Cash Management in Government: The Pakistan Experience

Cash Management in Government: The Pakistan Experience By Muhammad Akram Khan Former Deputy Auditor General of Pakistan makram1000@gmail.com Cash Management is at heart of the Public Financial Management (PFM) 1. Cash management is at the heart of public financial management. It has backward and forward linkages with budgeting, resource mobilization, public spending, accounting and auditing. Ministry of Finance (MoF) cannot prepare a budget until it has information on the expected receipts and payments and the time period in which this has to take place.

Public debt can neither be raised nor serviced without proper cash management. Cost of funds cannot be controlled without information on cash flows. Ministries, Departments and Autonomous bodies (MDAs) cannot execute approved budgets if they do not have information on availability of cash. Services cannot be delivered, projects cannot be implemented and human resources cannot be managed without information on expected cash flows. Accounts cannot be prepared in absence of information of past payouts, future commitments and adjustments for external inflows and outflows on a timely basis. Frauds cannot be prevented and detected without information on reconciliation with bank. Even effective auditing requires that the cash flows reflect the true and fair state of affairs of the actual operations of the government.

2. In brief, there cannot be any meaningful analysis of cash management until we have a look at the big picture of public financial management. That does not necessarily mean we need to discuss the whole of PFM in detail. Even references to various segments of PFM would be sufficient.

Myths about Public Financial Management 3. PFM in Pakistan is couched in ten myths. To understand cash management experience in Pakistan, it is pertinent to understand these myths and explode them for a meaningful change.

Myth 1: Accountability requirements are met adequately since federal/provincial secretaries are Principal Accounting Officers (PAOs).

4. By declaring Secretaries as Principal Accounting Officer (PAO) we have started believing that the top most people in the MDAs are managing the accounts and are accountable

for management of public resources. In practice, nothing is farther from the truth. The secretaries are PAOs only in name. In most cases the PAOs do not have any formal education or training in PFM. They neither understand nor can use the very accounts they receive from the accounts offices. The accounts offices prepare monthly civil accounts and send these to the MoF/FDs. The accounts offices also prepare monthly appropriation accounts and send these to MDAs where the PAO is supposed to sign if off and send it back to the accounts office by a deadline. In most of the cases, the deadline passes quietly and the accounts offices finalize the appropriation account even without PAOs’ feedback. Thus the PAOs do not assume ownership of the appropriation accounts. To some extent, they are right. All payments are made by the accounts offices. Effectively, the expenditure is controlled and recorded by accounts offices through an overly tight mechanism of pre-audit. Any excess expenditure can be rightly assigned to the failure of the pre-audit. Any saving in the budget could be due to nonavailability of funds – a failure of the MoF/FD rather than the PAO. Even when facing government auditors, except for personal expenses, the PAOs can easily pass on the bucks to other agencies and wash their hands off any deficiencies in service delivery. In such a situation how can PAOs feel the responsibility for rendering accounts?

Myth 2: MoF and its officers are more alive to public interest than people working in the MDAs. 5. This is the general culture of MoF. People working in MoF think that they are more loyal, more responsible and more adept in controlling public funds from waste and abuse than people working in the MDAs. That makes them reluctant in delegating powers to the MDAs. For example: (a) The PAOs have a limited role in budget preparation and approval. The budget preparation requires scrutiny by the Financial Advisor (FA) who is responsible to MoF. Anything not agreed to by the FA can hardly be included in the budget proposal.

The financial advisors assigned to the MDAs by the ministry exercise considerable influence over frequent in-year re-appropriations. (b) The PAOs have limited flexibility in managing the budgets. They must revert to the MoF at several stages. For example, they cannot allocate savings from one grant to another; cannot create posts; cannot transfer funds from Current to Development expenditure or vice versa; and cannot spend out of approved lump sum grant without approval of the MoF. In brief, the culture of MoF is a major obstacle in reforming PFM in Pakistan.

Myth 3: Accountants General (AGs) and their staff are more efficient in controlling expenditure than officers in MDAs.

6. The culture of accounts offices is that they consider themselves custodian of all resources and feel that if powers are delegated to MDAs they would launch an extravaganza of wasteful spending and the country’s resources would fritter away. They shudder at the thought of parting with the function of pre-audit. They would rather like to take over even those organizations which are at present out of their pale. The fact is that despite all checks and balances applied during pre-audit, the number of financial irregularities and noncompliance with policy guidelines are only increasing every year as is evident from audit reports. The accounts offices are a major obstacle in modernizing the PFM in Pakistan.

Myth 4: If you see irregularities happening, add more controls.

