Public Expenditure Management: Role of Audit in Controlling Sensitive Expenditure By Muhammad Akram Khan Former Deputy Auditor General of Pakistan makram1000@gmail.com
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Introduction
Public expenditure management is an essential ingredient of budget management. The budget is a strategic plan of the government that integrates the operational plans of various departments and agencies. One side of the budget outlines sources and methods of raising funds in the form of tax and non-tax revenues including public borrowing. The other side consists of governmental plans for public expenditure on various programs, projects and support services. The contemporary theory and practice visualizes certain basic principles for public expenditure management, such as follows: a) The public expenditure priorities should reflect the choices and preferences of the public for providing various goods and services. b) The public expenditure should be conceived in a multi-year strategic framework so that financial implications of the existing and future programs are kept in view while preparing operational plans of the departments. c) The public expenditure should keep in view the existing programs while planning for new initiatives, so that resources are adjusted or re-allocated from the existing low priority programs to the new high priority programs. d) The public expenditure plans should be based on monitoring reports of the existing programs so that lessons are learnt from the past mistakes. e) The public expenditure plans should aim at fostering greater autonomy to minister-in-charge or department head for achieving the planned objectives. The departmental management should have flexibility in adjusting the resources within the broader legislative approved budgets in the interest of achieving targets, minimizing costs and delivering results. f) The expenditure management system should have a well-functioning coordination mechanism for consultation among departmental leaders, where resources have to be curtailed from one program under a department and reallocated to another program in another department.
g) The expenditure management system should be supported by a system of integrated controls such as suggested by Committee of the Sponsoring Organizations (COSO) of Treadway Commission 1. The internal controls should be able to ensure that all transactions are recorded in a timely manner and on true basis; rules, regulations, laws and policies are followed in spirit; assets are safeguarded; and expenditures are incurred with due regard for economy, efficiency and effectiveness. Role of legislature and departments in public expenditure management The legislature approves the budget in broad and general terms. The departments and agencies are generally responsible for spending the funds allocated to each entity in light of the general guidelines issued by the ministry of finance. The first level of delegation thus takes place when the legislature authorizes the budget and the executive government gets the authority to spend the public resources. At second level, the ministry of finance delegates authority to spend to various public entities within a specified framework. The departmental heads can further delegate the authority to spend to lower levels or to offices and projects located at other stations. This is the third level of delegation. The very fact that public functionaries spend the public resources at different levels requires that some system of internal control and oversight be in place to ensure that the objectives of the legislature are achieved at the least cost and with maximum efficiency. For this purpose, the executive departments and agencies are supposed to devise internal controls for regulating the expenditure at different levels. It is now generally accepted that the internal controls should be balanced with sufficient flexibility for the public managers to ensure that the primary objectives are not defeated in the process of meeting the control procedures. This makes sense because internal controls should not be counter-productive. In the final analysis, the controls should enable the public managers achieve the planned targets at the most economical cost and with maximum efficiency. Similarly, the need for oversight on public expenditure by an independent agency such as the Supreme Audit Institution or by Chief Internal Auditor, who operates at an arm’s length from the executive departments, is also well recognized. The auditors, in particular the internal auditors, focus a lot of attention on the letter and spirit of rules, regulations and procedures. The public managers, quite often, feel uncomfortable with the approach and methodology of the auditors, who, the public managers assert, are mostly nit-picking finer details, looking at trees rather than forest and insisting on procedures rather than results. Some of this criticism is well placed, since the auditors should focus on the broader objectives of the public expenditure. However, the pressure to focus on broader objectives does not mean that the auditors turn their faces around even if the public expenditure is not meeting the essential minimum of probity, economy, and efficiency. They need to maintain balance in their approach while auditing the public expenditure.
