Public financial management and accountability

Budget execution, cash monitoring and accounting

This page provides an introduction to some of the more technical aspects of PFM systems. Once budgets are set, expenditure and cash management need to be monitored through robust accounting systems and procedures. On top of traditional accounting methods, Financial Management Information Systems are comprehensive tools for financial planning and management which can be integrated with every step of the budget process.

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Where is a good place to start?

Peters, L., 2002, ‘Sound Budget Execution for Poverty Reduction’, World Bank Institute, Washington DC
What are the problems with public sector budgeting in developing countries? How can budget processes be made more effective in reducing poverty? This background paper for the World Bank Institute addresses these questions using examples of successes and failures from Africa, Latin America, Australasia, and Indonesia. Effective transfer of public funds to government ministries and agencies is necessary in addition to sound budgeting to reduce poverty. Budget reform must be part of an integrated public sector reform agenda in the context of wider strategic development planning.
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Budget execution and cash management

Once the budget is agreed, there are crucial requirements to control spending in order to remain within approved budgets and to revise budgets according to changed resources and priorities. In many countries the unpredictability of revenue means that cash management systems play a key role in determining which approved budgets actually get funded. Poor arrangements for paying staff, suppliers and other creditors, in addition to weak controls over new commitments, lead to serious problems with arrears and add to the instability of spending programmes.

Schiavo-Campo, S and Tommasi, D. 1999, 'Assuring Compliance in Budget Execution', in 'Managing Government Expenditure', Asian Development Bank, Manila.
The authors outline the budget execution system, highlighting areas where implementation problems can happen. Traditionally, detailed controls are used to ensure that there will be no overspending and that the composition of the budget remains unaltered. However, even these rigid and time-consuming controls are insufficient to assure fiscal discipline.
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Schiavo-Campo, S. and Tommasi, D., 1999, 'Cash Management and the Treasury Function', Chapter 8 in 'Managing Government Expenditure', Asian Development Bank, Manila.
This chapter examines the most suitable role for government and the Treasury to adopt in controlling their cash flows and financial assets. Control of cash is a fundamental aspect of macroeconomic and budget management, whilst the increasing separation of the Central Bank and government increases the significance of cash management. 
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International Monetary Fund, Fiscal Affairs Department, 2001, ‘Manual on Fiscal Transparency’, International Monetary Fund, Washington DC
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Alm J. and Martínez-Vázquez, J., 2002, 'On the Use of Budgetary Norms as a Tool for Fiscal Management', Andrew Young School of Policy Studies, working paper 02:15
The use of expenditure (budgetary) norms is important in the formulation of budgets, representing a change in focus from budget costs to outcomes. But using these tools is a highly technical and complex process that is often not fully understood by key officials and stakeholders. How are norms constructed, and what can be learned from countries using these tools? 
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Dinh, H. T., Adugna, A. and Myers, B., 2002, 'The Impact of Cash Budgets on Poverty Reduction in Zambia: A Case Study of the Conflict Between Well- intentioned Macroeconomic Policy and Service Delivery to the Poor', World Bank Working Paper 2914.
This report evaluates the experience of Zambia in cash budgeting. The Zambian government adopted cash budgeting in the early 1990s to control runaway inflation and stabilise the economy. While cash budgeting reduced hyperinflation initially, overall it has contributed to keeping inflation at high levels, misallocation of resources, and a worsening in the inefficiencies and inequity in the delivery of social programmes. The document also contains a comparative analysis of the experiences of Uganda and Tanzania in cash budgeting which show similar results to Zambia. 
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Accounting systems

Good quality accounting systems are crucial for effective budget management, financial accountability, and decision-making. They are also critical to the effective use of international development aid. Accounts presented by ministries to the Ministry of Finance and Parliament state their financial activity during the previous budget year and form the basis for ministries' reports on how they have used their allocated resources.

An accrual system of accounting attempts to take into account expenses and sources of revenue/income which relate to the budget period but have not yet shown up on a cash account – i.e. expenditure and revenue both owing and owed. An accrual system may provide a more complete picture of financial health, and is therefore a better tool for budgeting, but it requires a high level of management capacity to implement and run effectively.  Any moves towards more sophisticated systems of accounting and performance budgeting must be implemented gradually and with full knowledge of the technical capacity needed to run them.

