Four objectives of PFM:

1. Macro economic statblixation 2. Allocative efficiency 3) operational efficien

cy 4) Fiscal transparency
Managing public finances:
1) needs to be comprehensive 2)permit a balanced divsion of roles and responisib
ilities 3) financial relations bw govt & transactingparties

So how d
o countries using cash-basis of accounting monitor commitments and unpaid expens
es?
Some countries have registers and records to monitor commitments and arrears out
side of the typical books of accounts.
Some countries actually don t have any mechanism! The Public Expenditure and Finan
cial Accountability (PEFA) indicators for commitment and arrears monitoring are
rated very low for many countries. In accrual accounting there is no need for se
parate records or memorandum ledgers since the accounting system will capture th
ese in the normal course of accounting.

In many countries, the budget execution report is the financial statement, as no

separate financial statements are prepared.
However, some countries have now begun preparing separate accounting financial s
tatements in addition to the normal budget execution reports.
The US has been preparing accrual-based financial statements for the last 15 yea
rs. The UK has also started to do so; it put together the first consolidated fin
ancial statement in 2007. France too has started doing the same.
But most countries still prepare only the budget execution reports.

Profile:
untapped wealth. 6.5mn Population
good GDP growth rate 5 to 8
management fiscal deficit 3to6
Public expenditure and financial accountability steady progress
periodic and annual budget execution report within 6 months
MoF leads.
MoF Secretary chairs.
Full poticial & Civil leadership support, qualified financial experts, not novel
to PFM area.
Limited professional accountants
no training program
low pay so attraction is lower in govt sectors.
Recommedation of sec: partial data, should implement accrual accounting on prior
ity.

Both cash basis and accrual basis accounting system have certain advantages and
limitations:
Cons of accrual accounting:
It is difficult to manage and complex which involves large numbers of informatio
n processing. It also may be the cause of deception to other deparments which re
ly on the info provided by their counterparts.
Pros: Provides upto date info on business balance sheet. Current and actual posi
tion of the budget. Planning makes easier and decision making becomes more reali
stic. Control over the actual system of accounting.
Advantages of Cash Accounting:
Its Simple to use and very handy to understand. Current number shows actual fund
s available instead of receivables as earned revenue.
Disadvantges:
Misleading information, distorted performance review, chances of error in over d
rafting revenue and expenditure details.
4)
They lack in human resources as well as technical aspects as very few of profess
ional accountants are available in Turenia. They need to develope a system at fi
rst.

In order to assess financial performance and financial situation it is not just

enough to have information regarding receipts and payments, but also about reven
ues due but not collected, expenditures incurred but not paid, commitments alrea
dy made, assets owned. Such information is rarely available in budget execution
reports. Financial statements have much wider scope and provide extensive inform
ation than a typical budget execution report.
Accrual-based financial statements are complex and require a trained accounting
team, which is not easy to find in the public sector. Countries that have implem
ented accrual-based accounting have struggled to prepare reliable financial stat
ements
for example, the United States GAO continues to provide disclaimer of opini
on on the US government Consolidated Financial Statements for the 16th year in a
row.
While accrual accounting has benefits, experience indicates that the transition
to this system can be time consuming and expensive. Many approaches for switchin
g from cash-basis to accrual-basis of accounting are possible and should be cons
idered in finalizing the plan of action.

Internal Controls:
Effectiveness and efficiency of operations
reliability of financial reporting
compliance with laws and regulations

Objectives:
Operations objective
Reporting objective
Compliance objectives
Components of Internal Control:
Control environment
Risk assesment
Information and communication
Control activities
monitoring
Control activities can be:
Preventive or detective
automated or manual
ex ante means before event or post ante means actual.
part of all functions
Review mechanism:
Overarching control environment
Risk assessment process
communicating and reporting system
monitoring process
Two models of Internal Audit:
Centralixed model:
Decentralixed model:

Case study 2:
Tone at the top: Ministers are not serious, involves in corruption, forgery.
Centralixed inspection agency: catches small wrong doings instead of high profil
e corruption,

It is very important to gain the support and equate with the tone at the top con
cerning the vitality of the health sector in the interest of larger public. Get
the support from top, understand the political economy, understand the sector fo
r which assesment is going to be carried out, read the literature
It is important that top management and bureaucracy understsands the importance
of the control environment whereas turensia lacks the same as their top official
s are involved in the corruption which shows they lack the tone at the top. Govt
needs to understand its importance of developing the control environment.

Models of Internal Audit:

Westminister model: Accountability of Parliament.

- single head.
- powers vested with single head.
- independance of head.
- qualified accountants
- SAI is not a court.
Judicial model:
SAI part of judiciary. Independent.
Responsibility of public accountants: MoF responsible.
SAI is a court and can punish.
Staff have legal background instead of accounting
SAi select its president.
No PAC.
Impose penality on its own.
purpose is to seek legality of transactions and their members are judges.
Board model:
jointly take decisions.
SAI comprises a board.
Several colleges conduct audit
PAC acts on audit reports
professional qualification varies of members.
good for weak financial control environment.
Types of Audits:
Compliance audits
financial audits
performance audits
Framework of SAI:
-Legal Basis
-Independnce
-Broad Mandate
-Follow up mechanism
Case study:
Parliamentry democracy.
Adopted judicial model
Features: Legality of transactions,
Does not conduct financial audit
no opinion on budge execution
report financial violations and irregularities and prepare annual report
Plan is to switch to westminister model:
Q1: Both have important independent of each others.
Judicial models have qualified legal experts instead of qualified accountants. T
hey are confined to seek the legality of transactions instead of auditing point
of view. It is independet and have right to punish. It has no PAC. Westminister
model has PAC and involves single head with powers vested to this office. It has
no powers to penalixe any offence on its own.