Definition of ACCOUNTABILITY: the quality or state of being accountable; especially: an obligation or willingness to accept responsibility or to account for one's actions <public officials lacking accountability>
Term stability Definition: Limiting macroeconomic fluctuations in prices, employment, and production. This is one of the five economic goals, specifically one of the three macro goals (the other two are economic growth and full employment). One primary focus of this stability goal is to keep inflation in check. High or unpredictable inflation rates can cause uncertainty and haphazardly redistribute income and wealth.
Accountability
Accountability is fundamental to good governance. Accountability is the process that allows people to measure and verify the performance of government. Financial accountability is a critical component of accountable government. It involves legislative control of the executive through budgets and accounts. Weaknesses in financial accountability are generally linked to weaknesses in public accounting, expenditure control, cash management, auditing and the management of financial records. An enhanced level of control over financial management is vital for all governments to maintain their commitment to their citizens.
Aims and Outcomes
Aims
This module has seven primary aims. These are
1. To explain the importance of good record keeping for efficient and effective financial management
2. To outline the role and importance of stakeholders in financial records management
3. To explain the business functions and processes of financial management, in relation to the records generated
4. To examine the information systems and records created by financial management
5. To outline how to manage financial records in a mixed paper/electronic records environment
6. To introduce the concepts involved with integrated financial management systems
7. To explain where to go for more information.
Outcomes
When you have completed this module, you will be able to
8. understand the importance of good record keeping for efficient and effective financial management
9. appreciate the role and importance of stakeholders in financial records management
10. understand the business functions and processes of financial management, in relation to the records generated
11. understand the information systems and records created by financial management
12. know how to manage financial records in a mixed paper/electronic records environment
13. understand the basic concepts involved with integrated financial management systems
14. know where to go for more information.
Ensuring Resources are matched to Objectives
Financial management ensures that money is allocated in accordance with the government’s strategic priorities. This is achieved by controlling the budget approved by the legislature and is reinforced by the publication of audited accounts of what was actually spent.
Efficiency
Public sector financial management has been the focus of increasing attention in recent years. Reductions in public expenditure have pressured public authorities to maintain services with less money. To achieve cuts, financial managers have had to improve their financial analysis as a basis for improving efficiency and value for money.
Traditionally, financial management in government has focused on controlling expenditure; the main emphasis has been on keeping public spending down in order to minimize borrowing. However, private sector financial management techniques have increasingly been imported into the public sector. For example the National Audit Office may carry out ‘value for money’ audits, which look beyond whether the money was spent according to the government’s financial regulations to whether the public is getting an economic, efficient and effective service. In other words, financial systems in government are changing from systems designed to keep the government from spending too much to systems that ensure the government makes the best use of resources.
Economic Stability
Every modern government needs to define an economic policy and then manage its economy according to that policy. Much of a country’s economy depends upon the private sector, but it can also be influenced by the government’s fiscal policies, interest rates and regulatory environment.
Government itself is a major component of a nation’s economy. Public sector borrowing and expenditure have an impact on the stability of the overall economy. Governments can improve their capacity to manage the economy by introducing reforms of the treasury, budget preparation and approval procedures. Reforms can also be made in tax administration, accounting and audit mechanisms, central bank operations and the preparation of official statistics. These reforms will help ensure the government manages its finances well and contributes to the overall stability of the nation.
Changing approaches to financial management
Records managers need to stay abreast of changing trends in financial management. Changes to financial management processes will inevitably affect the information systems needed to support them and the records generated by them. Each country will have different experiences with financial management, as the country’s own financial circumstances and political and cultural factors will create different requirements. The most successful systems are those that have been tailored to meet specific country needs.
Various approaches to financial management have been designed and tested in recent years. The recent trend is to move the focus away from measuring inputs toward measuring outputs: that is, to focus less on how much money has been spent on what product and more on whether the work performed has been useful. Public sector financial management is increasingly seen as a tool to enable management to discharge its responsibilities more efficiently and effectively. These trends are revolutionising government accounting practices, standards and reporting systems.
