1. ACCOUNTABILITY CAPACITY
REMARKS AT ICGFM 25th ANNUAL CONFERENCE
MAY 18, 2011 MIAMI
Larry McDonald
Deputy Assistant Secretary for Technical Assistance Policy
U.S. Treasury Department
It is a pleasure to be here for the ICGFM 25th Annual Conference and to reconnect with a number
of friends from the ICGFM family. The last time I was here was in May of 2006 for the 20th
anniversary conference. I am glad to see that ICGFM is still going strong, and by all
appearances stronger than ever. That is a credit to your leadership team, and a testament to the
importance of the issues that you deal with.
The theme that you have chosen for this year’s conference: “Achieving Real Accountability” is
an important and timely subject. And, as the second part of the conference theme suggests, the
emergence of multiple stakeholders has generated both opportunities and challenges.
There are many dimensions to this theme. Other presentations have considered, for example, the
importance of budget transparency, public outreach, and interaction with the media. In my
remarks, I would like to explore the notion of “accountability capacity” in public finance, which
I would define as the ability to receive, manage, expend, and report on the use of funds with
minimal losses and in accordance with an agreed, legitimate plan.
The basic premise of my remarks is that capacity is one of the factors that influences whether a
government achieves real accountability in the area of public finance. Of course, there are other
important elements of accountability, such as timely and equal access to information, a system of
internal and external checks and balances, penalties for non-accountability, and building a
professional institutional culture in which accountability becomes the norm -- almost a habit.
Capacity is by no means the only thing, but it is an important thing.
Capacity is important not only for public finance institutions themselves. It also influences the
quality of interaction between a government and its various stakeholders – citizens, civil society,
the media, donors – all of whom have a legitimate interest in public finance accountability.
Making information available to the public about the government’s finances is necessary but not
sufficient for real accountability. Meeting with the various groups that have equities in public
finance is necessary but not sufficient for real accountability. The benefits of information and
interaction depend, in part, on the capacity of all stakeholders to use information and interaction
well.
In my remarks I will first make a few general observations about the current international
environment and how it affects expectations about accountability in public finance. Then I will
focus on one dimension of the accountability balancing act between governments and
stakeholders – the relationship between governments and donors. Finally, I will briefly discuss
the activities of the organization that I oversee as they relate to building accountability capacity.
2. General Observations
I think it’s safe to say that accountability in public finance is always in vogue. Has there ever
been a time when the public purse was so full that people were indifferent to accountability? But
for a number of reasons, expectations about accountability are now higher than ever. Why?
First, the international financial crisis has led to tight money (both public and private), smaller
aid budgets, greater scrutiny by formal and informal “watchdogs”, and a general sense that
government finance managers have to make every dollar, dinar and peso count – whether the
money has been generated domestically or comes in the form of assistance from abroad.
Second, the call for donors to direct more foreign assistance through country systems rather than
going around country systems, as laid out in the Paris Declaration, has gained momentum. This
is a very positive development. At the same time, this development has been accompanied by
greater donor expectations that aid recipient countries will build their capacity to manage such
assistance well and accountably. I will return to this topic later.
Third, the emergence of new stakeholders equipped with new technologies that allow them to
interact with other networks of stakeholders, even internationally, has in some respects
fundamentally changed the landscape of expectations about public finance and indeed
governance. It’s no longer enough to merely publish the budget and occasionally have an
outreach meeting with one group or another. Now stakeholders expect regular, meaningful
interaction. Sometimes, as recent events in some parts of the world have shown, they even want
a change in government. Those events have to do with issues that go beyond the subject of
public finance accountability, but such accountability is a part of the story.
The Donor – Aid Recipient Balancing Act
For countries that receive foreign assistance, one of the most important dimensions of the
accountability balancing act is the relationship between the government and donors.
In recent years, discussions about aid effectiveness have devoted greater attention to the benefits
of providing assistance through the government institutions of recipient countries. By-passing
the state can weaken government capacity, effectiveness, and legitimacy, and can foster aid
dependency. At the same time, donors have doubts about the accountability of counterpart
government institutions. Aid recipients, in turn, have challenged donors to identify the specific
reforms and systems improvements that donors need to see in order to direct more assistance
through government systems. Sometimes this becomes a bit of a dance with one side saying “tell
us what you need to see” and the other side saying “we’ll know it when we see it.”
