. At least one
member of the audit committee should be an experienced financial
manager, preferably a qualified accountant. The names and terms of
office of the members of the audit committee should be provided in the
organisations annual report.

4.40 The functions of an audit committee should include:

reviewing the extent to which managers implement and maintain an

adequate internal control process (including the adequacy of policies
and practices to ensure compliance with relevant statutes,
directions, guidance and policies) and managements ability to
monitor compliance with relevant standards or codes of governance

reviewing, with management, the adequacy of the financial

information relied on to manage the organisation

reviewing, with senior managers, the latters relationship with the

organisations external auditor (see also paragraphs 5.205.25
below)

ensuring that the Internal Audit function is properly resourced and

has appropriate standing within the organisation

recommending or approving the hiring or removal of the head of

Internal Audit and, where appropriate, the external auditor (in
recognition of the wider accountability of parastatal organisations to
Parliament, the Auditor-General may be appointed as the external
auditor or may be responsible for appointing the external auditor)

reviewing the activities of the Internal Audit function, including

recommending authorisation of its annual work programme to the
governing body

reviewing the approach, scope and results of both Internal Audit and
the external auditor, for example, monitoring the extent to which
Internal Audit adopts a pre-audit approach and authorising any non-
audit work undertaken by the external auditor

65
 monitoring, on behalf of the governing body, all aspects of the
organisations relationship with the Auditor-General; this should
include:

reviewing the audit report and other communication with

management, as well as actions taken by management on
recommendations included in previous communications

and

ensuring that adequate safeguards are in place to prevent possible

conflicts of interest and guard the Auditor-Generals independence

providing advice to the governing body and chief executive and/or

relevant accounting officers on the above aspects of their work

and

holding formal meetings as required; this should usually be at least

four times a year.

RISK MANAGEMENT

4.41 The governing body and chief executive should ensure that effective
systems of risk management are established as part of the
organisations framework of internal control.

4.42 Risk can be defined as the chance of something happening that will
have an impact on the achievement of objectives. It can be expressed
in terms of consequences and likelihood. Risk can have either a
beneficial or a detrimental impact on the achievement of agreed
objectives.

4.43 Risk management can be viewed as a process of:

understanding the organisational objectives

identifying the risks associated with achieving the objectives

66
 assessing the risks, including the likelihood and potential impact of
specific risks

developing and implementing programmes/procedures to address

identified risks

and

monitoring and evaluating risks and the programmes/procedures in

place to address them.

4.44 The governing body, chief executive and other senior managers should
identify internal and external risks so they can react to (or initiate)
changes in an appropriate and timely manner.

4.45 Other staff should also understand the types of risk which are
acceptable to the governing body, chief executive and other senior
managers. In turn, the governing body and chief executive should
understand what risks are acceptable to the relevant ministry or other
oversight body. Risks that have been accepted by the organisation
should be documented and communicated to the governing body,
senior managers and relevant staff.

ANTI-CORRUPTION COMMISSION

4.46 The governing body and chief executive should ensure that they and
their staff support the work of the national anti-corruption commission,
where one exists. They should also regularly consider the extent to
which the work of their organisation can be co-ordinated with that of
the anti-corruption commission to ensure that fraud and corruption are
minimised.

4.47 Most ECSAFA member countries have established, or are establishing,

anti-corruption commissions. The creation of such an effective and
credible watchdog organisation has been identified as a key pillar for
sustaining or restoring national integrity. Governing bodies and chief
executives should support the creation of a national anti-corruption
commission where such an organisation does not yet exist.

67
4.48 These organisations usually investigate cases of alleged fraud or
corruption, provide advice on how to reduce corruption and play an
educational or campaigning role. Their success is seen as being
dependent on the extent to which they have been able to involve civil
society organisations in their work.

