Progress with implementation of the PFMA

Progress with implementation of the PFMA
Nols du Plessis
Chief Director: PFMA Implementation Unit, National Treasury

Introduction

The Public Finance Management Act (PFMA), 1999 (Act No. 1 of 1999) came into effect on 1 April
2000 with the aim of modernizing financial management in the Public sector. The PFMA enables
accounting officers to manage the resources allocated to their institutions and, at the same time,
holds them accountable for these resources. Financial management in the public sector focuses on
the prioritisation and considered use of scarce resources, on ensuring effective stewardship over
public money and assets, and on achieving value for money in meeting the objectives of Government:
i.e. rendering the best possible services to the community. This must be done transparently and in
terms of all relevant legislation.

Normative Measures for Financial Management

National Treasury developed a Framework on Normative Measures for Financial Management, which
serves as a benchmark for accounting officers to assess both compliance with the PFMA and
qualitative improvements associated with PFMA implementation. The Framework, which has been
compiled in a questionnaire format, is also designed to perform the following:

y      assist accounting officers to evaluate the quality of financial management practices within
       their departments and to report thereon in their annual reports;
y      contribute to the improvement of financial management within government departments;
y      enable the National Treasury to report to Cabinet and the Standing Committee on Public
       Accounts on specific aspects of financial management within a particular department or in
       respect of national departments as a whole; and
y      enable the Auditor-General to improve his reports to Parliament in respect of financial
       management in Government.

PFMA Implementation: National Departments

National Treasury required all 35 national departments to complete the Normative Measures
questionnaire/survey for the 2003/2004 financial year. The results are summarised below under the
following headings: Management Arrangements; Planning and Budgeting; Revenue, Expenditure,
Asset and Liability Management; and Accounting and Reporting. The survey results are also
presented graphically in the enclosed Annexure.

Management Arrangements

All 35 departments reported the appointment of chief financial officers. They average 17 years of
financial management experience.

Improvements have been made in the alignment of finance components (appropriate infrastructure
and staff) to support the chief financial officer with 22 departments now reporting such alignment
compared to 12 in the last survey. Since the last survey, marginal improvements have also been
made in the employment of financial accountants (28 posts are now occupied by financial
accountants compared to 26 in the previous survey), management accountants (from 17 to 23) and
supply chain management practitioners (from 18 to 22).

Whilst the survey indicates improvements in the employment of financial and management
accountants and supply chain management practitioners, there appears to be a significant turnover of
other finance personnel. The vacancy rate in finance components appears to have increased from
13% (2002/2003 survey) to the current level of 18%, which is considerably in excess of the
acceptable norm of 5%. The average duration of vacancies is currently eight months compared to an
acceptable norm of three months. Existing finance personnel have an average of nine years
appropriate experience, with 68% having finance related qualifications or currently studying towards
such qualifications.

The PFMA and the Treasury Regulations provide a broad framework for financial management, and
accounting officers were required to develop policies and procedures in line with the business needs
of their respective departments. These policies and procedures are also considered an integral part of
internal control. The Auditor-General, in his 2002/2003 General Report, voiced concern that
management in national departments was not implementing proper policies and procedures aimed at
ensuring effective internal control. These deficiencies were especially apparent in the areas of asset
management, payment of expenses, and in administration of personnel, revenue and cash.

The 2003/2004 survey reveals that 23 departments have now developed policies and procedures
compared to 22 recorded in the previous survey. Whilst there appears to be a marginal improvement
in the number of departments that have now compiled policies and procedures, the quality of these
internal documents appears questionable.

Responses suggest that 23 departments conduct regular information sessions with management at
which their delegated responsibilities and the principles of financial management are explained.

Regular risk assessments and a risk management strategy are formal requirements in terms of the
Treasury Regulations. In this regard, the latest survey reveals that all departments have conducted
risk assessments, with 30 departments indicating that such assessments are conducted annually. The
number of departments that make use of fraud prevention plans as part of their risk management
strategy has increased from 29 to 31 and all 35 departments report that regular feedback (at least two
reports per year) is received on the implementation of strategies to mitigate risks. This compares
favourably with the 26 reported in the previous survey. The survey also reveals that 28 departments
have communicated their risk management strategies to personnel.

All 35 departments have established Internal Audit functions. Thirty-one departments have appointed
competent heads of internal audit, with an average of eight years experience in internal auditing.
There is no significant change from the previous survey.