1
Internal Control – Integrated Framework (1992). USA: Committee of the Sponsoring Organizations (COSO) of Treadway Commission. (www.aicpa.org)
Sensitive expenditure and auditing While the need for flexibility and balance in implementation of internal controls is well taken, there are certain expenditures, which are sensitive by their very nature. The public entities may incur expenditure in a manner that some of their employees may appear to derive private benefit from it. For example, the expenditures on foreign travel, provision of accommodation during travel, provision of telephone and Internet at employees’ residences, and expenditure on hospitality could be necessary for performing official functions. However, such expenditures appear to provide some private benefit to public employees also. Since the public employees have the authority to spend public funds and since they can manipulate the expenditure in such a manner that the private interest takes over public interest, there is a perceived need to control such expenditure. The Controller and Auditor General of New Zealand has defined the sensitive expenditure as follows: “Sensitive expenditure is expenditure by a public entity that provides, has the potential to provide, or has the perceived potential to provide a private benefit to an individual staff member of a public entity that is additional to the business benefit to the entity of the expenditure. It also includes expenditure by a public entity that could be considered unusual for the entity’s purpose and/or functions”.2
The very nature of such expenditure is prone to the risk of misuse, conflict of interest or at least subordination of public interest to private benefit. The objective of the present paper is to provide guidelines for the audit of sensitive expenditure. Since controlling such expenditure is primarily responsibility of the senior management, the paper shall first discuss the general principles of good practice for senior management. These principles will set the stage for developing audit criteria and internal controls for various types of sensitive expenditure. The types of expenditure covered in this paper are: expenditure on travel, provision of vehicles and accommodation, expenditure on entertainment and hospitality, sale of public assets to employees, loyalty and reward schemes announced by vendors and suppliers, private use of official assets, and official use of private assets, use of official suppliers for private purchases, and various other expenditures on awards and honoraria. There could be other types of sensitive expenditures having implications for environments, social and economic indicators, safety and security and information management. The present paper does not cover such types of sensitive expenditure due to space limitations. Similarly, there could be sensitive expenditures that are provided in the employment conditions of the employee such as tax benefits, severance pay, and pension benefits. They are also not subject of this paper since the public managers have little control over such expenditures. The scheme of rest of the paper is as follows. Sections two, three and four discuss principles, role of senior management and policies relating to sensitive expenditure respectively. Section five is the substantive part of the paper. It focuses on controlling various types of sensitive expenditure. For each type of sensitive expenditure, it lays down the audit criteria and the internal controls. The last part of the paper provides guidelines for planning and executing audit of sensitive expenditure. 2
National Audit Office (2007). Controlling Sensitive Expenditure: Guidelines for Public Entities. Wellington: New Zealand. Pp. 8.
2.
Basic Principles for Controlling Sensitive Expenditure
The basic principles for controlling sensitive expenditure are the same as for other public expenditure. The principles of trusteeship, appropriateness, impartiality, moderation, probity, transparency and objectivity are relevant to sensitive expenditure as to other expenditure. Only because the sensitive expenditure is more likely to be misused, these principles assume greater significance. The most important principle for controlling public expenditure is that the public employees are trustees of public money. While taking spending decisions, they should remain conscious to the fact that they should spend public funds in public interest and not in their private interest. Private interest, if any, should be only incidental. Secondly, all public spending should be relevant to the occasion. The expenditure should be clearly appropriate to the situation. For example, if public business requires traveling for two days, it should not be more than this and the private interest of the individual should not be the basis for extending the travel days. While deciding about appropriateness of expenditure, the public entities should take into account individual transactions as well as total amount for the occasion as a whole. The amount on individual transactions may be small and appear justifiable but total expenditure for the occasion may be extravagant or wasteful. The public managers should consider both the aspects. Thirdly, the controlling authorities should remain completely impartial in approving the expenditure. For example, while deciding the list of persons for foreign training, the approving authority should use objective and verifiable criteria. Fourthly, as trustees of public funds, the controlling authorities should spend public funds with integrity and probity. The quantum of expenditure should be moderate and not extravagant and the there should be complete transparency and audit trail in incurring the expenditure. The above principles are quite broad and general. In case of sensitive expenditure, they assume greater importance, as the public managers may appear to be catering private interests rather than the public interest. For sake of preserving their reputation and maintaining public trust in their performance, the public managers should exercise greater care in applying these principles while approving sensitive expenditure. The senior management of public entities should exercise judgment to see if a particular expenditure proposal is dominantly serving the public interest or catering for the private interest, pushing the public interest to sidelines. No amount of regulation or rules can cover all situations. It is, finally, the judgment of the controlling authority to consider all facts and take a decision that serves public interest more than the private interest. 3.