4.49 The functions of an anti-corruption commission may include:

investigating any complaints or allegations of serious fraud or

corruption in any public body

assisting any law enforcement agency in the investigation of serious

offences involving dishonesty or cheating of the public revenue

reviewing the practices and procedures in public bodies in order to

facilitate the discovery of corrupt practices and making
recommendations to reduce the risk of corrupt practices occurring in
future

advising governing bodies and chief executives of changes in

practices or procedures, compatible with the effective discharge of
their duties, which the commission thinks necessary to reduce the
likelihood of the occurrence of corrupt practices

educating the public on the evils of corruption by providing

information on its harmful effects

and

enlisting and fostering public support in combating corruption.

4.50 The anti-corruption commission may hold workshops in parastatal

organisations to raise awareness of the problems of corruption and
ways of reducing its occurrence.

68
4.51 Perhaps the most important aspect of the work of anti-corruption
commissions has been their public education role. Activities in this area
have included:

talk and phone-in shows on television and radio

posters and pamphlets

press releases, newspaper articles and advertisements

and

talks and presentations to various civil societies and other groups.

69
70
5. External Reporting

ANNUAL REPORTING

5.1 Governing bodies should publish an annual report (including their

financial statements), presenting a balanced and understandable
account of the organisations performance, achievements, financial
position and prospects.

5.2 To discharge their accountability for public resources, governing bodies

should ensure that they publish their annual report promptly (within at
most 12 months and preferably 6 months of the financial year end).
The report should include:

audited financial statements and the auditors report

a statement of the aims and objectives of the organisation, the

performance measures against which future years performance will
be judged and a comparison of the actual performance achieved in
the year covered by the annual report with the performance
measures as determined in the previous financial year

a statement of the organisation's fees policy for members of the

governing body and the remuneration policy for the chief executive
and other senior managers, including details of their remuneration
packages (see also paragraphs 3.383.45 above)

and

a statement that presents an objective, balanced and understandable

commentary on the organisations financial performance and
position, its non-financial performance, and on its future ability to
meet liabilities and commitments.

5.3 The usefulness of financial statements is impaired if they are not made
available to users within a reasonable period after the reporting date.
International Public Sector Accounting Standards 1 (IPSAS 1)
Presentation of Financial Statements provides guidance that an

71
 organisation should be in a position to issue its audited financial
statements within six months of the reporting date.

5.4 To demonstrate their commitment to high standards of governance,

governing bodies should include in their annual report a statement that
they have complied with relevant standards or codes of governance.
This statement should identify the standards or codes adopted as well
as those standards or parts of codes with which they have not
complied, should disclose for what part of the period such non-
compliance continued, and give reasons for any such non-compliance.

5.5 The governing body should include in its annual report a statement
explaining (as a minimum) its responsibility for:

approving the budget to provide authorisation for the acquisition and

use of financial resources

preparing and providing financial statements that fairly present the

state of affairs of the organisation as at the end of the financial year
and the results of its operations for that year

maintaining an effective framework of internal control, risk

management and appropriate governance procedures

maintaining adequate accounting records and ensuring the

consistent use of appropriate accounting policies, supported by
reasonable and prudent judgements and estimates

and

ensuring adherence to applicable accounting standards unless

departures are fully disclosed, explained and quantified.

5.6 The annual report should also include a statement explaining the
external auditors responsibility for reporting on whether the
organisations financial statements are presented fairly.

5.7 The annual report should be made available to staff, their trade unions,
users of the organisation's services and the general public.

72
5.8 It is good practice for an annual meeting to be held at which the annual
report is presented. Members of the governing body, the chief
executive, the director of finance and the organisations external auditor
should attend the meeting and should be available to answer questions.
The meeting should be advertised to:

users and customers of the organisations services

employees and their trade unions

and

the general public through the media.

5.9 The governing body should also ensure that the following aspects of
external reporting are adequately and promptly implemented:

The long-term corporate strategies covering a period of five years

should be tabled in Parliament.

The governing body should submit its five-year corporate strategy

including business plans and budgets, to Parliament for information,
through the responsible minister (after review by the parastatal
oversight body).

The governing body should submit its annual report through the
responsible minister (after review by the parastatal oversight body)
for tabling in Parliament. This report should highlight the
corporations achievements and any constraints it has experienced
and the measures it has put in place to overcome these constraints.