The most recent survey reveals that 26 departments have established ‘in-house’ internal audit
functions, while four share such a function and five departments have outsourced the function.
Accountability arrangements relating to internal audit appear to have improved tremendously with 32
heads of internal audit reporting directly to the accounting officer, as opposed to 19 recorded in the
previous survey.

All 35 departments report the existence of annual internal audit plans with such plans indicating the
scope of each audit. Thirty-four departments now indicate the existence of three year rolling strategic
internal audit plans compared to 31 recorded in the last survey. The number of departments that have
had their internal audit charters approved by their audit committees remains 32. Whilst these statistics
appear promising, the survey also reveals that only 21 internal audit units are submitting quarterly
reports to their audit committees in which their performance against their annual internal audit plans is
detailed.

All 35 departments have now established audit committees, each constituted to ensure independence
and comprising an average of five members. All of these committees report directly to their
departmental accounting officers.

The survey reveals that 32 audit committees meet at least twice per annum, as required in terms of
the PFMA.

Whilst the Treasury Regulations require audit committees to meet with the Auditor-General at least
once a year, to ensure that that there are no unresolved areas of concern, the survey indicates a
more positive engagement between audit committees and the Auditor-General. In this regard, 23
audit committees meet with the Auditor-General at least quarterly.

All audit committees have submitted reports for the purpose of annual reporting with all covering the
issues of effectiveness of internal control and the evaluation of financial statements and 31 reporting
on the quality of in year management and monthly / quarterly reporting in terms of the PFMA and the
Division of Revenue Act.

Whilst the aforementioned statistics may appear promising, the qualitative effect of internal audit in
national departments appears to be of concern. In his 2002/2003 General Report, the Auditor-General
indicated that there was underperformance in the area of internal audit and that internal audit units
were inadequately staffed. The underperformance of internal audit continues to a certain extent as is
shown in the latest survey (2003/2004 period) in which the number of internal audit units reporting
quarterly to audit committees appear to be sub-standard.

Considering the amount of funds that are transferred to public entities annually from the fiscus, it is
imperative that sound processes are established to oversee and monitor the activities of these public
entities. Government requires assurance that its funds are being utilised effectively and efficiently.
Accountability instruments such as budgets, strategic and corporate plans and progress reports
thereon are therefore critical to enhancing sound financial management across government. It is
therefore of concern that only nine of those departments that have public entities reporting to their
executive authorities have established processes to oversee the public entities.

This lack of proper oversight could be seen as a key factor resulting in public entities not complying
with the PFMA’s requirements. Non-compliance is especially apparent in the non-submission of their
corporate/strategic plans to accounting officers of designated departments and the scarcity of
quarterly performance reports submitted to the relevant executive authorities.

In this regard, the 2003/2004 survey reveals that only 69% of Schedule 3A public entities have
submitted their strategic plans and estimates of revenue and expenditure to accounting officers of the
designated departments. Furthermore, only 58% have submitted quarterly reports on performance
against their strategic plans.

Schedule 2 and 3B public entities have been equally non-compliant, with only 76% indicating the
submission of corporate plans and estimates of revenue, expenditure and borrowings, whilst 60%
have submitted quarterly performance reports against their corporate plans. Sixty per cent of such
public entities report that shareholder compacts have been concluded with their executive authorities,
which represents a marginal improvement of 6% since the last survey.

Planning and Budgeting

The current survey reveals that all departments tabled their strategic plans in the legislature for the
2003/2004 financial year, with only one department being late with its submission. This represents a
notable improvement since the last survey when only 24 departments tabled their strategic plans
timeously.

The current survey reveals further that 33 departments indicate that their strategic plans are
performance based, are consistent with the Medium Term Expenditure Framework and comply with
the requirements of the Treasury Regulations and the Public Service Regulations. All 35 departments
have indicated that their strategic plans are revised annually.

Departments must establish procedures to report quarterly to their respective executive authorities.
These quarterly reports measure performance against their departmental strategic plans and facilitate
effective performance monitoring, evaluation and corrective action. In this regard, 28 departments
have such service delivery monitoring mechanisms. In line with the previous survey, 26 departments
have published annual statements of public service commitment, setting out departmental service
standards.

All 35 departments indicate compliance with the requirements contained in National Treasury’s
budget circulars and that measurable objectives exist for each programme. All but one department
indicates that organisational processes and structures are re-evaluated and aligned to outputs with 32
departments indicating that these evaluations are performed annually.