For example, the changing perspective in financial management has led to changes in the process of budgeting. There are now several different methods of budgeting, including the following.
· Line item budgeting lists expenditures for the coming year according to objects of expenditure, or ‘line’ items. These budgets specify how much money a particular agency is permitted to spend on personnel, fringe benefits, travel, equipment, and so on.
· Performance budgeting divides proposed expenditures into activities and relates the activity to cost. This method allows the budget to be built on the basis of anticipated workload rather than incrementally, as in traditional line-item budgeting.
· Programme budgeting focuses on budgetary choices among competing policies and treats the different budget objectives as variable.
· Zero-based budgeting arrives at a budget by literally starting from scratch. At the national level, this would require answering such questions as ‘what if we did not have an army?’ or ‘what if national insurance did not exist?’ This has not proved useful as an annual budget tool.
As governments develop more business-type functions and operate services on a commercial basis, the public sector is adopting features of private sector accounting. For example there is a move from cash accounting to accruals accounting.
· Cash accounting includes only the transactions that actually take place within the period covered by the account.
· Accruals accounting reflects all the financial transactions proper to the period of the account, regardless of whether the account has actually been paid during that time.
Cash accounting is traditional in central government. Under this system, receipts and payments are recognised only when cash is received or paid. The emphasis is on the objects and purposes for which funds have been received and paid out during a particular period. Cash accounting is also used when the system lacks enough sophistication to implement accruals accounting and the benefits of changing methods do not justify the costs involved.
Accruals accounting recognises transactions when they occur, irrespective of when cash is paid or received. Transactions are recorded in the accounting record and reported in the financial statements of the period in which the service was received (expenditure) or rendered (revenue).
Financial statements prepared on an accrual basis indicate past transactions involving payment and receipt of cash, as well as future obligations to pay and payments to be received in the future. This method facilitates economic decision making, by making it easier to account for the use of resources, focus on performance and measure outputs.
Financial Management and Records
Financial management systems provide decision makers and public sector managers with the means to
· control spending
· prioritise expenditures in order to allocate resources efficiently and equitably
· make better use of budgeted resources to achieve outcomes and produce outputs at the lowest possible cost.
All financial management systems create records, and all financial systems depend upon records.
The ways in which these records contribute to financial management are described below.
Accountability and Control
Records management reinforces financial management controls and supports accountability. The ability to establish who did what, when, why and how is a powerful means of deterring individuals from engaging in fraud or corruption, thus enforcing accountability. Well-managed records provide an unbiased account of responsibility and liability. Authentic, reliable records provide an unambiguous link between the authorisation to carry out a transaction, the particular individual concerned and the date. Thus records can identify abuse, misuse and non-compliance with financial instructions.
Financial management also depends upon a system of internal controls that make it possible to carry out business in an orderly and efficient manner, ensure adherence to management policies and safeguard assets. The management of financial records is a critical component of this control system. Where financial records are not controlled, their completeness and accuracy cannot be guaranteed. Records needed for reference, decision making and risk assessment can become difficult to access.
The senior official responsible for accounting, such as the Accountant General, normally issues detailed regulations for the control of financial management systems. In other countries such as Zimbabwe
In turn, these controls help to ensure that the records themselves retain their context, structure and content. In countries operating the Exchequer system of financial management, there is no Accountant General. Instead, each ministry maintains their own bank accounts and is responsible for their own accounting systems. The Exchequer system allows for a greater range of diversity of practice than the more centralised approach represented by the Accountant General system. In the Exchequer system, the Permanent Secretary to the Treasury is usually responsible for issuing general regulations where needed.
The aim of a records management programme should be to ensure that those records that provide evidence of financial management activity are systematically controlled throughout the organisation.
Accounting and Auditing
Records management also supports the accounting function and enables the audit function. Financial record keeping provides the basis or foundation for accounting and introduces controls that protect essential audit trails. At the most practical level, if records are disorganised, it will take auditors an excessive amount of time to locate needed documents, if they can find them at all. Individuals guilty of embezzlement may deliberately allow financial records to become disorganised or to be stored in unsuitable conditions because this makes it harder for auditors to identify fraud. Conversely, in some cases government officers have been inappropriately accused of embezzling funds simply because the documents authorising the expenditure could not be located. Well-organised and well-managed records are essential to combat economic crime and protect the innocent.
