CHAPTER 2b

FINANCIAL
SYSTEMS AND
PROCEDURES
Government Systems and Procedures
Divided into two categories:
oFinancial procedures
oNon-financial procedures
 Financial Procedures
Procedures related to the finance and
accounting of public funds and public
property
 Non-financial Procedures
Procedures on other aspects
excluding finance and accounting
 Financial Procedures
– Legal Documents
 Financial Provisions of the Federal
Constitution
 Financial Procedure Act 1957
 Audit Act 1957
 Treasury Instructions
 Treasury Circulars
 Government Accounting Standards (PPK)
 International Public Sector Accounting
Standards (IPSAS)
 FINANCIAL PROVISIONS OF THE FEDERAL
CONSTITUTION

Specified in Article 96 to Article 112

Act as the basis for managing the financial
aspects of the government.
 Objectives of Financial Provisions

 Establish the general framework for the control of

public expenditures by the legislators.
 Provide good financial management systems in
government.
 Govern the methods of which public funds are to be
administered and accounted for.
 Define the borrowing powers of Federal and State
governments.
 Provide guidelines on the maintenance of specified
Consolidated Funds by the Federal and State
governments.
 Provide guidelines on the preparation of budget and
annual statements of assets and liabilities.
 Financial Provisions
The financial provisions are discussed under
eight main categories:
o Revenues
o Expenditures
o Control and management of funds
o Borrowings
o Budgets
o Financial statements
o Auditor General
o National Finance Council
o Special provisions for Sabah and Sarawak.
 Revenues

Government’s revenue can be classified into two

categories
oFederal governments’ revenue
Article 96

oState governments’ revenue

Article 110
Part III of the Tenth Schedule of the Federal Constitution
– Sources of Revenue Assigned to States
Article 109 - Grants
Grants to the State Government
Three main categories:
o Grants payable under Article 109 of the Federal
Constitution (e.g. Capitation Grant, State Road
Grant and State Reserve Fund)
o Grants payable as a result of approval by National
Finance Council (e.g. grant for infrastructure)
o Grants payable under various act of Parliament
(e.g.. Revenue Growth Grant and Iron Ore Export
Duty Grant).
Four Major Types of Grants to the State
Governments
Capitation Grant
State Road Grant
State Reserve Fund
Revenue Growth Grant
 Expenditure

Article 98: Expenditure charged on Federal Consolidated

Fund
 E.g.: pensions, compensation for loss of office, debt charges,
Auditor General Remuneration, Grant
 These expenditures have been approved by Parliament.

Article 100: Supply Bills

 Approval from the Parliament is required for any expenditure
under this article
 Expenditure
Article 101: Supplementary and Excess Expenditure
 Approval from the Parliament is required for any expenditure
under this article.

Article 102: Power to authorised expenditure on account or

for unspecified purposes
 Expenditure

Article 103: Contingencies Fund

o Urgent and unforeseen need for expenditure eg. Tsunami,
Flood
o There is no other provisions allowing for such purpose
under the Constitution
o Supplementary estimate needs to be presented to the
Parliament and such amount will be included in a Supply
Bill to replace the amount drawn

Article 109: Capitation grant, State road grant and

State reserve fund.
 Control and Management of Fund

 Article 97(1): All revenues and moneys raised or received by the

Federation shall be paid into Federal Consolidated Fund
 Article 97(2): All revenues and moneys raised or received by
the state shall be paid into the State Consolidated Fund
 Exclude zakat, fitrah, baitulmal or similar Islamic religious
revenues

Article 104: Withdrawal of fund

 No money should be withdrawn from the Consolidated Fund
except for the following reasons:
o Charged Expenditure (Article 98)
o Authorised by Supply Act (Article 100)
o Authorised to be issued under Article 102
 Borrowings

 Borrowings by the government are strictly regulated as this will increase public
debts and have major implications on the ability of the government to meet its
objectives.

 Article 111(1) - Federal shall not borrow except under the authority of Federal
Law.

 Article 111(2) - The state governments are further restricted to borrow only from
the Federal Government. If the borrowings are for periods of less than 5 years, then
they are permitted to borrow from bank or financial institution approved by Federal
Government.