The annual report should be made available to the following

stakeholders:

users and customers of the organisations services

employees and their trade unions

and

73
 the general public through the media.

5.10 A summary of the annual report and financial statements should be

advertised in the main national newspapers as soon as it is published.
Full versions of these documents should be made available to the
public on request at no, or a minimal, charge. These documents
should also be published on the Internet.

USE OF APPROPRIATE ACCOUNTING STANDARDS

5.11 Governing bodies and directors of finance should ensure that the
financial statements are prepared in accordance with an authoritative
and recognised set of accounting standards, and applicable legislation.

5.12 Accounting standards are authoritative statements of how particular

types of transaction and other events should be reflected in the
financial statements. Accordingly, compliance with accounting
standards will normally be necessary for financial statements to give a
fair representation. In addition, compliance with accounting standards
should promote the reliability, consistency and transparency of financial
information.

5.13 IFAC Public Sector Committee has developed International Public

Sector Accounting Standards (IPSASs) on the cash and accrual basis.
In addition, it states that government business enterprises should follow
International Accounting Standards. In addition, in some countries
there are national accounting standard-setting bodies which determine
the standards to be followed by parastatal organisations. The notes to
the organisation's annual financial statements should clearly state the
accounting standards that have been followed and any exceptions to
these standards that were considered necessary.

5.14 In some cases there may be a conflict between the reporting

requirements set out in the accounting standards and certain
Parliamentary reporting requirements. While the Parliamentary
requirements should take precedence in this situation, it may mean
that the organisation will not be able to state that it complies with the
accounting standards in question.

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 PERFORMANCE MEASURES

5.15 The governing body and chief executive should establish and report
relevant performance measures to demonstrate that all resources have
been procured economically and are utilised efficiently and effectively.

5.16 The public sector is under intense pressure to improve its operations
and deliver its products and services more efficiently and at the least
cost to the taxpayer. Performance measurement is a useful tool in this
regard, since it formalises the process of tracking progress toward
established goals and provides objective justifications for organisational
and management decisions.

5.17 To improve performance, it is also necessary to measure performance

in non-monetary terms. Without information about what is being
delivered (outputs), what it is costing (inputs), and what is achieved
(outcomes) it is impossible to make efficient resource allocations within
the public sector. Performance measures should include responding to
accountability requirements, improving service delivery, and reducing
costs, while maximising output and increasing productivity in the
organisation. Performance measures usually work best when those
people involved in the activity being measured have themselves been
involved in creating the measures.

5.18 A basis of comparison is needed for performance measures. The most

usual bases are:

comparisons with previous years

comparisons with similar organisations

and

comparisons of actual results with targets.

5.19 Where comparisons over time are made by a particular organisation,

then a consistent basis of measurement should be used.

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5.20 Performance measures usually assess:

economy this refers to the acquisition of the appropriate quality

and quantity of financial, human and physical resources at the
appropriate time and place, and at the lowest possible cost

efficiency this refers to the use of resources so that output is

maximised for any given set of resource inputs, or input is minimised
for any given quantity and quality of output provided

effectiveness this refers to the extent of the achievement of set or

predetermined outcomes, objectives or other intended effects of
programmes, operations, activities or processes

and

appropriateness that is, whether the objectives or outcomes of

programmes, operations, activities or processes address the real
needs of customers.

EXTERNAL AUDIT

5.21 The governing body and chief executive should ensure that an objective
and professional relationship is maintained with the organisations
external auditor. An audit committee (see paragraphs 4.36-4.40
above) should be responsible for monitoring the relationship between
the organisation's senior management and its external auditor.

5.22 In most countries, public-sector external auditors have a wider range of

responsibilities for reporting on the activities of parastatal organisations
than do auditors working in the private sector, covering not only the
financial statements, but also compliance audits, value-for-money
audits and public-interest issues. The external auditor should be more
concerned with financial management in general than with just the
truth and fairness of the accounts.

