IN THE NAME OF ALLAH, THE MOST

BENEFICENT, THE MOST MERCIFUL

Public Financial Management

Niamatullah
SAS, CMA, CS
 Meaning and Definition
The term ‘Public Finance’ means money matters pertaining to a state.

‘Public Finance’ signifies the income and expenditure of public authorities and

adjustment of one with the other.

The term "Public Authorities“, includes Federal Government, Provincial

Governments, Autonomous Organizations and Local Bodies.

 Public Finance: Why Needed
 People in their individual capacity, can not afford to achieve certain wants such as
protection of life and property, construction of railways, roads, bridges and
irrigation canals and establishment of hospitals, universities and ordnance
factories, etc. it is responsibility of the state to fulfill these needs.

 In order to perform this task, the state does require finance, and that is done by
means of raising revenue and then incurring expenditure.

 Problems relating to the National Income and Expenditure, methods of Public

Accounting and matters of Taxation fall within the sphere of the 'Public Finance'.
 
 Taxation-Generation of Finance
 The primary requirement is the security of life and property. The nation should be

secure against internal disorders and external attacks.

 Then comes the promotion of welfare of the people. They should be well-fed,

properly clothed and housed.

 Facilities for health and education should be available to all and sundry.

 This can be achieved by increase in the production of wealth and its proper distribution.

 One way of doing it is to transfer wealth from those who have comparatively more to

those who have comparatively less.

 This is done by increased taxation on the former and providing more amenities to the

latter.

 
 Public Finance-Components
 There are four components of Public Finance:
1. Public Revenue.
2. Public Expenditure.
3. Public Debt.
4. Public Administration.

 
 Public Revenue
 Public Revenue has been classified as under:
1. Tax Revenue.
2. Non-Tax Revenue.

The Tax Revenue has been further classified as:

1. Direct Taxes.
2. Indirect Taxes.

 
 Public Income / Revenue

Public Revenue is classified into three broad categories:

1. Gratuitous Revenue.
2. Contractual Revenue.
3. Compulsory Revenue.
 Gratuitous Revenue

 Consists of gifts, donations and grants, etc., gratuitously

made without any direct or indirect demand.
 They do not carry any obligation for goods and services
to be paid in return.
 Such an income is neither very certain nor uniform.
 Contractual Revenue
 Comprises income derived from public property and industry.
 The state owns property in the form of lands and buildings. All
rents received from such sources constitute 'Contractual
Revenues'.
 The state may own industries such as railways, posts, telegraphs
and irrigation canals, etc. The income received from these
industries is also contractual revenue.
 The contractual income is called as "Prices" also. This is because
they resemble the prices charged by the producers for the goods
and services they sell.
 Compulsory Revenue

 The income under this category is mainly derived by

the use of penal and taxing powers of the state.
 The taxes are the most important source of revenues of
a state.
 The 'Compulsory Revenue' is further sub-divided into
three heads Fees, Special Assessment and Taxes.
 Compulsory Revenue
a. Fees. A fee is a payment levied by the State in respect of services performed for the
benefit of the individuals. Court fee, Registration fee and License fee are examples
of this kind of revenue.
b. Special Assessment. It is a payment made by the owners of property in respect of
any improvement made to their property by the public authority. If a park is built,
this goes to enhance the value of the properties in the locality and, therefore, the
owners may be required to pay extra tax in the form of special assessment.
Educational Cess or any other kind of special Cess may also be covered by this. Iqra
tax comes under this category. Toll tax collected on highways and bridges is another
example.
c. Tax. This is a compulsory charge imposed by a public authority for defraying
expenses in accordance with the common interest of all. The taxes can be direct as
well as indirect. Income Tax, Corporation Tax and Super Tax are direct taxes,
whereas import duties, excise duties and sales tax are indirect taxes.
 Public Expenditure
The Public Expenditure may be broadly categorized as under:
1) Maintenance and equipment of armed forces including police, (a) in peace
and (b) in war.
2) Administration of Justice.
3) Maintenance of the ceremonial head of state and diplomatic representatives
abroad.
4) Maintenance of the machinery of the civil government including ministries,
legislature and civil servants.
5) Public debt charges including payment of principal and interest.
6) Expenditure directly devoted in fostering industry and commerce.
7) Social Welfare health, education, old-age pensions, famine relief, Covid and
unemployment allowance, etc.
 Public Debt
  Total debt on 30-06-2018 was Rs.29.861 trillion.
 Foreign debt on 30-09-2018 was US$ 96.735 billion.
 The external debt servicing consumed $7.479 billion in last fiscal year 2017-18
including principle amount of $5.186 billion and interest payment of $2.293 billion.
 The External Debt and Liabilities (EDL) in percentage of GDP stands at 33.6
percent.