 Article 111(3) restricts a state from giving any guarantee except under the
authority of State Law and with approval of the Federal Government.

 Article 112B Sabah and Sarawak have special privilege of which the Federal
Constitution allows both States to borrow under the authority of the State Law
within the state. However it is applicable only if the borrowing has the approval of
Bank Negara Malaysia.
 Budget
 Article 99(1): Federal Government have to submit to the Parliament
Statements of the estimated receipts and expenditure of the Federation
of the following year before commencement of that year

 Article 100: Expenditures to be included in a supply bill for them to be

withdrawn from the Consolidated fund. Supply Bill is known as Supply Act
once it has been approved by the Parliament. Supply Act contains all the
approved expenditure budget of the government.

 Article 101: The supplementary budget is prepared if the amount

appropriated by the Supply Act is insufficient. The purpose of such
expenditure will be included in the Supply Bill. It will be submitted to the
Parliament for approval.

 Budgets are important operational tool for controlling and managing public
money,.
 Financial Statements
Article 99(4): Federal Government have to
submit to the Parliament Statement of assets
and liabilities of the Federation at the end of
the last completed financial year.
Financial statements provide an avenue for the
government to prove its performance
 Auditor General

Article 105
oAuditor General is appointed by the Yang di-Pertuan Agong upon the advice of the Prime
Minister and after consultation with the Conference of Rulers.
oAuditor General is eligible for reappointment but not for any other appointment in the service
of Federal or State.
oThe Auditor General may resign at any time but not to be removed from office except on the
like grounds and the like manner as a judge of the Federal Court.
oHis remuneration is charged on the Consolidated Fund.
oThe terms and conditions of service of the Auditor General shall be determined by the Federal
Law and shall not be altered to his disadvantages after his appointment.

Article 106 - the Auditor General has the powers and duties to audit and report on the accounts of
the federal and states and also other duties in relation to the accounts of the federal, state and
public authorities

Article 107 - Audit Report will then be prepared and submitted to the Yang di-Pertuan Agong and
to be laid before the House of Representative in the Parliament . As for the State Governments
and other public authorities, the Audit Reports are to be submitted to the State Ruler or Yang di-
Pertua Negeri, then laid before the Legislative Assembly.
 National Finance Council

Article 108
 To provide a venue in which representatives from the federal and the states are to
meet and discuss various issues concerning the financial aspects of both parties.
 Comprises of the Prime Minister, other ministers and one representative from each
state appointed by the Ruler. The representatives from the state are usually the
Menteri Besar or Chief Ministers.
 A meeting will convene if one of these conditions arise: as and when necessary by
the Prime Minister; or at the request of three or more representatives; or at least
once a year.
 The meeting will be presided by the Prime Minister or his representative.
 Federal Government is to consult the National Finance Council in respect of the
following matters:
 making of grants by federal to states;
 assignment to the States of any proceeds of federal tax/fee;
 annual loan requirements of federal and state;
 making of loans to any of the states;
 making of development plans;
 matters related to item 7(f) or (g) of Federal List
 Any other matters required by the Federal Law to be consulted with the Council.
 Special Provisions for States of Sabah and Sarawak

 Article 112A - The Auditor General shall submit his reports relating to the accounts of
each of the States of Sabah and Sarawak or any public authority exercising powers
vested in it by State law to the Yang di-Pertuan Agong and the Yang di-Pertua Negeri of
the State.

 Article 112(B) - provides special privilege to the States of Sabah and Sarawak whereby
the Federal Constitution shall not restrict them to borrow under the authority of State
Law. However, the approval from the Central Bank must be obtained.
 Special Provisions for States of Sabah and Sarawak

 Article 112C - Special grants and assignments of revenue to States of

Sabah and Sarawak: - the Federation shall pay grants specified by Part IV
to the States of Sabah and Sarawak for each financial year and each of
those states shall receive all proceeds from the taxes, fees and dues
specified in Part V of that schedule, if collected, levied or raised within the
states. The amounts under Part IV and Section 3 or 4 of Part V, shall be
charged on the Consolidated Fund but shall not be paid into the respective
State Consolidated Fund.