A financial records management programme should enable the physical and logical control of records and prevent unauthorised access, tampering, loss or destruction, whether intentional or accidental. Records management should contribute a layer of security and reassurance that operations are functioning at the level required.
Taken together, records management, accounting and auditing provide the layers of control that are essential to ensuring transparency, probity and integrity in financial management systems. Although in reality records management is integrally connected to accounting and auditing, their interface is illustrated below in a simple fashion.
Figure 1: The Financial Accountability Cycle
Management Issues
In many respects, financial records are similar to other kinds of administrative records, and thus many of the professional principles and practices described in other modules in this study programme are applicable. However, financial records also have unique features that require attention.
Financial record-keeping systems in government are so large and pervasive that changes to the system will need support at a senior level. Moreover, because financial management systems are subject to accounting and auditing standards and are under the close control and scrutiny of government financial officers, it is essential that records managers gain the support of senior managers and other stakeholders in order to provide an effective financial records management service.
It is the record managers’ job to understand how records management can contribute to the organisation’s financial management objectives and to articulate the case for efficient records management in terms that senior management can understand. Therefore, records managers must understand the unique qualities of financial records and the effect of good or poor financial records management on the government or organisation.
The Volume, Scope and Complexity of Financial Records
Financial records are voluminous. The records of financial transactions are one of the largest categories of records found in government. The benefit of managing these records translates into large savings in office space. Most of these records need to be kept for relatively short periods of time (often only 6 or 7 years, depending upon the relevant legislation), but during that time they are vital for controlling fraud and corruption. Records related to financial policy are smaller in volume compared to records of transactions, but policy records are very important for the process of developing and then executing policies. These records can be of considerable historical significance and need to be identified by as having archival value.
Further, financial records are found everywhere. Every aspect of government involves expenditure and thus requires financial management, which in turn generates records. These records need managing across the entire spectrum of government.
Moreover, financial management systems are complex. The scale of financial management and its importance to government has led to the development of a complex and inter-related set of functions and systems including budgeting, accounting, forecasting, purchasing and payroll. The range of controls and regulators (for instance internal audit, external audit) are also complex. Records managers must understand the basic principles involved with financial management in order to be credible when working with financial managers. Records managers must also understand financial management in order to analyse and appraise the records.
Financial Records and Accountability
Records are essential for financial accountability. Records provide a reliable, legally verifiable source of evidence of decisions and actions about the management of government finance and are the basis for determining responsibility. They are a powerful tool in constraining individuals from engaging in corruption. But if financial records management systems are weak, public servants cannot be held accountable for their decisions and actions. Fraud and corruption will flourish. Records management is a cost-effective restraint. If corrupt officials know that there is an audit trail, they are less likely to take the risk. Conversely, a clear audit trail can protect the innocent from false accusations. Where the ultimate sanction of prosecution is appropriate, lawyers will rely heavily upon records to provide the evidence.
However, records management controls are often missing in government financial control systems. The organisation’s financial instructions and the accounting manual will specify rules for the security and use of financial records. However, these documents tend not to prescribe rules for the management of records. At the same time, financial records are usually outside the jurisdiction of the organisation’s records manager. As a result, this vital resource is not managed or controlled adequately. Failure to manage records can lead to the build up of unwanted records, overcrowding and disorganisation. This will make it very difficult to retrieve and use financial records efficiently and to carry out the audit process.
Regulatory Requirements and Financial Records
Financial records should be subject to tight regulation and control. Financial records are usually subject to legislation that forbids their destruction for a set period of years after the accounts have been audited. Failure to observe these requirements could lead to prosecution. The legal framework affecting financial records comprises the constitution, which may provide for the supervision and audit of public accounts, and laws relating to finance, audit and government records. Finance and audit laws generally require ministries, departments and agencies to ensure that financial and accounting records are adequately kept and managed. They also empower the audit body to obtain access to all financial records.
