TOPIC 1

INTRODUCTION TO PUBLIC FINANCIAL ADMINISTRATION

 SYLLABUS CONTENT
• Definition of public financial administration
• Scope and components of public financial administration
• Objectives and significance of public financial administration
• Distinction between public finance and private finance
• Principle and Legal Framework
 DEFINITION OF PUBLIC FINANCIAL ADMINISTRATION

• Financial administration which involves the machinery and methods by

which the funds for the support of public services are raised, spent and
accounted for is at the very core of modern government (Hoover
Commission, 1949).
• Financial matters and activities of public sector (Groenewegen, P.D.,1990).
• Financial administration as activities involving finance and taxation. It
includes central and regional institutions for accounting, auditing and
budgeting, the supervision of local government finances; tax administration,
tax collection, custody and disbursement of funds and the like (Fox & Meyer,
1995).
• In general, public financial administration describes and analyses the
expenditure of government and techniques used by the government to
finance these expenditure.
 DEFINITION OF PUBLIC FINANCIAL ADMINISTRATION

• Public financial administration also can be defined based on several

concepts:
o As a Discipline of Study
▪ Which explains several principles and theories that related to financial
administration such as principles of taxation, principles of accounting and
theories of procurement.
o As a Process for financial management
▪ Financial administration involves time cycle process begin with tax collection for
revenue generation then process of spending. Later, it involve process of
recording for account preparation until process of auditing.
▪ This process involve the preparation of budget, preparing proper account
statements and methods for internal control, and finally preparation on financial
statements before being reviewed by external controller such as Parliament and
the Auditor General
 DEFINITION OF PUBLIC FINANCIAL ADMINISTRATION

• Public financial administration also can be defined based on several

concepts:
o As a Management Tool
▪ Financial administration also involve the management of financial function such
as planning and control of goods and services used. To be fully effective, public
expenditure management systems also help to achieve government objectives.
o As a Development Tool
▪ Proper financial administration also important in order to accomplish
development goals and stabilize the economy. As examples , the used of proper
tools or methods for procurement to support government programs can help in
maintaining and improving the effective public service operations.
 SCOPE AND COMPONENTS OF PUBLIC FINANCIAL
ADMINISTRATION

• Scope of public financial administration

o Public financial administration involves all levels of government and all agencies
that present their budget to Parliament or the State Legislative Assembly.
o In Malaysia, the scope involves all Ministries and departments under the control
of Treasury such as the Ministry of Health and Defence whereas for the States, it
includes all state departments and agencies including local government bodies.
o It also includes all statutory bodies of the federal and state government.
Examples of federal and state statutory bodies are MARA, RISDA and PKNS.

Federal State Local Government

Statutory bodies
 SCOPE AND COMPONENTS OF PUBLIC FINANCIAL ADMINISTRATION

• There are six (6) main components of public financial administration.

o Tax administration
o Budgeting
o Purchasing/Procurement
o Accounting
o Auditing
o Treasury/ Ministry of Finance
 TAX ADMINISTRATION

• A tax is a compulsory charge imposed by the state or public authority in

respect of which no specific service to the individual is rendered in return.
• Taxes are levied by governments primarily as a means of raising revenue to
finance the operations of government.
• Taxes can also be imposed by governments to influence the economy by
raising or lowering the level of taxation.
• Two types of taxes - direct and indirect taxes.
• Direct taxes is levied directly on the income or assets of individuals or
company.
• Indirect taxes can be used to control spending on luxury goods and to
discourage excessive drinking and smoking.
 BUDGETING

• A statement of revenue and expenditure of government for the future. It is

also a planning and management tool used for national economic
purposes.
• Two types of government budgeting
o Operating/recurrent budget
o Development budget
• Operating budget
• It is used for recurrent expenditure such as payment of salaries and stationery.
• Development budget
• It is used to achieve governments planning objectives such as the spending
made under Malaysia Plans
 PROCUREMENT/PURCHASING

• It is the purchasing of government goods, services and works.

• It includes storage of goods as well as the process of disposing on the assets.
Government buys a lot of products and services and there should be proper
methods for purchasing, storing and disposing of goods.
• The usual methods used are:
1. Casual buying/ Direct purchase
2. Quotations
3. Tenders
4. Emergency purchase
5. Foreign buying/International purchasing
• There are also important factors to consider in buying such as honest and
competent personnel, centralisation, regulations, effective purchasing procedures
and effective inventory procedures.
 ACCOUNTING

• It is a process of recording, collecting and disbursing of govt resources and

the making of reports concerning any or all of those operations or about
their results.
• Three main types of government accounting:
o Hybrid accounting – a combination of both types depending on the operation.
o Accrual accounting – process of recording when the goods are received but
not yet paid and revenue recorded when it is supposed to be earned.
o Cash accounting – the revenue is recorded when it is received and spending
has been made when it is paid. In other words, when cash changes hands.
 AUDITING

• It is a review and examination of governments revenue and expenditures.

• This is to ensure that governments revenue and expenditure have been collected
and disbursed according to proper financial laws and regulations and have
achieved governments objectives.
• There are two (2) categories of audit which are internal and external audit.
• Auditing is done by various people.
• Internal auditing is done by the Controlling Office of a Ministry or department.
Treasury also does auditing on all government departments.
• External auditing is done by the Parliament and the office of the Auditor General.
• Practically, pre-audit is done before expenditure is incurred whereas post-audit is
done after expenditure is incurred.
 TREASURY/MINISTRY OF FINANCE (MOF)

• It is responsible for all governments financial and economic matters.