 Article 112D - Reviews of special grants to States of Sabah and Sarawak

will be carried out by the Governments of the Federation and the States or
State concerned and if they agree on the alteration or abolition of any of
those grants or the making of another grant, it shall be modified by order
of the Yang di-Pertuan Agong to give effect to the agreement.
FINANCIAL PROCEDURE ACT 1957
Describes in detail the financial
provisions that has been laid down in the
Federal Constitution especially in terms of
accountability and enforces the said
provisions.
 Objectives of Financial Procedure Act 1957

 to provide guidance for the control and management of public

finance
 to provide financial and accounting procedure;
 to provide guidelines on the collection, custody and payment
of public monies;
 to provide the procedures for purchase, custody and disposal
of public properties;
 to provide the authority for the investment of money standing
in the Consolidated Funds;
 to define and explain in detail the three accounts of the
Consolidated Funds; and
 to enforce the provisions of the Federal Constitution relating
to finance.
 Section 3
Definition Of Terms

Consolidated Fund
◦ Federal Consolidated Fund (Article 97(1)
◦ Consolidated Fund of the States (Article 97 (2)
◦ Separate Fund (Article 97(3)
 Section 3
Definition Of Terms
Financial Authority :

o Federal Consolidated Fund - Treasury

o Consolidated Fund of a State - State financial

authority.
 Section 3
Definition Of Terms

Financial Year
A period of twelve months ending on the 31st
day of December in any year.
 Section 3
Definition Of Terms
Public Moneys
All revenue, loan, trust and other moneys
and all bonds, debentures, and other
securities whatsoever raised or received
by or on account of the Federation or by
or on account of a State
Does not include Zakat, fitrah, Baitul-Mal
or similar Muslim revenues.
 Section 3
Definition Of Terms
Public Stores
The property of or in the possession
or under the control of the Federation
or of a State.
 Section 3
Definition Of Terms
Accounting Officer
Every public officer who is charged with:
othe duty of collecting, receiving, accounting,
disbursing of public money
othe receipt, custody, disposal and accounting
of public stores
 Section 4
Duties of Accounting Officer
keep such books and render(present)
such accounts
as prescribed by this Act or by
instructions issued by the Treasury
in matters of financial and accounting
procedures
 Section 7

Consolidated Fund Accounts

Consolidated Revenue Account

Consolidated Loan Account
Consolidated Trust Account
 Consolidated Revenue Account
Section 7(a)
To keep all types of money or revenue
received except from loans and trusts
These moneys will be used to maintain two
types of expenditure:
oCharged expenditure (Article 98)
oSupply expenditure (Article 100)
 Consolidated Loan Account
 Section 7(b)
 To keep all types of money or revenue received from
loans
 The main sources of this account are domestic
borrowings and external borrowings.
 Domestic borrowings consist of borrowings from
local banks and financial institutions
 External borrowings are borrowings from foreign
banks or financial institutions.
 Consolidated Trust Account

Section 7(c)
To keep all types of money or revenue
received from trusts
Among the sources of this account are
deposits, trusts and recoveries of advances or
loans.
 Section 8
Custody And Investment Of Public Fund

oMoneys paid to the Consolidated Fund should be

kept in bank/banks as direct by the financial
authority
 Section8(3)(a)
 Moneys standing to the credit of the Federation with any bank, or
otherwise held by the Federation, may be invested by the Minister:
o on deposit in any bank;
o in any of the investments authorised by the
Trustee Ordinance, 1949, or the Trustee
Investment Act, 1965, for the investment of
trust funds;
o in any joint fund maintained by the Crown
Agents for such investment;
o as otherwise authorised by federal law or by
resolution of the Dewan Rakyat,
 The investments together with any interest received thereform shall
form part of the Federal Consolidated Fund”.
 Section 8(3)(b)
oMoneys standing to the credit of a State with any bank or otherwise
held by the State, may be invested by the State financial authority:
 on deposit in any bank;
 in securities issued or to be issued by the Federal Government
 with the written authority of the Treasury, in any of the investments
authorised by the Trustee Ordinance, 1949, or the Trustee Investment Act,
1965, for the investment of trust funds; or in any joint fund maintained by
the Crown Agents for such investment
 subject to the authority of State law or a resolution of the Legislature in any
undertaking after consultation with the Treasury
oThe investments, together with any interest received therefrom, shall
form part of the Consolidated Fund of the State.
oAll interest received from investment goes to the Consolidated
Revenue Account except for the interest on investment of trust fund
where this type of interest shall be put into the trust accounts.
 Section 9
Public Trust Fund