Other legislation enacted in support of government functions may also give rise to financial records or specify conditions for their maintenance, use or disposal. For example, pensions legislation imposes an obligation on departments to maintain records of contributions. Revenue laws may indicate a time limit on the recovery of tax or duties, thereby establishing a minimum period for the retention of revenue files. Subsidiary requirements such as accounting instructions and financial regulations are frequently promulgated under powers conferred by a main law, such as a finance act. These subsidiary requirements lay down more detailed conditions and requirements for accounting and financial records, including their creation, filing, storage, production and disposal.
Financial Records and Computers
Financial records are increasingly created using computers. Financial functions are usually among the first to be automated. Most countries have automated payroll systems and many have automated budget and accounting systems. In some countries the entire financial management function has been incorporated into a single automated integrated financial management system. Financial records are often the first electronic records that records managers are likely to encounter.
With the increasing use of electronic technologies, record keeping is becoming technically more complex. Although the fundamental principles for keeping records in an electronic environment are more or less the same as in a paper environment, the skills required to manage them may be different. Records professionals and information technology (IT) specialists need to co-operate closely. This may require the creation of a specialised electronic records unit within the National Archives. The unit will require specialised equipment and an enhanced set of professional capacities.
There are few precedents that address the admissibility of computer records in a court of law. Where computer evidence has been submitted in legal cases the courts have taken into account expert evidence on the effectiveness of the IT control environment before assessing the reliability of the computer data. Computerised transactions or images of documents may be inadmissible as legal evidence unless controls can be shown to be so strong as to remove reasonable doubt about the authenticity and integrity of data held by the system. Some of these controls are recorded on paper. It is therefore important that both the electronic records and the paper records that document the control environment are managed properly.
Creating an enabling environment will enhance the success of records management programmes. Institutions need to promote an environment which will encourage the better maintenance and use of records systems. Senior management should support an agenda for the future that includes
· developing a culture for creating, maintaining and using records
· strengthening the role of records management and records managers within an institution
· identifying and strengthening records legislation
· defining and implementing records related standards
· developing tools to assess the vulnerability of records systems to corruption and fraud
The Need for Financial Records Management
Financial records tend to be excluded from the records management process. Despite the fact that financial records are covered under the broad legislation governing the management of government records and archives, financial records tend to be stored separately from other records and even excluded from the jurisdiction of the records manager. In this situation, the volume of records may grow uncontrolled until is exceeds the space available to store it. Then the systems to control and retrieve the records will break down.
The breakdown of financial systems are often related to the breakdown in records management. People rarely make the link between problems in financial management and inadequacies in the way records are managed, yet records are the source of all the information used in financial management systems. If records become so disorganised that it is difficult or impossible to audit properly, the long-term effect will be that fraud or errors will not be detected or corrected.
When a system of financial management breaks down, the consequences are serious. Typical symptoms include the following.
· Monitoring systems are inadequate and information is difficult to access.
· Votes ledgers are not kept properly, and an important tool for expenditure control is lost.
· Accounts are not produced on time, rendering them of limited value for expenditure control and monitoring.
· The audit process is ineffective.
Summary
This lesson introduces the concept of financial management and explains its importance to government for
· accountability
· ensuring resources are matched to objectives
· efficiency
· economic stability.
Approaches to financial management change over time, and their success depends upon access to information. Reliable information is ultimately derived from accurate and complete records. It is not enough simply to change approaches to financial management systems without giving attention to information systems. It is essential that records managers understand the functions and processes that the records document so that they can ensure that records systems remain appropriate and effective. This lesson has discussed those changing approaches to financial management, and it has examined the relationship between financial management and records.
It has also considered the senior management issues involved in financial records management, emphasising the importance of securing senior management support for the involvement of records managers in financial records care. The issues examined include
· the volume, scope and complexity of financial records
· financial records and accountability
· regulatory requirements and financial records
· financial records and electronic technologies
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