 
 Public Financial Administration
  All Government Divisions / Departments including Finance Ministry /
Finance Departments, Auditor General of Pakistan, State Bank of
Pakistan and other Government Organizations are included in the
Public Administration.
 They all take care of the Public Finance. They look after the Public
Revenue, Public Expenditure and Public Debt.

 
 Scope of Financial Administration
The Financial Administration means the operations designed to make funds
available (Earning, Saving, Borrowing) and to ensure their lawful and
efficient use. Investment of surplus funds is also a function of Financial
Administration.

The principal parties involved are:

1) The executive bodies, which need funds.
2) The legislative bodies which grant funds.
3) The executive offices that incur and control the expenditure of funds.
4) The auditing offices which determine the legality and propriety of the use of
the funds.
 Scope of Financial Administration
 The first task is to secure funds. The second task is to
use the funds in the performance of operations.

 Accounts be maintained to show the flow of funds and

to indicate the results of the expenditure.

 Finally the accounts record is presented for an

independent audit to determine the legality and
propriety of the actions.
 General Characteristics of Financial
Administration
Financial Administration has three broad objectives or
responsibilities :
1. Fiscal policy.
2. Accountability.
3. Management.
 Fiscal Policy
The term Fiscal relates to public revenues
(taxation), public spending, debt, and finance.

Policy means ‘a course of action’.

Policy means ‘ the set of basic principles and
associated guidelines, formulated and enforced
by the governing body of an organization, to
direct and limit its actions in pursuit of long-
term goals’.
 Fiscal Policy
 Fiscal policy is defined as ‘a policy under which the government
uses its expenditure and revenue programme to produce desirable
effects and to avoid undesirable effects on the national income,
production and employment’.
 The Government estimates its expenditure for a fiscal year and
then generates revenue to meet the estimated expenditure. If the
estimated revenue is less than estimated expenditure , then the
government borrows money from internal and / or external
sources.
 Fiscal Policy

 In respect of ‘Fiscal Policy’, we use the terms

‘Deficit Budget’, ‘Surplus Budget’ and
‘Balanced Budget’.

 It is the comparison of ‘Estimated Expenditure’

with ‘Estimated Revenue’.
 Accountability
 In case of financial matters (money and property matters), a question
arises as to who is accountable to whom and for what?

 This accountability pervades (encompasses) all activities where funds

and property are involved.

 For example, a store manager must see that his inventory conforms to
the record of purchase and sale.
 A cashier must balance his cash.
 A pharmacist must account for his supply of medicines.
 Accountability
 Government Departments are accountable to the public
for their operations.
 Accountability requires a system of internal checks.

 A system of internal checks requires a system of record

keeping.
 Record-Keeping is required:

1. By Law.

2. By the needs of Management.

 Accountability
Examples of a system of internal checks based upon record-

keeping:

1. When a store-keeper receives an order to issue a particular item

of store, he makes an entry to that effect in the issue register and

obtains the acknowledgement of the person concerned.

2. Similarly if a cashier has to pay some money, he has to get an

acknowledgment for it and to make necessary entries in the cash

book.
 Accountability
A Public Officer / Official has two types of accountability:
1) Fiduciary.
2) Accountability for the exercise of wisdom and judgment
in making fiscal decisions.

Fiduciary refers to faith, trust and confidence.

The other type of accountability requires whether the public

officers / officials are ‘good managers’?
 Good Management
 There can be no denying the fact that Good Management is the best antidote
(remedy) and preventive measure for the following ills:
1. Overstaffing.
2. Incompetent personnel.
3. Incompetent practices.
4. Poor motivation.
5. Unwise spending.
6. Poor accounting practices.
7. Unimaginative leadership.
The antidote (cure) for these ills lies in Good Management i.e. Dynamic and
Constructive Leadership.
 Performance Budgeting
 The Performance Budgeting means budgeting
units of work rather than things that are bought
and paid for, such as papers and personal
services etc.

 The theory is that the tax payer can hold the

bureaucrat accountable when it is known that a
given amount of money should buy X miles of a
street sweeping or Y acres of soil conservation.
 Financial Administration
A system of Financial Administration requires:
1. The machinery and procedures for collecting revenue.
2. Making appropriations.
3. Spending of public money.
4. Keeping accounts (record).
5. Auditing the records.