o One of the accounts established under Consolidated Trust account

o The following money shall be paid to the public trust fund:
 all moneys appropriated for the purpose of any trust account
 all money received from sale to any person or department of any articles
purchased or produced, or for work paid for with monyes standing to the credit of
trust account
 all moneys paid by any person for the purpose of any trust account
 repayment of any loans or advance made from moneys standing to the credit of
trust account and where applicable any interest received from investment of
money (section 8(4).
 Section 10
Government Trust Fund

oOne of the accounts established under Consolidated

Trust account
oFederal Govt. Trust Fund – Second Schedule
oState Govt. Trust Fund – Third Schedule
 Section 13
Procedures For Payment

o Any money to be withdrawn from the funds must be by

way of warrant.
o A warrant is a letter of authorisation either from the
Minister for the Federal or Menteri Besar or Chief
Minister for the states.
o In the case of Consolidated Trust Account, no money
shall be withdrawn unless for trust purposes as authorised
by a law.
o Each warrant issued for any year shall lapsed and cease at
the close of one calendar month following the financial
year.
 Section 15(1)
Estimates
Estimates prepared should show clearly:
◦ the divisions and sub-divisions of expenditure
proposed
◦ the amount expected to be received or spent
for the year
◦ the purpose of such expenditure.
 Section 15(2)
For expenditure involving payment of
personal emoluments, the estimates shall
show:
◦ number of public offices as are remunerated at
monthly rates of salary;
◦ the total amount of personal emoluments
 Section 15(4)
Virement

A transfer of allocation between sub-

heads within the same head
eg. Transfer of virements between
different departments of same ministry.
Virements need prior approval from the
Treasury or State Financial Authority.
 No virement is allowed from personal
emoluments
Example of Virements Between Departments

Ministry A
Amount Department Y Department X
Allocated RM 350,000 RM 400,000
Spent RM 400,000 RM 350,000
Excess RM 50,000
 Section 15a
Controlling Officer

Controlling officer is the chief accounting

officer.
 Section 16
Yearly Statement Of Accounts

o Describes the annual statements of the government which consist

of:
 Statement of Consolidated Revenue Account
 Statement of Consolidated Loan Account
 Statement of Consolidated Trust Account
 Statement of accounts of funds created by the Federal Constitution or by
Section 10 of the Financial Procedure Act 1957 and not accounted in the
Consolidated Trust Account
 Statement of assets and liabilities of the Federal and States
 Other statements as the financial authority may think fit.

o Have to be presented to the Legislature after being

examined and audited by the Auditor General.
 Section 17
Write Off

Minister of the Federation or Menteri

Besar/Chief Minister of the State have the power
to :
write off losses or deficiencies of public
moneys
write off deficient or obsolete stores
 to abandon irrecoverable amounts of
revenues, debts and over-payments.
 Section 18, 19, 20
Surcharge

Surcharged is the fine imposed to any person who is or was in the employment of Federal or
State Government.

Government officers will be surcharged for the following reasons :

Failed to collect moneys owing to govt.
Make improper payment of public moneys
Responsible for any deficiencies in public moneys or properties.
Delay payment
Failed to keep proper accounts and record.

The Chairman of the Service Commission shall notify the head of department of the
person surcharged and he shall notify the person surcharged.