5.23 The prime role of the external auditor is to provide independent

assurance that the financial statements of the parastatal organisation
provide a true and fair view of the financial affairs of the organisation.
The auditor may also undertake a number of additional roles: one of
these is to provide a management report which should be addressed to

76
 the governing body. This provides details of weaknesses found in the
organisations systems of internal financial control and
recommendations to overcome such weaknesses. This management
report can be an important source of information for the governing body
on the soundness or otherwise of its organisations internal control
systems.

5.24 The external auditor may also be required to submit his or her
management report to the relevant minister or other supervisory body.
The Auditor-General will also be required to report the results of his or
her work to Parliament.

5.25 In monitoring the organisations relationship with its external auditor on

behalf of the governing body and chief executive, the audit committees
responsibilities should include:

considering, where relevant, the appointment of the external auditor,

the audit fee, and any questions of resignation or dismissal

considering the objectives and scope of any non-financial audit or

consultancy work proposed to be undertaken by the external auditor,
and reviewing the remuneration for this work

discussing with the external auditor before the audit commences the
scope of the audit and the extent of reliance on the Internal Audit
section and other review agencies

discussing with the external auditor any significant issues arising

from the committees review of the financial statements (in the
absence of senior managers where necessary) and any other work
undertaken or overseen by the audit committee

reviewing and considering communication between the Auditor-

General and the organisation's senior managers

and

reviewing progress on accepted recommendations from the Auditor-

General.

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5.26 Generally, the organisations external auditor should be contracted to
carry out non-audit work only where the audit committee is satisfied
that there are no conflicts of interest and the auditors independence
will not be compromised. Such work may be prohibited in some
countries.

Independent assurance function of external auditors

5.27 The Auditor-General is usually appointed as the auditor or given

responsibility for the audit of all parastatal organisations by statute; this
is in recognition of the auditors wider responsibility, beyond the
governing body, to Parliament. There are exceptions, for example,
where a dedicated body is responsible for the audit of parastatal
organisations or where private-sector audit firms conduct the audit of
parastatal organisations, often on behalf of the Auditor-General. With
the privatisation of many parastatal organisations in recent years, the
independence of the audit of parastatal organisations will often be
improved if the dedicated audit body is merged with the office of the
Auditor-General. Where an audit firm undertakes the audit of a
parastatal organisation, the independence of this function will be
improved if the firm is appointed by and undertakes the audit on behalf
of the Auditor-General. The Auditor-General should report to Parliament
on his or her audit of parastatal organisations.

5.28 Relevant, reliable and audited financial statements are a key aspect of
good governance and accountability. Parastatal organisations should
prepare their own financial statements. The external auditor provides
assurance through the expression of an independent opinion on
whether these statements provide a true and fair view of the financial
affairs of the particular organisation (financial audit).

5.29 The external auditor should follow generally recognised auditing

standards when undertaking external audit. Auditors-General are
members of the International Organisation of Supreme Audit
Institutions (INTOSAI). The Lima Declaration of INTOSAI is reproduced
as Appendix 5 to these Guidelines. Further details are provided in
INTOSAIs Code of Ethics and Auditing Standards and the Guidelines
for Financial Audit. The Guidelines will consist of an International
Standard on Auditing (issued by the International Auditing and
Assurance Standards Board IAASB)) and a practice note.

78
5.30 Detailed auditing standards may be developed for the Auditor-General's
Office from recognised international auditing standards and guidance or
from local private sector auditing standards. The African Organisation of
Supreme Audit Institutions (AFROSAI)(E), the regional body for
Auditors-General, provides guidance, examples of good practice and
training for the Auditors-General of the ECSAFA region.

5.31 The financial statements of parastatal organisations may include

information that is different from, or additional to, that contained in the
financial statements of private-sector organisations, for example,
comparison of expenditure in the period with limits established by
Parliament in its budget. In such circumstances, appropriate
modifications may be required to the nature, timing and extent of audit
procedures, and the external auditors report.

5.32 The external auditor may also be required to report on whether or not:

expenditure has been applied for authorised purposes and conforms

to the authority that governs it (regularity auditing/compliance
auditing)

and

due regard has been paid to securing economy, efficiency and

effectiveness (performance auditing/value-for-money auditing).