As every administrative act has its financial implications. For example,

transfer of an officer/official has the implication of TA/DA. Finance is,
therefore, one of the first and inescapable responsibilities of
Government executives.
 Financial Management Control
Financial Management Control has three ingredients:
 First is Administrative Control.
 Second is control by the Legislature (National
Assembly / Provincial Assembly).
 Third control is audit by an independent auditor (the
Auditor-General of Pakistan).
 Administrative Control
 One example of Administrative Control is Budgetary
Control.

 The Executive Officers exercise this control in their own

spare.

 Ultimately Finance Division / Department exercises this

control on overall revenue and expenditure of the
Government.
 Administrative Control
 The Administrative Control is exercised by the executive through the
Ministry of Finance.
 The Budget is prepared by the various administrative units, which is
finally consolidated by the Ministry of Finance and then presented to
the National Assembly.
 After the budget is passed, the execution thereof is the responsibility of
the Ministry of Finance. It is concerned not only with the supervision
of all aspects of the nation's finances but also with the economic
planning in collaboration with the Planning and Economic Affairs
Divisions.
 Parliamentary Control
 Legislature (National / Provincial Assembly) approves the
Budget Demands and authorize the Budget Grants /
Appropriations.
 The financial year, from July to June, is the standard accounting
period and all authorizations apply specifically to that accounting
period.
 The unspent moneys have to be surrendered at the end of the
financial year and excess payments must receive specific
authorization.
 Parliamentary Control
 After the close of the Accounting Year, the Legislature sees the
actual receipts and actual expenditure and their comparison with
the Grants and Appropriations.

 Legislature also checks violation of law, if any, made by the

Executing Agencies.
 Independent Control
 Independent Control in the system of Financial Administration is
embodied in the functions of the Auditor-General of Pakistan.

 His organization is the Supreme Audit Institution of Pakistan and

member of the International Organizations of Supreme Audit
Institutions.

 This Control is exercised by him through Professional Auditors.

 Trends in Fiscal Organization
 The emphasis, on the exploitation of the natural resources for
the benefit of the colonial rulers and maintenance of law and
order, in those days, has now been shifted to a welfare state.

 In order to achieve the objectives of the Government, the

greatest emphasis is on planning.

 For this purpose, the Planning Commission was established.

The Planning Commission prepared the First Five Year Plan
which covered the period from 1955 to 1960 and so on.
 Trends in Fiscal Organization
 The second important change which was brought about in
1960 is regarding the preparation of budget. The
preparation of budget is now a continuous process rather
than being a seasonal activity as was the position up to
1960.

 The third important change brought about in Pakistan is

in respect of the decentralization and devolution.
 Public Accounts and Accounting Control
  Accounting is the science of producing promptly and
presenting clearly the facts relating to financial
condition and operations that are required as a basis of
management.

 Following are the functions of the system of Public

Accounts.
 Functions of Public Accounts
 The primary Functions of a system of Public Accounts are:
1. To make a financial record;
2. To protect those handling funds;
3. To reveal the financial condition of the organization;
4. To facilitate necessary adjustments in rate of expenditure;
5. To give financial information to those in responsible positions
on the basis of which decision making and future planning is
done.
6. To aid auditor in conducting the audit.
 Public Accounts and Accounting Control
  The accounts and supporting financial documents provide the
evidence on the basis of which each spending officer justifies his
expenditure, either to controlling authority or to the audit.
 The accounting system is essential as a means of preventing the
wrongful use of funds.
 Tt also underlies all other types of executive control of fiscal
operations.
 It is the basis on which executives act to prevent deficit.
 It is the documentary foundation for questioning the care and wisdom
with which funds have been used.
 The accounting reports are essential to management.
 Accountability and Audit
 Funds are given to Disbursing Officers to pay for current

services, supplies and equipment. They are accountable for the

funds they receive.

 Collectors of revenues are accountable for the funds they collect.

 The general rule is that every official or employee receiving,

collecting or using public money is accountable for its proper

application.
 A Head of the Department is as accountable as a lower

functionary.
 Accountability and Audit

 The first accountability is to the employing

agency.
 The second and conclusive accountability is to

an independent audit and National Assembly.