Senior Management Role and Responsibilities
Tone at the top The COSO integrated framework of internal controls suggests that the most important element of a robust system depends on, what is appropriately termed as, ‘tone at the top.’ The staff members of an organization follow the examples set by the senior managers and leaders of the organization. If the staff observes that the senior managers
‘exploit’ the public expenditure for private interest, a lax tone is set at the top and controlling the sensitive expenditure becomes difficult at lower levels. The senior management has primary responsibility for demonstrating a high degree of integrity, impartiality, objectivity, transparency and moderation in approving and incurring the sensitive expenditure. They can do this by issuing mission statements and codes of conduct, and arranging training and refresher courses on appropriate organizational behavior. But all this would be fruitless if the senior management does not set the tone by their personal behavior. Setting adequate controls and exercise of sound judgment Besides their personal example, the senior management has the responsibility for devising adequate controls for the sensitive expenditure. The controls should cover at least the following:
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Process of approval and verification of claims Compliance with organizational policies and norms Inspection and physical verification of goods and services procured Processing and payment of invoices Recording of transactions correctly and on timely basis Generating an audit trail for all transactions.
While the internal controls will be exercised as prescribed at different tiers of the organization, the most significant role of the senior management is to exercise judgment for seeing that in the final analysis the expenditure serves public interest in a dominant manner.
Policies for Sensitive Expenditure: Generic Content
4.
The senior management has the primary responsibility for controlling the sensitive expenditure. It should issue policies relating to sensitive expenditure and communicate them to staff at all levels widely. While the specific content of such policies would differ in each public entity, the generic content of such policies should be as follows: Generic content of policy on sensitive expenditure
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The policy on various types of sensitive expenditure should set out clearly what is permissible and what is not. The policy should define clearly approving authorities for various types of sensitive expenditure and also the alternative system of approval if the defined authority is not available for the time being. The policy should clearly spell out quantitative limits (e.g. dollars, number of days, etc.) for each type of sensitive expenditure and the approving authority where a limit has to be exceeded. As far as possible, the policy should not use
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such vague terms as ‘reasonable’ or ‘appropriate’ and should define such terms in unambiguous terms. The policy should define the situations where the management has discretion and extent of the discretion. It should also describe the method of verification for the use of discretion. The policy should lay down monitoring and oversight mechanism, such as internal verification or internal audit of the sensitive expenditure so that all transactions are subjected to verification in a given period. The policy on sensitive expenditure should also lay down the method of amendment in the policy itself.
Criteria for approval of sensitive expenditure Approval of sensitive expenditure should meet the following criteria:
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The expenditure should be dominantly for public purpose. The approving authority should be at least one-step higher than the person likely to benefit or appear to benefit from the expenditure. At the senior most level, like for example the minister, an officer who does not report directly to the top most position should grant the approval. Budget should be available for the expenditure. The approval should be within the delegated limits of the approving authority.
Criteria for sensitive expenditure claims Processing of claims of sensitive expenditure should follow the following criteria.
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The claims should have all supporting documents. Where receipts are not available (e.g. tips, taxis, etc.), the amounts should appear to be reasonable. The claimant should mention the date, amount and place where the expenditure was incurred. The claims should clearly identify the public purpose served. The claim should be submitted promptly after the expenditure. Any cash advance paid earlier should be adjusted while admitting the claim.
Controlling Sensitive Expenditure
5.1 Official travel Public employees have to undertake domestic and international travel to perform their duties. During travel they are entitled to specified travel expenses. However, some situations may appear to be of sensitive nature. For example, during air travel, while the employees are receiving per diem allowance, they may also be availing of meals and
accommodation provided by the airlines. The employees may opt to combine personal leave or weekend with official travel or take their spouses along while on official travel. The employees may choose to have stopover, which may have implications for cost of the air-ticket. The employees may hire vehicles during travel or pay tips as a social compulsion and claim refund from the public exchequer. The departmental travel policy should cover all such situations in clear and unambiguous terms. The policy should be based on the general principles of appropriateness, probity, and economy. However, considerations of personal safety, security, distance and urgency should also be taken into account while devising a policy on travel. Basic controls Some of the controls on air travel could be as follows: (a) All air travel should have prior approval of the competent authority. As a general rule, ex-post-facto approval should be discouraged. (b) While purchasing air-tickets, the airline discounts on advance booking should be availed. For this purpose, air passage should be booked in advance and ‘rush orders’ should be avoided. (c) Except where personal health or safety or work schedule so require, air travel should be in economy or discounted economy class for a minimum number of hours (say, four hours or so). (d) The competent authority should approve travel by business or first class on the basis of a written justification. (e) There should be suitable adjustment of per diem allowance where meals are provided by the airline on board. (f) The employees should not be reimbursed for any mini-bar expenses during their stay at hotels. (g) Where another entity or the host government provides meals, suitable adjustment should be made in per diem allowance. (h) The rules should specify separately entitlement for reimbursement of accommodation cost during travel in case of (i) commercial accommodation in a hotel; (ii) government rest house; (iii) stay with family or friends. (i) Terminal charges should be standardized for most locations, dispensing with the need for producing receipts. The standardized rates should be adjusted where the government employee uses an official vehicle for going to and from airport. Any unusual claim of terminal charges, not covered by the standardized rate, must have supporting vouchers. (j) Where a vehicle has to be rented for reasons of security, distance or number of personnel traveling together, the size and the rent of the vehicle should be the most economical. The rent should include toll taxes, parking tickets or traffic fines.