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80
 Appendix 1
Good Governance: A Checklist for
Governing Bodies and Chief
Executives

This checklist is intended to assist governing bodies in identifying

potential strengths and weaknesses in governance arrangements.
Where the checklist uncovers weaknesses in the governance
arrangements, the governing body will need to give further
consideration to the specific areas identified.

STANDARDS OF BEHAVIOUR

Leadership

1 Has the governing body taken steps to ensure that its members exercise
leadership by conducting themselves in accordance with high standards
of behaviour?

Codes of conduct

2 Has the governing body adopted a formal code of conduct defining the
standards of behaviour that individual governing body members and all
employees of the organisation are required to follow?

3 Does the governing body periodically review adherence to the code of

conduct?

Objectivity, integrity and honesty

4 Has the governing body established appropriate mechanisms to ensure

that members of the governing body and employees of public-sector
entities are not influenced by prejudice, bias or conflicts of interest?

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 ORGANISATIONAL STRUCTURES AND PROCESSES

Statutory accountability

5 Has the governing body established effective arrangements to ensure

compliance with all applicable statutes and regulations, and other
relevant statements of best practice?

Accountability for public money and performance

6 Has the governing body established appropriate arrangements to ensure

that public funds and resources are:

properly safeguarded?

used economically, efficiently, effectively, appropriately and with due

propriety?

used in accordance with the statutory or other authorities that

govern their use?

Communication with stakeholders

7 Has the governing body made an explicit commitment to openness and

transparency in all the activities of the organisation?

Roles and responsibilities

8 Is there a clearly defined division of responsibilities at the head of the

body to ensure a balance of power and responsibility?

9 Does the governing body:

meet regularly?

effectively lead and exercise control over the entity?

monitor the executive management?

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10 Do members of the governing body receive induction training on the
first occasion of their appointment, and subsequently as necessary?

11 Has the governing body established appropriate arrangements to ensure

that it has access to all such relevant information, advice and resources
as are necessary to enable it to carry out its role effectively?

12 Has the governing body established a framework of strategic control (or

scheme of delegated or reserved powers)?

13 Does the governing body keep the framework of strategic control up to

date?

14 Does the framework of strategic control include a formal schedule of

those matters specifically reserved for the collective decision of the
governing body?

15 Has the governing body established clearly documented and

understood management processes for:

policy development, implementation and review?

decision making, monitoring, control and reporting?

16 Has the governing body established formal procedural and financial

regulations to govern the conduct of its business?

17 Where the governing body is responsible for making appointments to

the governing body itself, has it established a formal process to ensure
that such appointments are made:

in accordance with specified criteria?

on the basis of merit and the individuals ability to carry out a

defined role within the organisation?

18 Where the governing body is responsible for making appointments of its

own members, are such appointments dealt with by the governing body
as a whole?

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19 Is the role of the chairman formally defined in writing, and does it
include responsibility for providing effective leadership to the governing
body and for the activities of the entity as a whole?

20 Are non-executive governing body members:

independent of management?

free from any other relationships that may materially interfere with
exercising an independent judgement on issues of strategy,
performance, resources and standards of conduct?

21 Where the governing body is responsible for making appointments of its

own non-executives members, are the appointments for a fixed term
and are reappointments subject to a formal appraisal process?

22 Does the chief executive have line responsibility for all aspects of
executive management?

23 Is the chief executive accountable to the governing body for the

ultimate performance of the organisation and the implementation of the
governing bodys policies?

24 Are the duties, terms of office, remuneration and the review thereof, of
non-executive governing body members defined clearly?

25 Has the governing body made a senior executive responsible for

ensuring that appropriate advice is given to it on all financial matters
and for maintaining an effective system of internal and financial
control?

26 Has the governing body made a senior executive responsible for

ensuring that governing body procedures are followed and that all
applicable statutes and regulations, and other relevant statements of
best practice, are complied with?

27 Has the governing body established a formal and transparent procedure

for developing policy on executive remuneration and for fixing the
remuneration packages of its individual members?

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28 Has the governing body established procedures to ensure that none of
its members is involved in determining his or her own remuneration?