• It is the role of the Treasury/MoF to prepare annual government budget to
be presented to Cabinet.
• It also prepares the Appropriation bills to be tabled in Parliament.
• It is also responsible for the financial and economic policies and
administration of the government.
• It is also responsible for the general oversight/audit of the finances of
government departments.
 OBJECTIVES AND SIGNIFICANCE OF PUBLIC FINANCIAL
ADMINISTRATION
• There are several objectives of public financial administration:

o To achieve overall fiscal discipline, allocation of resources to priority needs, and

efficient and effective allocation of public services.
o To ensure financial accountability of all government agencies and government
related agencies
o To ensure proper management of all public resources due to high and unlimited
demand from the public
o To ensure compliance with legal and other mandatory requirements
o To ensure government programs and activities achieve their intended targets
 OBJECTIVES AND SIGNIFICANCE OF PUBLIC FINANCIAL
ADMINISTRATION
• Public financial administration also importance in order:

o To avoid wastage of government resources

o To avoid deception and breach of trust
o To ensure proper revenue collection and expenditure
o To achieve governments development objectives
o To ensure proper implementation and evaluation of all government economic
policies
o To assess efficiency and effectiveness of all government resources
 DISTINCTION BETWEEN PUBLIC FINANCE AND PRIVATE FINANCE

The public sector comprises of all government owned organizations, all agencies and state offices. The
private sector on the other hand refers to all privately-owned businesses, companies, partnerships and
the profit and non-profit corporations.

Basis of Comparison Public Finance Private Finance

Income and expenditure Income adjusted according to expenditure Expenditure adjusted according to income
Adjustment
Borrowing Can borrow both internally and externally Can borrow externally

Currency Ownership Controls currency wholly Has no rights over currency

Present vs. Future Income Investments done for long-term benefits Short-term benefits expected

Objective To create social benefit To create profit

Coercion to acquire revenue Revenue can be forcefully acquired through taxes Can’t be forcefully acquired

Big and Deliberate Changes Can make instant changes on income deliberately Has no ability to make instant changes deliberately

Surplus Budget Surplus budgets is a vice in this sector Surplus budget is a virtue

Evah Kungu, 2018.

 PRINCIPLE AND LEGAL FRAMEWORK

• As a guideline for proper financial administration in government. It refers to

laws and regulations that ensure proper, efficient and effective use of public
moneys.
• The main sources are from Federal Constitutions, Financial Procedure Act
1957 and some sections from Treasury Circular (1PP).
 FEDERAL CONSTITUTION (PART VII)- FINANCIAL
PROVISIONS
• Article 96
o No taxation unless authorized by law.
• Article 97
o Consolidated Funds.
• Article 98
o Expenditure charged on federal Consolidated Fund.
• Article 99
o Annual financial statement
• Article 100
o Supply Bills.
• Article 101
o Supplementary and excess expenditures.
 FEDERAL CONSTITUTION (PART VII)- FINANCIAL
PROVISIONS
• Article 102
o Power of authorize expenditure on account or for unspecified purposes.
• Article 103
o Contingencies Fund.
• Article 104
o Withdrawals from Consolidated Fund.
• Article 105
o Auditor General.
• Article 106
o Powers and duties of Auditor General.
• Article 107
o Reports of Auditor General.
 FEDERAL CONSTITUTION (PART VII)- FINANCIAL
PROVISIONS

• Article 108
o National Finance Council.
• Article 109
o Grants to States.
• Article 110
o Assignment of taxes and fees to the States
• Article 111
o Restriction on borrowing.
• Article 112
o Restriction on alterations in establishments of States.
 FINANCIAL PROCEDURE ACT 1957

• PART II : ACCOUNTING OFFICERS

o Section 4
▪ Duties of accounting officers.
o Section 5
▪ Bank accounts.

• PART III : CONTROL AND MANAGEMENT OF PUBLIC FINANCES

o Section 6
▪ Management and control of Consolidated Funds.
o Section 7
▪ Consolidated Fund accounts
o Section 8
▪ Custody and investment of moneys
 FINANCIAL PROCEDURE ACT 1957
• Section 9
o Trust accounts.
• Section 10
o Government trust funds.
• Section 11
o Contingencies Fund.
• Section 12
o State Reserve Fund.
• Section 13
o Payment of moneys.
• Section 14
o Guarantees.
• Section 14A
o Refunds, etc., charged on Consolidated Funds.
 FINANCIAL PROCEDURE ACT 1957

• Section 15
o Estimates and virement.
• Section 15A
o Controlling officers.
• Section 16
o Yearly statement of accounts.
• Section 17
o Write-off.
• Section 18
o Surcharge
• Section 19
o Notification of surcharge.
• Section 20
o Withdrawal of surcharge.
• Section 21
o Recovery of surcharge.
 MAIN PROVISIONS IN TREASURY INSTRUCTIONS

• The treasury instructions give detailed guidance and procedures that must be
followed in public financial management. These instructions must follow the
Financial Procedure Act 1957. Hence the Treasury can give any financial orders or
instructions as long as they do not go against the federal and state constitutions.
• It includes the procedures and guidelines on how to spend money and record
accounts.
• The following are some Treasury Instructions regarding public procurement:
o Casual purchase 173 under TI (Direct purchasing of not more than RM50 000 per
year)
o Quotation 170 under 170 TI (display notice to invite at least 5 suppliers for
contracts between RM50 000-RM500 000 per year)
o Tender under 171 TI (display notice through newspapers to invite at least 5
suppliers for contracts over RM500 000)
o Emergency purchase under 173 (b). Under TI no limits.
 TUTORIAL DISCUSSION

• With relevant examples, discuss the basis of comparison between public and
private finance.
• Further elaborate on Section 4 and Section 5 of Part II on Accounting
Officers
• Explain on Section 19 to Section 21 of Financial Procedure Act 1957.