(k) Drivers with the rental cars should drive the cars. Private use of rental cars should not be allowed. (l) Taxis should not be used for commuting between home and offices on a daily basis, except when traveling. . (m)Where the entity has a contract with a taxi company, taxi cards should be issued in the name of specific persons and record maintained for the purpose and distance to be covered by the card. (n) Tipping is an expenditure that cannot be supported with paid receipts. As a general principle, employees should be responsible for any tips while traveling on domestic routes. For international travel, moderate tips may be allowed where the nature of the employee’s job and the local custom so necessitate. It would be a good practice that limits of such tips are laid down and any exceptions are approved by a competent authority. (o) The public entity should issue specific instructions for using telecommunication equipment and services, including Internet, during travel for official purposes. As a general rule, the employees should be responsible for all private use and the public exchequer should bear expenses for official use only. (p) Public employees may combine private travel with the official travel in the beginning, at the end or during some official break of the official journey. However, the employee should seek this permission specifically, and the public exchequer should not bear any additional cost due to combining of private travel with official journey. Further, it should be clear that the purpose of the travel is official and combining of private travel is only incidental. (q) Employees may take their spouses, family members or partners along on official travel provided they bear all costs incidental to their accompaniment. (r) The staff member should pay for any additional cost relating to stopover at the desire of the staff member. 5.2 Using official vehicles for private purpose Some officials require vehicles for performing routine functions and it is only fair that the government provide the vehicles. However, the possibility that these officials will use the official vehicles for private purposes cannot be ruled out. The policy on private use of official vehicles should follow the principles of moderation and transparency. Following basic controls can help proper management of the official vehicles. Basic controls (a) The public entities should issue a comprehensive policy for using official vehicles, clearly setting out that private use of these vehicles is not allowed except when approved in advance by a competent authority. (b) The public entities should avoid procuring cars that appear to be private cars. The makes and sizes of the official vehicles should be such that they are easily distinguished as official, making it difficult for the user to hide the fact that they are riding an official vehicle. There should be other distinctive marks such as a
different color number plate and a bold marking that the vehicle is on an official trip. Such measures would expose the misuse of the official vehicles. (c) While an official vehicle is in private use, only an official driver should drive it. (d) The drivers should be responsible for paying parking fines or penalties for traffic offences. (e) Where authorized to use official vehicles for private purpose, the employee should pay for its use on the basis of mileage covered, including the proportionate wage of the driver and his overtime cost. (f) The public entities should promptly deduct charges for private use of official vehicles from salary of the user. (g) When authorized for private use, there should be a bold signboard on the official vehicle indicating that fact, to save the user from the embarrassment of allegation of misuse. (h) The drivers should be obliged to maintain logbook or trip tickets of the official vehicles, indicating mileage for each trip and its nature, whether official or private. In case of private use, the official using the vehicle should sign the trip ticket or the logbook. 5.3 Overtime expenditure of official drivers The official drivers are generally entitled to overtime if they work more than their duty hours. The public employees who use official vehicles with a driver have the temptation of retaining the driver for longer hours. That suits the drivers as well since they would be able to earn overtime allowance. For controlling expenditure on overtime of drivers, principles of moderation, safety and security of employees and considerations of economy are relevant. Basic controls (a) There should be a maximum daily rate for payment of overtime allowance to drivers. (b) Where drivers are required to attend office on weekends or during holidays, the officials requiring the service should seek prior authorization for such attendance. (c) In case some officials require drivers beyond office hours on most of the days, they should plan their requirement ahead for each coming month, get it approved from their supervisor and submit it to the controlling officer for assignment of the driver beyond the office hours. (d) Depending upon the number of vehicles, staff, and drivers, the possibility of assigning drivers in two shifts may be considered so that the drivers of the second shift take up the job, relieving the first shift drivers, avoiding the payment of overtime allowance to the first shift drivers. 5.4 Using private vehicles for official purpose At times the department may require use of private vehicle owned by an employee for official business. For example, the public official may take his own car for attending a
