Progress with implementation of the PFMA
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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.
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