A country where donors and the government are making a concerted effort to direct more
assistance through government systems is Afghanistan. At the January 2010 London
Conference, the U.S. and other conference participants indicated they would increase the
proportion of development aid delivered through the Government of Afghanistan to 50% in the
next two years. However, donors noted that their support for the 50% goal was conditional on
the Afghan Government making progress in strengthening public financial management systems,
improving budget execution, and reducing corruption.
3. In an effort to accelerate this process, the Afghan authorities proposed the creation of a
standardized methodology for assessing and certifying the financial management capacity of
Afghan ministries. The Afghan proposal foresaw that donors and Afghans would jointly assess
and certify ministries. Ministries certified through this process would need to demonstrate their
ability to meet robust financial management and accountability standards. Under the Afghan
proposal, where Ministries did not achieve the standards necessary for certification, technical
assistance would be provided to build capacity.
What has come of this effort? Broadly, the share of donor assistance through Afghan
government systems has increased, but the proposal to jointly assess and certify ministries has
encountered a number of issues. Three issues stand out.
First, there is not a shared understanding of what is meant by providing assistance “through
the government.” Donors and counterparts use a range of terms loosely and interchangeably,
such as “assistance through government institutions,” “assistance reflected in the budget,” and
“direct budget support.” Each of these terms has different nuances and possible interpretations.
Moreover, these terms cover a broad spectrum of assistance interventions that can entail either
very little or a great deal of interaction with government systems. At one end of the spectrum, a
donor may simply reimburse a counterpart government for the government’s purchase of goods
for a project that was designed by the donor and implemented by an NGO. That scenario entails
minimal interaction with government systems. At the other end of the spectrum is cash budget
support to be used entirely as the authorities see fit. In the middle would be, for example, ninety
days forward funding for a project that is mutually developed by the donor and counterpart, in
which the government procures project-related goods and services using the government’s own
procurement systems.
Should all of these examples count equally towards the goal of increasing donor assistance
through the government?
Second, there is not a shared understanding of which aspects of a government’s financial
management and accountability system are most relevant to providing assistance through the
government. As you know, government financial management covers a broad range of systems
and processes for generating revenue, receiving external assistance (whether financial or in-
kind), framing and executing the national budget and ministry expenditure plans, procuring
goods and services, monitoring the outcome and effectiveness of government expenditures, and
so on.
All of these systems and processes are important, but are they equally important for assuring
donors that they can safely provide assistance through a government’s systems? In my view, and
in the experience of Treasury’s technical assistance program, the most important aspects of a
government’s financial management system for achieving accountability in the eyes of the donor
4. community are those that come under the rubric of internal controls. Such controls consist of a
number of management principles – for example, segregation of duties, policies and procedures;
authorization and approval; review and monitoring -- that are applied across a range of financial
management areas, such as payment of salaries and procurement.
Taken together, these controls constitute the “center of gravity” for a government’s financial
accountability system. They should be the focus of ministry assessments to determine strengths,
weaknesses, degree of risk (material or immaterial) in the system, and to inform donor judgments
about whether and in what way to deliver assistance “through the government.”
Third, the notions of “joint donor/recipient assessments” and “certification” are fraught with
difficulties. It has proven impractical to set up assessment teams comprised of experts from a
variety of bilateral donors as each donor has its own set of stakeholders back home with its own
expectations and comfort level about direct assistance. Including officials from the aid recipient
government in assessment teams poses problems. To state the obvious, they have a vested
interest in the outcome.
The notion of “certification” is also problematic. It implies an “all or nothing” determination. In
my view, it would be more useful to adopt a risk-based approach, such as that used by
professional auditors whose findings focus on identifying strengths and weaknesses in a system,
and distinguishing between acceptable and material risk. There will always be some risk.
Rather than presenting a finding of “certified” or “not certified,” assessments should inform the
judgment of donors about how to structure their engagements with a particular government or
ministry. In addition, risk-based evaluations would help donors and counterparts plan and
prioritize capacity building efforts.