meeting, receiving a visitor or procuring something for the department. Principles of fairness, economy, efficiency and transparency should guide the policy on this issue. Basic controls (a) There should be clear rules when an employee can use private vehicle for official business. The rules should specify the rates of reimbursement with reference to distance covered. As a matter of general principle, such a provision should be made in the rules only when it is more cost-effective to do so. (b) Where it is deemed economical for the public exchequer to allow employee use of private vehicles for official purpose, the entity should not bear any expenses relating to parking fines or traffic offences. However, routine-parking fee can be a legitimate charge. (c) The claim for reimbursement of charges for using private vehicle should give complete details of the itinerary, distance, and the purpose of the journey. 5.5 Rental of office space owned by public officials Where a public entity likes to hire office space and an employee is the owner of the space, likelihood of conflict of interest increases. The public employee may exploit the situation and burden the public exchequer with unnecessarily higher lease cost. Principles of transparency, economy, safety and security should guide such decisions. Basic controls (a) There should be open competition among suppliers of office space and the department should adopt the least cost option subject to technical evaluation. (b) If an official is submitting his quotation or tender for renting the space, he should not be part of the decision process at any stage. (c) The final approval for renting the space owned by an employee should be given by an authority higher than the owner of the space. The approving authority should be aware of the owner’s relationship with the organization. (d) The terms and conditions of the contract of hiring should, in particular the terms relating to advance rent, increase in rent, periodic repairs and de-hiring of accommodation, be as applicable to any other owner of the space. In no case an exception should be made for an undue favor to the employee of the entity. 5.6 Rental of residential accommodation owned by public officials Sometime the government regulations, as in Pakistan, for example, provide that the government would provide a government-owned house to all employees and if it does not, it will allow them hiring of private accommodation at public expense. Part of this provision may also allow the employees to offer their own houses for lease to the government and then live in those houses as government tenants. Such a provision has roots in the concept of staff welfare as it encourages the staff to build their houses, thus making up the shortage of houses to some extent. Principles of economy, equity, and transparency should guide policy on hiring residential accommodation owned by the employees.
Basic controls (a) The residential accommodations should consist of different categories, specifying entitlement of staff for each category. (b) The government should lay down specifications for each category of accommodation. (c) The rent of each category should be fixed with reference to prevalent rents in the market. Assessment of the market rents should be made on the basis of periodic surveys. (d) In case of self-hiring, the staff member who owns the accommodation should not be part of the hiring process at any stage. (e) The terms and conditions of the contract, especially, those relating to advance rent, routine maintenance and increase in the rent should be standardized and the staff member who owns the accommodation should also be subject to those conditions. No relaxation of terms and conditions should be allowed. 5.7 Expenditure on meals for official visitors and trainees Public entities may have to entertain official visitors. It could range from tea or coffee with biscuits to formal dinners and lunches. Some of this entertainment may be essential due to reasons of reciprocity, building good relationship (like, for example, entertainment by ambassadors, etc), representing the government, showing courtesy or observing protocols. Sometimes tea, coffee, or lunches are also provided to participants of training courses or formal conferences, seminars and workshops to economize on business time. The government departments may also provide lunch or dinner where discussions with private parties may extend beyond meal hours and it is in public interest to continue the business uninterrupted. Expenditure on hospitality has a significant potential for misuse as the government officials may entertain their friends and family members and charge the public exchequer for the expenses. Principles of moderation and conservatism should guide the policy on hospitality and entertainment. Basic controls (a) There should be no provision for tea or coffee at official expense for routine visitors in the office. The entertainment should be related to special occasions and approved by a competent authority. (b) The policy on hospitality should clearly mention the occasions, type of visitors and nature of hospitality. (c) The policy should lay down a scale of maximum expenditure per person for each occasion. (d) The delegation of authority for approving expenditure on hospitality should provide for hierarchy of authorities for different levels of total expenditure. (e) The competent authority for each level of expenditure should approve the proposed expenditure on entertainment in advance. The proposal should clearly mention the need, number of persons, type of entertainment and maximum limit of expenditure.