29 Does the annual report of the governing body contain a statement on

the remuneration policy and details of the remuneration of its
members?

CONTROL

Internal control

30 Has the governing body taken steps to ensure that an effective

framework of internal control:

is established?

operates in practice?

31 Does the governing body include, in the organisations annual report, a

statement on the effectiveness of its framework of internal control?

Budgeting and financial management

32 Does the governing body ensure that procedures are in place to ensure
effective and efficient budgeting and financial management?

Staff training

33 Has the governing body established training programmes to ensure that

staff are competent to perform their work?

Internal audit

34 Has the governing body taken steps to ensure that an effective internal
audit function is established as part of the framework of internal
control?

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 Audit committees

35 Has the governing body established an audit committee, comprising

independent members with responsibility for the independent review of
the framework of control and of the external audit process?

Risk management

36 Has the governing body taken steps to ensure that effective systems of
risk management are established as part of the framework of internal
control?

Anti-corruption commission

37 Does the governing body ensure that all staff of the organisation
support the work of the national anti-corruption commission, if one
exists?

38 Does the governing body also regularly consider the extent that the
work of the organisation is coordinated with that of the anti-corruption
commission, to ensure that the incidence of fraud and corruption is
minimised?

EXTERNAL REPORTING

Annual reporting

39 Does the governing body publish promptly an objective, balanced and

understandable annual report?

40 Does the annual report contain a statement on whether or not the

organisation has adopted specific standards or codes of governance?

41 Does the governing body ensure that the organisation's financial

statements comply with the relevant accounting standards?

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 Performance measures

42 Does the governing body develop and report on relevant performance

measures?

External audit

43 Has the governing body taken steps to ensure that an objective and
professional relationship is maintained with the external auditors?

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88
Appendix 2
Disclosure

INTRODUCTION

Openness is one of the three pillars of good governance (the others

being integrity and accountability). Thus parastatal organisations
should be as open as possible with their stakeholders. This appendix
summarises the main disclosures which should be provided promptly to
these stakeholders.

The governing body and chief executive should each make an explicit
commitment to openness and transparency in all the activities of the
organisation, subject only to the need to preserve confidentiality in
those specific circumstances where it is proper and appropriate to do
so. Openness is more than structures and processes. It is also an
attitude and belief among key players, politicians, staff of parastatal
organisations and other stakeholders that information is to be shared
and is not owned by any particular organisation it is a public
resource.

In any communication with the stakeholders, the governing body and

chief executive should ask themselves the following five questions.

Is the communication open, honest and transparent?

Is it relevant and substantial or merely a communication of form?

Is the communication prompt and clear?

Does it fairly and comprehensively set out the position?

and

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 Are details provided to enable individual stakeholders to obtain
specific additional information?

THE ANNUAL REPORT

Governing bodies should publish an annual report (including their

financial statements), presenting a balanced and understandable
account of the organisations performance, achievements, financial
position and prospects. The annual report should be published
promptly within at most 12 months and preferably 6 months of the
financial year end.

The annual report should include:

the audited financial statements and the auditors report

a statement of the aims and objectives of the organisation, the

performance measures against which future years performance will
be judged and a comparison of the actual performance achieved in
the year covered by the annual report with the performance
measures as determined in the previous financial year

a statement that presents an objective, balanced and understandable

commentary on the organisations financial performance and
position, its non-financial performance, and on its future ability to
meet liabilities and commitments

a statement of the organisation's fees policy for members of the

governing body and details of the total fees, expenses and any
facilities made available to each member

the remuneration policy for the chief executive and other senior
managers, including details of their total remuneration packages

details of any changes to the composition of the governing body

during the year, including the appointment of new members,
renewals or extensions to appointments and any removals

brief details of the background of any member of the governing body

who served at any time during the year

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 the number of full meetings of the governing body and the number of
committee meetings held, committee composition and the details of
attendance of each member of the governing body

brief details of any significant complaints which have been made

against the organisation

and

where non-financial information was subject to external validation,

details in this regard.