Whilst all departments indicate the existence of measurable objectives within their programmes, it
must be noted that the quality of these objectives needs to improve in order to provide more
meaningful information to stakeholders.

Revenue, Expenditure, Asset and Liability (Real) Management

Accounting officers must review (at least annually) the existing fees, charges, rates, and tariffs for
revenue accruing to the revenue fund. In this regard, the survey reveals that 22 departments
performed this review annually. It also reveals that 24 departments regularly deposited cash and that
32 departments regularly monitored the collection of revenue, reporting this to the executive authority
monthly.

Accounting officers are required to ensure that, before funds are transferred to an entity either within
or outside government, a certificate must be obtained from that entity stating that the entity
implements effective, efficient and transparent financial management and internal control systems.
Twenty-two departments indicate that such certificates are obtained.

The 2003/2004 survey indicates that 19 departments spend in line with their cash flow projections,
which is a marginal improvement from the 14 recorded in the last survey, but still unacceptably low.
Similarly, actual cash flows deviate from projected cash flows by 7%, whilst the acceptable norm in
this regard is a 2% deviation.

All departments once again recorded that effective outstanding debt collection processes were in
place. On average outstanding debts were recovered within 34 days, where the norm is 30 days. This
represents a significant improvement since the last survey, which revealed that it took an average of
71 days to recover outstanding debts. Thirty departments now report the existence of a debt write-off
policy compared to 18 in the previous survey. Twenty-five departments indicate that monthly age
analysis reports are being generated.

The current survey reveals that 22 departments have now developed policy and procedure manuals
to ensure the effective management of assets, whilst 31 departments indicate that asset registers
have been established. Notable improvements have been made in other areas of asset management:
Thirty departments indicate that their asset registers provide clear indication as to who is responsible
for assets (compared to 23 in the previous survey) and that these registers clearly distinguish
between different classes of assets (compared to 26 in the previous survey).

There is, however, evidence that asset registers are not updated regularly and contain inaccurate
data. This concern was also recorded in the Auditor-General’s 2002/2003 General Report in which he
cites asset management as being a widespread problem amongst national departments.

Accounting and Reporting

The survey reveals that postings to clearing and suspense accounts are approved of at an
appropriate level in 28 departments. Monthly reporting to the accounting officer of these uncleared
amounts has improved substantially from 24 departments now reporting such compared to 14 as
reported previously. The survey also records that the number of month end closures being certified by
accounting officers has risen from 16 to 24.

All 35 departments report that monthly reports, indicating actual and projected revenue and
expenditure are submitted to the National Treasury, with 34 departments indicating that such reports
are submitted within 15 days from the end of each month.

Departmental annual reports and financial statements must be tabled in the relevant legislature within
six months of the financial year end (i.e. by the end of September).

The survey reveals that 34 departments submitted their 2002/2003 financial statements to the
National Treasury and the Auditor-General before 31 May 2003, while 25 departments tabled their
annual reports and financial statements in the legislature by the required date of 30 September 2003
compared to the 23 departments recorded in the previous year.

Departments that do not table their annual reports and financial statements timeously in the
legislature are required to submit a written explanation to the legislature. In the 2003/2004 survey,
three departments submitted such explanations. Thirty-four departments report that their annual

reports and financial statements are consistent with National Treasury’s guidelines compared to 29
recorded in the previous survey.

Fifty seven per cent of public entities tabled their annual reports and financial statements in the
legislature within six months of their financial year-ends compared to the 29% in the previous survey.
The current survey also notes that 12% of public entities tabled explanations in the legislature for the
late tabling of their annual reports.

The annual report and financial statements of public entities must fairly represent, amongst other
things, its performance against predetermined objectives. This is essentially the non-financial
information that provides details of the entity’s service delivery performance. In this regard, it is of
concern to note that most public entities have not included such information in their annual reports
and financial statements, whilst those that attempted such reporting provided poor quality information.
The Auditor-General, in his 2002/2003 General Report, has also alluded to performance information
being problematic in public entities.

National Treasury interventions to assist departments, constitutional institutions and public
entities with PFMA Implementation

The National Treasury is currently involved with several initiatives aimed at providing further
assistance to departments implementing the PFMA requirements. Key interventions include:

Internal Audit Framework

During November 2001, an Internal Audit Framework was developed to provide a standard set of
guidelines regarding internal audit in Government. This Framework has since been revised and
benchmarked against the King II Report on Corporate Governance in South Africa, 2002.