Schiavo-Campo, S and Tommasi, D. 1999, 'Chapter 10: Accounting', in Managing Government Expenditure, Asia Development Bank, Manila.
This chapter from the ADB's comprehensive manual explains and defines the key terms in cash and accrual accounting and budgeting systems. It provides a guide to the key issues and areas of analysis required when undertaking reform of existing accounting systems and gives attention to weaknesses and special issues in the organisation of accounting, budgetary controls and cash management.
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Schiavo-Campo, S. and Tommasi, D. 1999, 'Chapter 11: Reporting', in 'Managing Government Expenditure', Asian Development Bank, Manila.
This chapter from the ADB's manual explains what systems and procedures need to be in place for developing country governments to carry out effective reporting within the public expenditure management cycle. Traditionally, reporting was aimed at showing compliance with the budget. Whilst this function is met in countries with a parliamentary tradition and adequate audit capacity, in other countries, improving compliance remains the priority challenge. In addition, the growing demand for transparency and accountability calls for a wider scope of reporting. 
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Athukorala, S.L. and Reid, B., 2003, 'Accrual Budgeting And Accounting In Government And Its Relevance For Developing Member Countries', ADB, Manila.
This article, written for the Asian Development Bank (ADB), examines the advantages and disadvantages of implementing accrual accounting in the Developing Member Countries (DMCs) of the ADB. It also looks at how accrual accounting should be applied in DMCs. Recent studies of DMCs of the ADB show that many of their governments are either moving towards, or are considering moving towards, accrual accounting from cash accounting.
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Diamond, J., 2002, 'Performance Budgeting - Is Accrual Accounting Required?', IMF, Working Paper No. 02/240
This IMF Working Paper is relevant to middle-income or transitional economies which are considering the move from cash-based to accrual accountancy. It argues that, following changes in government finance statistics reporting standards, some emerging economies have been too eager to adopt accrual accounting. Accrual systems are most likely to be effective if they are implemented gradually as part of a wider process of public sector reform. 
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Financial management information systems

The need for up to date and comprehensive information on budgeting and expenditure means that Financial Management Information Systems (FMIS) have become an essential part of PFM reform. Advances in IT capability and communications in many developing countries have made integrated FMIS relying on electronic management of financial records a possibility.  By integrating information from varied sources of government revenue and expenditure FMIS can support better expenditure controls and improve accountability and transparency in the budget cycle. However, success in introducing information systems depends on, among other things, the wider institutional context: politicians and bureaucrats must show commitment to using FMIS as a tool for enhanced resource allocation and accountability.  Experts further warn against wide scale computerisation where capacity does not exist to implement complex systems and maintain data across a variety of electronic media.

Diamond, J. and Khemani, P., 2005, 'Introducing Financial Management Information Systems in Developing Countries', Working Paper no. 5, Fiscal Affairs Department, International Monetary Fund, Washington
Computerising government accounting and payment operations by introducing government financial management information systems (FMIS) has been a popular reform measure over the past decade. Why have such projects almost universally failed? This paper from the International Monetary Fund reviews the "received wisdom" in implementing FMIS, and analyses problems in its application in developing country contexts. With specific reference to Tanzania, Ghana, Uganda, Malawi and Kenya, it identifies key factors to explain why FMIS projects have been so problematic. It concludes that FMIS success needs strong commitment from top manages and that the implementation strategy needs to be phased.
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World Bank, 2005, ‘Fostering Trust and Transparency through Information Systems’ PREM Notes No. 97, March 2005, World Bank, Washington DC
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Heidenhof, G., Grandvoinet, H., Kianpiour, D. Rezaian, B., 2002, 'Design and Implementation of Financial Management Systems: An African Perspective', Africa Region Working Paper Series, World Bank, Washington D.C.
In the early 1990s developing countries in Africa began to place more emphasis on public expenditure management reform, this led to the formation of integrated Financial Management Systems. This paper written for the World Bank considers Financial Management Systems (FMS) and their key components and what can be learnt from the FMS experience of five African countries.
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Wynee,A., 2005, ‘Public Financial Management Reforms in Developing Countries: Lessons of Experience from Ghana, Tanzania and Uganda’  ACBF Working Paper NO. 7, December 2005, African Capacity Building Foundation, Harare
Major public expenditure management reforms have been adopted in many developing countries in recent years, with mixed success. Andy Wynne, of the Association of Chartered Certified Accountants, reviews the implementation of Medium Term Expenditure Framework (MTEF) and Integrated Financial Management Information Systems (IFMIS) type reforms in Ghana, Tanzania and Uganda. He stresses the need for caution in advocating such widespread reforms elsewhere in the absence of further evidence of successful implementation. Small-scale investment in basic internal financial controls may bring greater returns than large-scale investment in innovative reforms, which carry significant risks of failure.
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UN Department of Economic and Social Affairs 1999, 'Integrated Financial Management in Least Developed Countries', report ST/ESA/PAD/SER.E/18, United Nations, New York
Produced by the Public Finance and Private Sector Development Branch of the UN's Department of Economic and Social Affairs, this case study highlights the key elements of integrated financial management. It identifies barriers to improvements in least developed countries and recommends measures to sustain reforms.
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World Bank, 2005, ‘Automating Financial Management Systems in Post-Conflict Environments’, Video & Powerpoint Presentations, World Bank, Washington
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