The annual report should also include a statement that the governing
body has complied with relevant standards or codes of governance.
This statement should identify the standards or codes adopted, as well
as those standards or parts of codes with which they have not
complied; should disclose for what part of the period such non-
compliance continued; and give reasons for any such non-compliance.

The governing body should also include in its annual report a statement
explaining (as a minimum) its responsibility for:

approving the budget to provide authorisation for the acquisition and

use of financial resources

preparing and providing financial statements that fairly present the

state of affairs of the organisation as at the end of the financial year
and the results of its operations for that year

maintaining an effective framework of internal control, risk

management and appropriate governance procedures

maintaining adequate accounting records and ensuring the

consistent use of appropriate accounting policies, supported by
reasonable and prudent judgements and estimates

and

ensuring adherence to applicable accounting standards unless fully

disclosed, explained and quantified.

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 The annual report should include a statement explaining the external
auditors responsibility for reporting on whether the organisations
financial statements are presented fairly.

The annual report should be made available to staff, their trade unions,
users of the organisation's services and the general public. A summary
of the annual report and financial statements should be advertised in
the main national newspapers as soon as it is published. Full versions
of these documents should be made available to the public on request
at no, or a minimal, charge. These documents should also be
published on the Internet.

Disclosures in the annual financial statements

The following details should be included in the organisations financial

statements:

the amounts paid to the external audit for audit and separately for
non-audit services, including a description of the nature and
amounts paid for each of the services undertaken

an outline of the organisations structure

a review of financial performance

internal and external factors influencing the organisations

performance

significant events which may affect the organisations future

performance

judicial proceedings filed or likely to be filed against the organisation

significant post-balance sheet events

discussion of relations with stakeholders, referring to significant

changes

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 financial and other effects of directions from the oversight body

and

a description of social service obligations.

ANNUAL GENERAL MEETING

It is good practice for an annual meeting to be held at which the annual

report is presented. Members of the governing body, the chief
executive, the director of finance and the organisations external auditor
should attend the meeting and should be available to answer questions.
The meeting should be advertised to

users and customers of the organisations services

employees and their trade unions

and

the general public through the media.

DISCLOSURES TO THE PARASTATAL OVERSIGHT BODY

The following details should be promptly reported to the parastatal

oversight body and, as appropriate, to the Ministry of Finance and the
relevant line ministry:

details of the quarterly financial statements, including a comparison

with the annual budget and cash flow statements for the following
12 months

the results of any governing body assessments of the organisations

performance

information having a material effect on the organisations value

and

93
 capital and current budgets, and corporate and borrowing plans.
These must be submitted for review at least one month before the
start of the financial year.

DISCLOSURES IN CORPORATE PLAN

The organisations corporate plan should be submitted to the parastatal

oversight body for review and submitted to Parliament thorough the
relevant ministry. The plan should include:

where and how resources will be used, where they will be obtained,
and what the organisation expects to accomplish

the organisations proposed strategy and how it will be achieved

the organisations vision, value and mission statement

a justification to support proposed capital expenditure programmes

assumption made by the governing body on the organisations

business environment

the organisations contributions to job creation, rural development,

urban renewal, poverty alleviation, empowerment of women, skills
and management development, and education

and

benchmark standards or baseline data against which the

organisation is compared in future periods.

OTHER DISCLOSURES

The governing body should also ensure that the following aspects of
external reporting are adequately and promptly implemented.

The long-term corporate strategies covering a period of five years and

which should be tabled in Parliament.

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 The governing body should submit its five-year corporate strategy,
including business plans and budgets to Parliament for information,
through the responsible minister (after review by the parastatal
oversight body).

The governing body should submit its annual reports through the
responsible minister (after review by the parastatal oversight body)
for tabling in Parliament. These reports should highlight the
corporations achievements, any constraints and measures it has put
in place to overcome these constraints.

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96
Appendix 3
Further Information

KENYA

Commonwealth Association for Corporate Governance, CACG Guidelines

Principles for Corporate Governance in Kenya and a Sample Code of Best
Practice for Corporate Governance, 2000, http://www.ecgi.de/codes

Private Sector Corporate Governance Trust, Good Corporate Governance in

State Owned Corporations, 2002. ISBN 9966-9969-0-15.