Internal audit reports from departments and General Reports of the Auditor-General have provided
invaluable information, enhancing the Internal Audit Framework, and ensuring that highlighted
weaknesses are addressed. This revised Framework has been circulated for comment to, amongst
others, the Heads of Internal Audit Forum, the Auditor-General and the Institute of Internal Auditors.

Risk Management Framework

The King II Report on Corporate Governance, 2002 reflects that risk management forms an integral
part of an organisation’s strategic and operational activities. It is a process whereby an organisation
both methodically and intuitively addresses the risks attached to their activities, with the goal of
achieving sustained benefit within each activity and across a portfolio of activities.

To this end, section 38(1) (a) of the PFMA requires, amongst other things, that accounting officers
have and maintain effective, efficient and transparent systems of financial, risk management and
internal control. In this regard, National Treasury has developed a Risk Management Framework to
provide pertinent assistance to departments. This Framework is in the process of finalisation for
implementation during the current financial year.

Asset Management Guideline

Good asset management is imperative in any business environment and provides a vital foundation
for economic activity. In the public sector a sound asset management system is critical, especially
since a significant portion of state assets are infrastructural, with long life spans and enormous capital
outlays.

Taking cognisance of the concerns raised by the Auditor-General in his 2002/2003 General Report
with regard to the quality of asset registers, the National Treasury has compiled an Asset
Management Guideline that aims to strengthen the understanding of the concept and principles of
asset management. An Asset Management Practical Guide, which is at an advanced stage of
preparation, is designed to transform the Asset Management Guideline into a practical working
document.

Framework for Departmental Policies and Procedures

Due to differing operations systems amongst departments, the Treasury Regulations were formulated
with the intention of providing fundamental best practice financial management principles rather than
outlining detail, procedures and processes. This inevitably allows individual accounting officers to
determine the detail, procedures and processes according to the business needs of their
departments.

As indicated previously and as reported by the Auditor-General in his 2002/2003 General Report,
inconsistencies exist in the layout, quality and content of policy and procedure documents. In this
regard, the National Treasury and the Office of the Auditor-General are in the process of developing a
Framework for Departmental Policies and Procedures. This Framework is aimed at, amongst other
things, identifying the minimum requirements, the layout and contents of policies and procedures, and
the consideration of legislative requirements and other aspects of financial management.

This Framework will contribute positively to the standardization of policy and procedure formats and
will also lead to an improvement in internal control. The Framework will also enable external auditors
to evaluate such policy and procedures in accordance with predetermined criteria.

Framework for the Formulation of Performance Information

During April 2004, a Performance Information Working Committee was established. It drew delegates
from the National Treasury, The Presidency, the Department of Public Service and Administration and
the Office of the Auditor-General. The Working committee has wide-ranging responsibilities. These
include conducting research, debating and interacting with various stakeholders to establish and issue
guidance as well as to raise awareness and understanding of performance information and
performance management in the public sector.

The objectives of the Committee include the development of a Framework that provides consolidated
guidance for the formulation of performance information. The Framework will accommodate all
spheres of government and will reflect a common understanding of the following:

y       Terminology relevant to performance information;
y       The process to be followed when establishing performance indicators as well as the
        measurement thereof;
y       The characteristics of performance information and of a good performance information
        system; and
y       The attributes of good performance measures and public performance monitoring.

This Framework is expected to be completed by February 2005 for implementation from the
2005/2006 financial year.

Conclusion

In general, departments appear to be making good progress towards PFMA compliance. However the
survey results suggest that some departments are still struggling to achieve the qualitative
improvements associated with PFMA implementation. This is especially relevant in the following
areas:

y       Monthly reports on expenditure against budgets;
y       Quarterly performance reports on progress with implementation of strategic plans;
y       Development and implementation of departmental policies and procedures to improve internal
        controls;
y       Asset management and the maintenance of related records;
y       Effective internal audit functions and audit committees;
y       Quality of performance information (non-financial) in strategic plans and annual reports.

National Treasury’s initiatives to assist departments will address some of the technical and procedural
concerns. However, two elements are critical for the successful implementation of the PFMA: properly

trained personnel within departments, and the will and commitment of accounting officers to
effectively implement the letter and the spirit of the PFMA.