7. Internal controls are considered panacea of all ills. Since independence, layers over layers of internal controls have been stacked, making the system inefficient, cumbersome and prone to misuse. Internal controls are excessive but weak. Each time an irregularity comes to notice another control is added. As a result, the system is overburdened with controls leading to inefficiency and obstacles in service delivery.

Myth 5: Even though we do not plan our cash flows, we have the intuitive capacity of managing the budget.

8. This is the stand ard thinking in the MoF/FDs. They fail to realize that in this age of complex government operations where time is money, no amount of intuition or hunch can replace detailed analysis based on hard information. Despite credible and accurate data available on a timely basis from the government financial management information system, decision makers have not started using this information. Until serious efforts are made to forecast cash flows, budgets cannot be managed effectively.

Myth 6: The work of our Supreme Audit Institution (SAI) provides assurance that the MDAs are functioning efficiently and effectively.

9. This is blatantly untrue. SAIs around the globe are moving away from compliance auditing and devoting more time and resources to performance auditing. The SAI in Pakistan though took the initiative of introducing PA some thirty years ago, yet it has not covered much ground so far. The organization does not have the capacity and expertise for undertaking performance auditing. There are serious questions about the independence, competence, neutrality, integrity and efficiency of the SAI. Its existence is not more than a fake threat to those who are prone to remain lawful even otherwise.

Those who know the actual functioning of the SAI have innumerable means to fool the auditors or to make their way through regulations without alerting anyone to the irregularities they are committing or taking the auditors along on their corrupt ways.

Size of the compliance audit reports is bulging. That is the evidence that audit has not been effective in creating financial discipline. On accounting side, due to poor reconciliation with banks, frauds are a real risk even the detection of frauds has not been quite effective in all cases. The myth obstructs the way for improvement in the functioning of the SAI. Myth 7: Chief Finance and Accounts Officer can be entrusted internal audit function also for sake of economy.

10. The positions of 22 Chief Finance and Accounts Officers (CFAOs) were created in 2006 in federal ministries (to be replicated in provinces and agencies) on the insistence of a former AG. Somehow, he thought that the CFAOs could also be assigned the task of internal audit. He could not perceive the obvious conflict interest when a finance and accounts officer becomes his or her own internal auditor. Since then no one has reviewed the role of the CFAOs, nor has a serious effort been made for installing internal audit functions throughout the government. Their role of CFAO is still secondary to the Ministry of Finance, which maintains the primary role for stewardship of funds The CFAOs have become the stumbling blocks against internal audit function.

Myth 8: By segregating PFM among MoF, MDAs and CGA/AG, we have created an effective system of checks and balances.

11. The MoF/FDs play a dominant role in budgeting and expenditure control. The CGA makes payments and maintains accounts. The MDAs execute the budget within the residual space permitted by the Ministry of Finance and the CGA even though the secretary of each line department is the designated principal accounting officer (PAO) accountable for MDA performance. Internal controls are excessive but weak. Extensively documented rules are issued by the MoF/FDs. The CGA applies controls on payments and accounts. The MDAs only exercise operational controls. Partial controls, exercised by three silos of authority, leave loopholes (as highlighted in audit reports). With fragmented controls, no single authority can be held accountable for failing to deliver.

Equally, although the PAOs are responsible for internal controls, due to shared responsibility with the MoF/FDs and the CGA they have not developed the systems and processes for implementing the controls, overseeing management overrides, or preventing waste and fraud. These weaknesses have led to poor ratings for internal audit and non-salary internal controls, per the latest PEFA assessments, and increase the risk of over- or under-spending.

Myth 9: Federal/provincial secretaries are too busy to devote time and attention to financial management.

12. That is the standard excuse presented by the MoF/FDs for excluding the heads of MDAs from the loop of financial management and giving them effective control of their organizations. Their role is kept to the extent a time arrives for fixing the responsibility.

However, while delegating authority, the standard excuse is that they are too busy people to attend to the nitty-gritty of PFM. Until PFM is considered important enough for heads of MDAs to pay attention, they will not be given the responsibility for PFM. Myth 10: PF statements are too technical for general public to understand and make a contribution.

13. That is another standard excuse presented by the MoF/FDs for keeping the citizens at a distance from the actual business of the country. That allows bureaucracy to maintain secrecy, exclude the citizens from understanding the government business and taking real public interest into account while planning budgets and cash flows.