 Finally, everyone is accountable to Almighty

Allah.
 Accountability and Audit
 Fiscal accountability means that a Receiving Officer must demonstrate
that his collection was authorized by law, was correct, was supported
by authenticating documents, and was deposited in full.
 A Disbursing Officer must demonstrate that the payments he made
were authorized by law, authenticated by supporting documents, was
correct and in strict accord with all formalities.
 The proof in each case must be completed, and must satisfy an
independent auditing officer whose business it is to detect errors,
irregularities or misrepresentations.
 Accountability and Audit
 Financial transaction must not only be correct in fact, but must be
supported by proper documentary proof.

 For instance to determine the validity of a disbursement, an Auditor

will need to have evidence of the authority of the disbursing officer,
the appropriation on the basis of which the disbursement was made, the
receipt of the money by the proper person, proof that the service for
which payment was made was actually performed, proof that the
charge was not excessive, and presence of the signatures of the
Disbursing Officer.
 Accountability and Audit
 The Auditor will also ascertain that funds were available in

proper appropriation head, that all the papers were in order, that

the arithmetical computations were correct, and that the claim

was not a duplicate.

 To audit a complex transaction is a difficult operation requiring

often knowledge of law precedents, and financial regulations and

practice as well as the principles of accounting and auditing.

 Accountability and Audit
The normal sequence of events, seen from the point of view of
accountable officer, is this:
He receives and acknowledges an advance.
He disburses particular sums and takes receipts and other
evidence of the transactions.
He submits periodically a statement of his transactions, with all
the supporting documents to the auditor.
The Auditor examines the documents, and if they are in order he
settles the account, thus clearing the Disbursing Officer of any
further responsibility.
 Accountability and Audit
 If the Auditor finds an error or is otherwise not satisfied he raises
an objection and reports it to the Disbursing Officer.
 The latter then furnishes any further explanation or justification,
leading at times to extensive correspondence.
 If the auditor remains unsatisfied, the disbursing officer has in
principle, only two recourses (choices):
a. To pay the disputed balance out of his personal funds; or
b. To appeal to the higher authorities to regularize the transaction.
 Accountability and Audit
 The audit is designed to prevent embezzlement, frauds,
carelessness or innocent error.
 Embezzlement is now relatively rare, but the
knowledge that an audit is to be made is doubtless still a
necessary deterrent.
 Most controversies between executive and audit turn on
different interpretations of law and misunderstanding of
procedure.
 Basic Functions of Audit
 The audit is a function undertaken on behalf of the
appropriating body and is a legislative task, not an
executive task.
 It is part of the external control over administration.
 Audit is independent.
 Its primary task is to enforce accountability by the
independent examination of every financial transaction.
 Basic Functions of Audit
 In the words of the Comptroller General of the United States, one of
the important objectives of the audit is to fix the accountability of the
officer of the Government for any illegal, improper or incorrect
payments made resulting from any false, inaccurate, or misleading
certifications made by them, as well as for any payment prohibited
by Law or which did not represent a legal obligation under the
appropriation or fund involved.
 At the same time, an audit is a protection to responsible executives, a
double check against malfeasance of subordinates, a shield against
irresponsible charges, and an assurance to a new official taking over
a going concern.
 Basic Functions of Audit
 Audit is an operation conducted after payments have been fully
authorized and actually made. That is, Audit takes place subsequent
to expenditure.

 It is a scrutiny of books and supporting documents (payrolls,

vouchers etc.) at the close of a fiscal year.

 The full year's operations are then available for study and criticism,
surpluses or deficits are disclosed, and the net result of fiscal
operations can be ascertained and reported to the appropriating body.
 Basic Functions of Audit
 The deterrent effect upon misuse of funds lay in the danger of
ultimate discovery.

 An audit does not replace the operation involved in administrative

control of expenditure, although the procedures are similar in part.

 In pre-audit, bills, and claims pass through the auditor's hands

before payment.
 Basic Functions of Audit
The basic objectives of an audit are to see that:
The funds have been used only for the purpose for which those were
intended.
The expenditure was in accordance with the conditions established by
law.
To check the accuracy of accounts and inventories.
To ensure against embezzlement or loss of funds.
to report findings to the proper agency, i.e. the administrative agency,
in case of unauthorized expenditure, the prosecuting officers, in case of
wrong-doing and the legislative body in case of inefficiency or
unsatisfactory operation of the fiscal system.
 Basic Functions of Audit
 The purpose of administrative examination of expenditure is to
ensure care, as well as regularity and accuracy.
 The end of an audit is to ensure legality and correctness of
administrative control to avoid deficits, to supervise current
expenditure, and to ensure that all fiscal programmes are in
conformity with the master-plan of the Government.
 These objectives overlap in part, but not entirely.