(f) The expenditure vouchers should have complete details about the persons for whom the expenditure was incurred and the type of food and other stuff provided. (g) Where participants of a training program are provided with lunches or dinners, a suitable adjustment in their per diem entitlement, if applicable, should be made. 5.8 Sale of surplus assets to staff Good property management requires that public entities dispose off obsolete or surplus assets or when the maintenance expenditure on the assets is excessive. The staff of the public entities may have temptation to buy such assets at nominal prices, exposing the entity to financial loss and to public criticism. The public entities should follow principles of transparency, open competition and impartiality while disposing off surplus assets, and in particular to its own employees. Basic controls (a) The assets to be disposed off should be determined through a process of technical evaluation and on the recommendation of a committee and not by a single person. The members of the technical committee should not be entitled to buy these assets. (b) Value of the assets should be determined through an open competitive process, where possible. In case, the process of open tendering is more expensive or cumbersome, the value should be determined by a committee in light of depreciated value, recurring maintenance cost, replacement cost and other allied issues such as safety and security of staff. Once the value of the asset has been determined, the staff member purchasing the asset should not get any discount in the price. (c) The person offering to purchase an asset should not be part of the decisionmaking process at any stage. Alternatively, those who are part of the decisionmaking process should not be allowed to purchase the asset in any case. 5.9 Loyalty reward schemes and benefits announced by vendors and suppliers The procurement staff may come across certain rewards or benefits offered by suppliers for goods and services purchased for the public entity. These could be in the form of future discounts, gifts by vendors, free tickets for excursions, subscription to exclusive clubs, etc. As a matter of principle, such rewards and benefits should accrue to the public entity that paid for the procurement. However, it is quite easy for the procurement staff to avail of such benefits without declaring it. The public entities may thus be deprived of certain benefits besides exposing the public entity to criticism. Basic controls (a) The policy on rewards and benefits should lay down monetary limits for acceptance of such rewards by the public employees. It should specifically notify the types of rewards and benefits, which must be declared by the public employees and made available to the public entity.
(b) In case of personal rewards, such as free excursion tickets, the policy of the organization should establish some merit list for distributing such rewards so that a particular group does not monopolize them. (c) The public entities should advise the vendors to make the rewards and benefits available to the entity administration for deciding about who will get it rather than offer them to the procurement staff only. 5.10 Private use of official assets (other than vehicles) The public employees have access to various types of public assets such as vehicles, telephones, Internet, photocopiers, office stationery, etc. As everyday users of these assets and because they are so many and dispersed so widely, it is quite difficult to restrain the public employees from using these assets for private purposes. The very nature of these assets exposes the public entity some unavoidable risk of misuse. Devising a foolproof system of misuse could be expensive and counterproductive. Therefore, all public entities allow the private use of these assets within certain limits. It is possible that the public entities may not make a clear announcement about their tolerance of misuse to a certain extent to forestall a completely lax atmosphere. But in most of the cases, such public assets are prone to some misuse. The public entities should formulate clear policy on the private use of the public assets. In doing so, they should be guided by principles of moderation and transparency. Basic controls (a) The public entities should clearly define the extent and limit of private use of the public assets. (b) The public officials should pay fair cost of using public assets until it is uneconomical to calculate this cost. (c) The cost for the use of public assets should be recovered promptly from the salaries of the public employees. (d) In no case should a public employee be able to use a public asset in his or her private business. 5.11 Official use of private assets (other than vehicles) The public entities may use private assets for official use where it is uneconomical for the entity to acquire its own asset. For example, the entity may direct an employee to perform some official function by using his or her computer, photocopier, telephone or Internet facility. The likelihood of compensating a public employee for use of his or her assets improperly, while the government assets were available or could be made available at lower cost makes such expenses sensitive. In such situations, the guiding principles are economy, impartiality and transparency. We have discussed above the use of private vehicles for official use. Basic controls for other assets could be as follows: Basic controls (a) There should be unambiguous justification for allowing an individual to use his or her private asset for public business.