The appropriate Service Commission may withdraw any surcharge if satisfactory

explanation has been received.
 Section 21
Recovery of surcharge
The amount of any surcharge:
 Shall be a debt due to the government from the person
against whom surcharge is made
 May be sued for and recovered in any court
 May also be recovered by deduction from the salary or
from the pension of the person surcharged by equal
monthly installments not exceeding one-fourth of the total
monthly salary or pension.
 Section 36
Financial Regulations Provided By Yang Di-Pertuan Agong
 Collection, receipt, custody, issue, expenditure, due accounting for, care and
management of public moneys and the guidance of all persons concerned
therein.
 More effectual record, examination, inspection and departmental check of all
receipts and expenditures and the keeping of necessary books and accounts.
 Forms for all books and documents required under this Act.
 Purchase, safe custody, issue, sale or other disposal or writing-off, accounting
and stock-taking of stores and property of Federal and States.
 Preparation of estimates of revenue and expenditure of Federal and States.
 Authorisation of rates of payments of public funds for specific purposes if not
provided by law.
 Making of advances to public officers and other persons and the rates and
limits of such advances and the rates of interest.
 Government Accounting Standards
 Government Accounting Standards (PPK) has been set
up by the Accountant General Department since 2002.
 Itsobjective is to prescribe the standards and the basis
for preparation of government financial statements in
accordance with the requirements of the Federal
Constitution and the Financial Procedure Act 1957.
 These standards must be complied by the Federal and
State governments in preparing their Public Accounts.
 The Accountant General Department has issued ten PPK
which is listed in the following figure below.
Government Accounting Standards

Government Accounting Standards (PPK)

PPK Particulars Issued On Effective for

Financial
Year
1 Government Accounting Policies November 2002 2003

2 Presentation of Financial May 2004 2005

Statements

3 Consolidated Revenue Account May 2004 2005

4 Consolidated Trust Account December 2004 2006

5 Consolidated Loan Account December 2004 2006

6 Investment December 2004 2006

7 Cash December 2005 2007

8 Statement of Memorandum Account December 2005 2007

9 Foreign Exchange June 2007 2008

10 Government Grant June 2007 2008

International Public Sector Accounting Standards
(IPSASs)
Accounting standards for public sector entities
developed by the International Federation of
Accountants (IFAC) through its Public Sector
Committee.
IPSASs are being prepared for application by
both entities adopting either the accrual basis of
accounting or cash basis of accounting.
The adoption of the IPSASs by governments
will improve both the quality and comparability
of financial information reported by public
sector entities around the world.
 Tutorial Questions
Q1. What are the objectives of Financial
Provisions of the Federal Constitution?
Q2. What are the eight main categories of the
Financial Provisions?
Q3. Name the four major types of grants to
the State Governments.
Q4. What is the role of the National Finance
Council and who are the members of this
Council?
 Tutorial Questions
 Q5. Elaborate on Articles 105-107 relating to the
appointment of the Auditor General, his powers and
duties as well as the preparation and submission of
the Audit Report.
 Q6. Discuss the objectives of the Financial Procedure
Act 1957.
 Q7. What is the Financial Year in the Public Sector?
 Q8. Differentiate between the terms ‘Public Moneys’
and ‘Public Stores’ as applied in the
Public Sector?
 Tutorial Questions
 Q9. Who is the Accounting Officer and what are his
duties?
 Q10. The Consolidated Fund Accounts comprises i.
Revenue Account ii. Loan Account iii. Trust Account.
Differentiate between the three Accounts.
 Q11. One of the accounts established under the
Consolidated Trust Account is the Public Trust Fund.
Which money shall be paid into this Public Trust
Fund?
 Q12. Any money to be withdrawn from the funds
must be by way of warrant. What is a warrant and
when does it lapse or cease?
 Tutorial Questions
Q13. What is a Virement? Who is the
authorizing authority for a Virement?
Q14. Who is the Controlling Officer?
Q15. What are the Yearly Statement of
Accounts? When do they have to be
presented to the Legislature?
Q16. What is a write off and who has the
authority to make any write off of losses or
deficiencies of public moneys?
 Tutorial Questions
Q17. What is a Surcharge and for what
reasons can government officers be
surcharged?
Q18. What is the procedure for recovery of
Surcharge?
Q19. What is the objective of Government
Accounting Standards (PPK) and who must
comply with these Standards?
 Tutorial Questions
Q20. Briefly describe the ten PPK
issued by the Accountant General
Department since 2002. What are
International Public Sector Accounting
Standards (IPSASs) and how will their
adoption improve the quality of
accounting and reporting by Public
Sector agencies in Malaysia?