MALAWI

Department of Statutory Corporations, Code of Conduct for Boards of Directors

of Statutory Corporations, September 1999.

SOUTH AFRICA

Institute of Directors in Southern Africa, The King Report on Corporate

Governance for South Africa 2002 (King II Report), ISBN 0-620-28851-5.
http://www.iodsa.co.za

Department of Public Enterprises, Protocol on Corporate Governance in the

Public Sector, September 2002, http://www.dpe.gov.za

Office of the Auditor-General, Public Entities: Best Practice Guide On

Corporate Governance, September 2003, http://www.agsa.co.za

97
TANZANIA

The National Board of Accountants & Auditors, Tanzania Statement of

Recommended Practice No.3 on Governance in the Public Sector An
Accounting Officers Perspective, 2002.

UNITED KINGDOM

Cadbury Committee, Report of the Committee on the Financial Aspects of

Corporate Governance (Cadbury Report), December 1992.
http://www.ecgi.de/codes

The London Stock Exchange, The Combined Code: Principles of Good

Governance and Code of Best Practice, 1998, http://www.ecgi.de/codes

UNITED STATES

Committee of Sponsoring Organizations of the Treadway Commission (COSO),

Internal Control Integrated Framework, September 1992 (July 1994 edition).
Available from the Institute of Internal Auditors http://www.theiia.org

INTERNATIONAL

Commonwealth Association for Corporate Governance, Principles for Corporate

Governance in the Commonwealth Towards Global Competitiveness and
Economic Accountability, 1999, http://www.ecgi.de/codes

Commonwealth Association for Corporate Governance, CACG Guidelines:

Corporate Governance in Government Companies, Best Practice Guide No. 3,
June 2002.

The CACG Guidelines may be found on the following websites:

http://www.cacg-inc.com
http://www.cbc.to
http://www.combinet.net

OECD Principles of Corporate Governance, 2004,

http://www.oecd.org/dataoecd/32/18/31557724.pdf

98
Kaufman, D; Kraay A; and Zoido Lobaton, P., Governance Matters, Working
Paper 2196, The World Bank, 1999,
http://www.worldbank.org/wbi/governance/pdf/govmatrs.pdf

The IFAC Public Sector Committee, Governance in the Public Sector: A

Governing Body Perspective, 2001, http://www.ifac.org

The Institute of Internal Auditors, Standards for the Professional Practice of

Internal Auditing, December 2000, http://www.theiia.org or www.iia.org.uk

CORPORATE GOVERNANCE BODIES IN ECSAFA COUNTRIES:

Secretariat for the Corporate Governance Task Force

P.O. Box 1 Blantyre Malawi.
Tel: +265 1 620301

The Tanzania Institute of Corporate Governance Limited

Teleconsult, 5th Floor, Wing B NIC Life House, Dar es Salam.
Tel: +255 22 2111968

Institute of Corporate Governance Uganda [ICGU]

Crusader House, P.O. Box 3034, Kampala.

The Institute of Directors of Zambia

Ms. M. Ncube, Acting Chief Executive, Plot 201 Kasangala Rd, Lusaka, Zambia.

Centre for Corporate Governance

Brokeside Grove, Westlands, Nairobi, Kenya.
Tel +254 20 4440003/4443230/4456013
Fax +254 20 4442724

P.O. Box 13936, Nairobi, Kenya.

Tel: +254 020 440003
http://www.ccg.or.ke
http://www.corporategovernanceafrica.org

99
EASTERN, CENTRAL AND SOUTHERN AFRICAN FEDERATION OF ACCOUNTANTS (ECSAFA)
Hughes Building, Kenyatta Avenue, PO Box 42423, Nairobi, Kenya
e-mail: ecsafa@africaonline.co.ke www.ecsafa.org

THE ASSOCIATION OF CHARTERED CERTIFIED ACCOUNTANTS

29 Lincoln's Inn Fields, London WC2A 3EE United Kingdom
www.accaglobal.com