(b) The rates and scales of expenses should be predetermined and approved in advance. (c) The person providing the asset should not approve its use. (d) The entity should keep a record of such use of assets for future planning. 5.12 Use of official suppliers for private purchases The staff of public entity may be able to avail of the same terms and conditions that are available to the entity and that are preferential as compared to the general public for procuring their private goods and services from the suppliers of the entity. The risk in such situations is that the staff may be tempted to prefer the existing suppliers for future official procurement to other suppliers. It could be uneconomical to the entity in the long run. The principles of transparency and moderation should guide public policy on this matter. Basic controls (a) The public employees should have a limited access to official suppliers. The entity should prescribe quantitative or monetary limits for each staff member for preferential purchasing, with explicit provision to exclude other family members and friends from the privileged purchases. (b) All future procurement decisions should be meticulously monitored to ensure that open competition is not compromised in favor of the current supplier. 5.13 Efficiency honorarium, bonuses, rewards and special compensations to staff The government may have a policy of providing incentives to exceptionally hard working personnel in the form of efficiency honorarium, bonus or special compensation. Such a policy is conducive to higher productivity. Principles of objectivity, fairness, transparency and moderation are relevant for such incentives. Basic controls (a) The reward, honorarium or compensation should be for well-defined tasks, which are over and above the routine functions of the staff member. (b) Amount of the reward should be settled and approved in advance. (c) There should be no discrimination while disbursing the award among staff members. All staff members doing a similar contribution should get a similar award. (d) Amount of the award should be moderate and have relevance to the staff member’s regular emoluments. (e) While making the payment, the approving authority should certify that the staff members worked for longer hours, the work performed was of exceptional nature and that the work was satisfactory. 5.14 Speaking honoraria at official training sessions, workshops and conferences There could be a policy for compensating the staff members for undertaking speaking assignments in official seminars, workshops or training program. The objective,
usually, is to benefit from the expertise of the field staff in disseminating knowledge and for training other staff members. Considerations of economy, fairness and transparency should guide the policy on the subject. Basic controls (a) The assignment should have approval of supervisor of the speaker. While approving the assignment, the supervisor should certify that the official performance of the staff member would not be affected by the assignment. (b) The subject of lecture and the objectives of the moot should be relevant to the official job of the speaker. (c) The rates of compensation should be pre-determined and approved in advance. (d) There should be an upper limit of the time per month that a staff member can devote to such activities. 5.15 Staff welfare: clothing and grooming Some official jobs require staff members to wear uniforms and official logos. Some jobs may also require certain type of haircuts. Except where it is in the interest of the public entity, the staff members should pay for the clothing and grooming expenses. Where it is essential to do so at public expense, the expenditure should be moderate and standardized. 5.16 Caring for dependents It is the responsibility of staff members to take care of their dependents. In normal circumstances, public exchequer should not pay for caring of staff members’ dependents. Abnormal circumstances could include where a staff member is asked to perform certain exceptional duties without prior notice and over and above his or her normal working hours. In such situations, the rates of compensation should be predetermined. A competent authority should also approve the arrangement in advance. 5.17 Financing activities of social clubs Some public entities set up social clubs for their employees. The objective is to provide the staff opportunities for meeting and interacting with their colleagues in a free and frank atmosphere. It is generally understood that such clubs enhance the welfare of the staff and cement team-relationships. The public entities usually make a lump sum contribution for the activities of the club. Such contributions should be moderate. There should be some arrangement of overseeing and auditing the actual expenditure from this grant. 5.18 Paying for newspapers and magazines at staff residences The nature of job of some public employees is such that they have to remain abreast of the current news and press reports. The public entity may arrange to pay for cost of the newspapers and magazines, which can also be delivered at their residences. The guiding principles are moderation and necessity for the performance of the job. Prescribing the number of newspapers and magazine for each employee can control the expenditure on newspapers and magazines.
5.19 Farewell parties and retirement gifts The employees themselves should normally pay for farewell parties and retirement gifts. The public exchequer should not pay for it, irrespective of the level of the person retiring. 5.20 Sponsorship of sporting or other social events Public entities may have a policy to sponsor a sporting or social event in the interest of a justifiable business purpose, publicity for the entity’s performance, marketing of entity’s products and services or organizational development. In principle, expenditure on such sponsorship should be moderate and paid to some organization or social club rather than an individual. 5.21 Donations for charitable purposes Public entities may also decide to make a donation for charitable purposes, not directly related to the principle business of the entity. The donation should be made to known organizations engaged in acts of public welfare, have a reputation of honesty and social service, and are apolitical in nature. The expenditure on such accounts should remain moderate. 5.22 Gifts The public entities may give gifts for enhancing the business purpose. The expenditure on gifts should be moderate and pre-approved.