Cash Management by Finance Ministries and Departments Best Practice Criteria 14. Good cash management enables organizations plan cash flows in light of spending plans and timing of receipts. It helps minimize cost of borrowing during periods of revenue short-fall and enables the MoF/FDs release funds on a timely basis according to commitments of ministries, departments and agencies (MDAs) and thus contributes toward better service delivery. Salient features of good cash management are as follows: (a) MoF/FDs should provide MDAs reliable information on availability of funds enabling them to plan their expenditures. The banks 1 should provide information on cash balances on daily basis. The MoF/FDs should prepare monthly cash flow plans and monitor actual spending and revenue collection based on reliable information from its bank and MDAs. The cash flow plans should take into account commitments of MDAs and any abnormal expected events. It should highlight need for borrowing to ensure adequate liquidity during the coming period. (b) For avoiding unnecessary borrowing and interest costs cash balances in all government bank accounts should be consolidated into a single treasury account. (c) MDAs should plan and commit expenditure for at least six month in advance in accordance with budgeted appropriations.

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Banks in this note refer to State Bank of Pakistan and National Bank of Pakistan and all branches of these banks.

(d) The MoF/FDs should make significant adjustments to budget allocations only once or twice in a year and adopt a pre-announced framework for doing so.

(e) The accounts offices2, spending units and banks should reconcile their balances at the end of every month.

The Situation Report 15. The situation in federal and provincial governments, with slight differences among them, was as follows (a) The MoF/FDs receive information on cash balances from different sources with different frequency. For example, they receive cash balance reports on daily basis and loan maturity reports on fortnightly basis from the banks. The account offices report figures of expenditure and revenue on monthly basis. (b) The MoF/FDs prepare cash flow forecasts on quarterly basis and make in-year adjustments in budget authorizations unsystematically without reference to the forecasts.

(c) The accuracy of the cash forecasts is undermined by missing information on the stock of arrears, commitments, and unresolved reconciliation differences. (d) Accounts offices have not yet fully implemented commitment accounting. (e) Treasury offices maintain accounts of receipts. Accounts offices make payments and maintain accounts of expenditure. Accounts offices compile accounts received from districts, treasury offices and self-accounting units and prepare annual financial statements. (f) The governments have made some progress toward abolishing public ledger accounts (PLAs) and consolidating cash balances. The MoF/FDs now authorize limits for cash withdrawals under system of special drawing accounts and replenish these limits against actual expenditures. The system has helped overcome the situation where idle cash balances kept sitting in PLAs while the MoF/FDs were borrowing on interest to manage liquidity. (g) The MoF/FDs issue treasury bills to manage liquidity on fortnightly basis. The MoF/FDs release funds on quarterly basis. (h) MDAs reconcile balances with accounts offices which in turn reconcile book balances with banks on monthly basis.

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Accounts offices in this note refer to Offices of Accountants General (AG) in federal and provincial governments and also all treasury offices.

Gaps Analysis 16. The ground reality deviates from the best practice leading to various gaps as summarized below: (a) The MoF/FDs prepare cash flow forecast on quarterly basis instead of on monthly basis. (b) The MoF/FDs but do not use the forecasts for re-estimating and rescheduling of cash requirements. (c) The MoF/FDs apply budget cuts in an unsystematic manner during the year. (d) Despite regular exercises of reconciliation between accounts offices, banks and MDAs, significant unresolved differences exist and some are quite old. (e) MDAs sign contracts but cannot enter commitments in accounts as that is function of the accounts office. (f) The governments have not yet been able to achieve the objective of single

treasury account as some accounts are still exempt from the consolidated funds. For example, hospital receipts remain outside the consolidated cash balances.

Causes of Gaps 17. Causes for deviation from the best practice are as follows: (a) The system of fragmented financial management where accounting is split between accounts offices and treasury offices and budget management is split between MoF/FDs and MDAs is a remnant of the colonial days that has survived with all its inefficiencies due to resistance against change. (b) Information flows on bank balances, accounting figures and MDAs’ actual data follow different time-lines. The MoF/FDs do not receive the necessary information required for monthly cash flow forecast. (c) MDAs do not have the capacity for projecting cash requirements for six months ahead. The system of quarterly releases by MoF/FDs also leaves MDAs unsure about availability of cash for next six months. (d) MDAs do not have control over accounting of payments and receipts. The accounts offices control these functions. (e) MDAs do not have professionally qualified staff for financial management. They cannot generate reliable data accurately for cash flow forecast.

Effects of Gaps 18. Deviation from the best practice leads to several risks and costs, some of which are as follows: (a) Weak cash management affects the MoF/FDs ability to prepare monthly cash-flow forecasts, in turn influencing the MDAs’ capacity to implement the budget effectively. The MoF/FDs are not sure of their cash needs during a specified period. The risk of unnecessary borrowing due to lack of precise information is high. MDAs do not communicate information on commitments to accounts offices, leading to unreliable cash flow information to MoF/FDs. (b) Unsystematic in-year budget cuts can cause delays in service delivery. (c) Un-reconciled book and bank balances have the risk of undetected frauds.