6. Role of Audit in Controlling Sensitive Expenditure 6.1 Audit objective The objective in the audit of sensitive expenditure is to ensure that the public entity under audit has effective and reliable internal controls in place for managing the sensitive expenditure. 6.2 Audit scope and methodology The audit would cover expenditure as are normally considered to be sensitive such as travel, use of official vehicles, hospitality and entertainment, use of official assets for public use, official use of public assets, and various types of welfare expenditures, honoraria, donations, and gifts. These expenses pose risks of conflict of interest, extravagance, abuse of powers and reputation risk due to their visibility. The auditors would review the sensitive expenditure in light of applicable rules, regulations and procedures. However, they would be guided by the generally accepted principles of moderation, conservatism, impartiality, integrity, transparency, fairness and objectivity. During audit other sensitive expenses may come to the notice of auditors, leading to the extension of audit scope. 6.3 Review of internal controls and assessing their effectiveness Tone at the top The auditors should assess the control environments to have a clear view of the tone at the top. It requires looking into such documents as mission statements, code of conduct, frequency of reminders about the code of conduct, general reputation of the senior
management in following the internal controls and training courses for the staff in corporate ethics. The objective is to assess the likelihood of management override of internal controls. In case, the tone at the top is relaxed, evaluation of rest of the controls should be more rigorous. Understanding the internal controls The auditors should try to understand the internal controls applicable to sensitive payments through study of basic documents and interviews of key personnel. The auditors should have a clear grasp of the procedures for planning, approving, paying and recording various transactions. The auditors should: (a) Obtain documents relating to regulations, rules, procedures and controls relating to sensitive expenditure. (b) Get awareness about any changes made in the regulations, rules and procedures since implemented. (c) Identify key personnel in the approval process of the sensitive expenditure. (d) Acquaint themselves with the entity’s monitoring procedure regarding compliance with internal controls. They should also identify the follow-up actions for noncompliance and abuse of the procedures. (e) Enlist the types of sensitive expenditure mostly in vogue in the entity with broad information about their quantum. Assessing control effectiveness The auditors should undertake the following procedure: (a) Select a random sample of transactions for each type of sensitive expenditure. (b) Determine through a process of observation, inquiry, and inspection that the applicable controls are being applied at each stage. (c) Identify the areas where the controls have been missing or weak. (d) Discuss such cases with concerned employees to confirm the understanding and the findings. (e) Undertake additional procedures for verifying that the instances where internal procedures were either missing or weak did not have the effect of abuse, waste, fraud or corruption. The auditors should remain alert to the fact that noncompliance with a procedure does not necessarily mean abuse of authority or corruption. Abuse of authority or corruption is usually a hidden fact and cannot be documented. The auditors can, at best, point out the possibility of such a happening without accusing anyone. 6.4 Reporting results of audit The audit report should adopt the standard reporting format in which audit finding is divided into following segments. For sake of brevity we are not elaborating these segments. Also, this is quite familiar to the auditors. :
• • • • •
Conditions: what are facts? Criteria: what did the auditors expect to see in light of applicable regulations, rules, and procedures? Cause: why it happened? Effect: what is the effect or likely effect of the finding? Recommendation: what should be done now?
The auditors should discuss the findings, primarily, with the officials dealing with particular transactions. At a secondary level, they should bring those findings to the notice of senior management. The auditors should modify their findings in light of these discussions and issue the draft audit report for a formal reply by the management. They should prepare the final audit report after incorporating the management reply, modifying the report if they agree with the management.
7. Concluding Remarks The paper has discussed the nature of sensitive expenses, which may have the effect, or appearance of providing some private benefit to public employees while performing public functions. The paper discusses the generally accepted principles relating to sensitive expenditure and the responsibilities of senior management for controlling it. The substantive part of the paper discusses the principles and general controls applicable to each type of sensitive expenditure. The main stance of the paper is that control of sensitive expenditure is primarily the responsibility of the management. However, auditors can play a significant role in ensuring that all tiers of staff are applying the internal controls devised by the management. The fact that the auditors are supposed to be independent of the management and are detached from decision making on the subject, they can be effective in controlling sensitive expenditure. Audit of sensitive expenditure follows the standard auditing methodology. However, the auditors need to be aware of the applicable controls and procedures. While doing so they should look at the underlying principles and the rationale for the internal controls. In the final analysis, principles and not the procedures should be auditors’ guide. Secondly, in case of sensitive expenditure, the auditors need to be overly vigilant about the possibility of management over-ride of internal controls because, most of the decisions on sensitive expenditure have the approval of the senior management, who would like to suppress the matter under the guise of authority or discretion. Where the auditors feel that the expenditure is significantly excessive than the occasion demands, they should discuss the matter with the senior management and report it if they are not satisfied by the explanation.
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