Centralized system of accounting has created a complicated scenario. The accounts offices have to reconcile balances with the banks. MDAs have to reconcile balances with the accounts offices. Instead of one-step reconciliation between MDAs and banks, two-step reconciliation has to be done: between banks and accounts offices; and between MDAs and accounts offices. Thus an additional tier for reconciliation of balances exists. The system creates a complicated situation for bank reconciliation with little incentive for MDAs to maintain proper accounts. (d) Fragmented PFM between MoF, MDAs, and AGs offices. A further segmentation is caused by accounting of receipts and payments. The Treasury Offices maintain accounts of receipts and the AGs maintain accounts of expenditures. Added to this are self-accounting units which prepare their own accounts and control their own payments. (e) MDAs do not have full control over accounts and payments. (f) The MDAs do not have the capacity for preparing reliable monthly cash forecasts due to lack to professional staff, technology, poor coordination between AGs offices and MoF. 19. In brief, lack of timely reconciliation of balances, unresolved reconciliation differences, and substantially incomplete information on commitments and arrears undermine the MoF/FDs’ other efforts to streamline cash management.

Lessons Learned 20. Given current gaps, business process reengineering will be required to meet these objectives.

(a) For institutionalizing top-rate cash management, the Ministry of MoF/FDs should set up a high level committee to oversee monthly cash-flow forecasts, reconcile accounts, and borrow and invest surplus funds in the short term. Countries such as Argentina, Brazil, Chile, Costa Rica, Ecuador, and Peru have such committees in their treasury departments (b) The MoF/FDs should prepare cash flow forecast on monthly basis. Besides daily cash balances from banks, it should get information on actual and estimated receipts and payments from MDAs on monthly basis. The MoF/FDs should take into account information on stocks of arrears and future commitments while preparing cash flow forecasts. (c) Procedures should be installed to ensure that all cash balances become part of the consolidated funds. Policies and procedures already issued for the establishment of a single treasury account need to be made operational. All existing exemptions for keeping some cash balances out of the consolidated funds should be withdrawn. (d) Timely and regular reconciliation of differences in accounts needs to be enforced. The present pace of reconciling outstanding balances must be accelerated. A cut-off date must be specified for historical items, after which these should be written off as a one-time adjustment. (e) The accounts offices should implement commitment accounting as required under New Accounting Model. (f) MDAs should have dedicated offices, under supervision of CFAO, responsible for the entire cycle of financial management. The AG offices should be responsible for compilation of accounts and preparation of annual financial statements only. The treasury offices should be phased out gradually. (g) In case of unforeseen situations, the MoF/FDs should apply budget cuts according to a pre-announced scheme. (h) Internal audit function should be developed and strengthened in consonance with internal standards.

Structural Changes Required 21. The above reforms cannot be implemented effectively until a series of structural changes are made in various institutions responsible for PFM. It would require fundamental changes in the present roles of MoF/FDs, MDAs and CGA offices. New role for various agencies are visualized as follows:

(a) MoF/FDs to prepare budgets, manage cash flows, manage public debt, and monitor execution of budget with minimal control on expenditure and receipts. (b) MDAs to be fully independent in executing the approved budget with accountability for service delivery and resource management. MDAs should have professionally trained staff for budgeting, payment, accounting and cash flow forecasting. MDAs should prepare monthly cash forecasts and submit it to MoF/FDs for consolidation and cash management purpose. MDAs should reconcile their respective accounts with the banks. (c) MDAs should prepare monthly and annual financial statements and periodic performance reports. (d) All federal and provincial level accounts offices should gradually fade away. Their staff should be posted in MDAs where they perform functions relating to payments and accounts under the supervision of Chief Finance and Accounts Officers. The role of CGA should be confined to consolidation of accounts, issuance of annual financial statements, issuance of accounting standards, monitoring compliance with accounting standards, training manpower in accounting and auditing and managing human resources of the accounting staff in MDAs. (e) Treasury offices, at present for keeping accounts of receipts, should fade away as this work would be handled by MDAs locally. (f) A post of Chief Internal Auditor be created with power to audit all accounts in MDAs, manage internal audit staff, issue internal audit standards and procedures. (g) The Auditor General should audit annual accounts of all MDAs and also annual financial statements of the whole government. Besides, the AG should certify performance reports of the MDAs. The main task of the AG should be PA. The compliance audit works should gradually be passed on the internal audit.