To summarize, in circumstances where an aid recipient government chooses to proactively
undergo a process of assessing the capacity of its public financial management systems in order
to encourage donors to direct more assistance through the government, the following
considerations suggest themselves:
(1) ministry assessments should take the form of audits focused on internal controls;
(2) audits should be conducted by a reputable third party specialized in audits, for example a
private firm, international organization, or professional peer group; and
(3) audits should not produce “certifications” but rather risk-based analyses of ministry systems
that would inform donor decisions about whether and how to provide assistance through the
government.
An example of a basic, notional template that could be used for an audit of internal controls is
attached to my remarks.
Building Accountability Capacity
5. Building capacity to achieve real accountability in public financial management is a challenge
even when the focus is entirely on governments. The challenge is greater when the effort is
broadened to include multiple stakeholders.
The U.S. Treasury Department program that I oversee provides technical assistance to public
financial institutions in developing and transition countries around the world. Our main partners
are finance ministries and central banks. We provide assistance in a number of areas directly
related to public financial management, such as budget formulation and execution, tax
administration, debt management, cash management, internal controls and internal audit. In our
engagements we attempt to go beyond knowledge transfer and systems upgrades. Part of our
goal is to help our counterparts develop professional, institutional cultures in which
accountability is the norm. We do this through multi-year engagements in which we work side-
by-side with our counterparts.
We very much recognize the importance of other stakeholders in sound public finance –
parliaments, citizens, civil society groups, the media, academia -- and encourage meaningful
interaction between them and the government. Not infrequently, we provide technical assistance
to parliamentary committees that are responsible for budget and finance. We strongly believe
that a well-informed interaction between the executive and parliamentary branches of
government is in everyone’s interest. We support projects to make the budget more transparent
and understandable to the public. In our work with central banks and specialized institutions
such as financial intelligence units we support projects that strengthen the capacity of private
financial institutions to play their role in strengthening the financial sector.
In my travels, in addition to meeting with the Treasury Department’s finance ministry and
central bank collaborators, I typically meet with private sector groups, think tanks, the media,
parliament and academia. It is instructive and sometimes quite eye-opening to hear the different
perspectives on how public finance is managed. The most common theme, no matter which
group I’m talking to, is “They don’t get it.” The finance ministry’s description of the relevant
committees in parliament is “They don’t get it.” The private sector’s description of the public
sector: “They don’t get it.” The perspective that civil society groups have of both the public and
private sector: “They don’t get.”
Sometimes the phrase “They don’t get it” really means “They don’t agree with me.” To an
extent, that is normal when you are dealing with difficult, complex issues on which people can
reasonably disagree. But I also believe that the potential for un-reasoned disagreement is greater
when the capacity among various stakeholders is very different. As our conference materials put
it: “Governments must strive to listen to the voices of the various stakeholders of public finance,
even when the messages are not consistent, and achieving real accountability is a balancing act
among stakeholders.” Performing that balancing act well is made easier when there is a
reasonably level playing field of information and understanding among the stakeholder groups.
There will still be disagreements, but they will be more about the substance of real issues and
trade-offs, and less about false assumptions or incomplete understandings.
Conclusion
6. In concluding, I would like to pose a few questions about which I would welcome your views.
First, do you agree that capacity is an important dimension of accountability? Is there anything
to the concept of “accountability capacity”?
Second, do you think that the goal of directing more assistance through government systems
would be advanced by aid-recipient governments pro-actively participating in third-party
assessments of their public financial management systems? Should such assessments focus
primarily on internal controls, as I have suggested, or on other things? How could the results of
such assessments best be used?
Third, what role might ICGFM play in such a process?
7. Notional Template for Audit of Internal Controls
Principles of Control
MonitoringReview and
ApprovalAuthorization and
Segregation of Duties
ControlSupervision and
Physical Safeguards
Management Areas:
Accounting system
Budget system
Fixed assets
Stores
Salaries
Procurement
Cashiers and income
Information technology
For each management area, there are a number of specific principles that the audit would consider. 1
Some examples of these principles include the following:
Accounting and Budgetary Systems
• Accounting staff should not be involved in other finance-related operational tasks
• Balances and reconciliation procedures are carried out to ensure that transactions are correctly
recorded and processed; and that there is agreement between the general ledger and subsidiary
records
Fixed Assets
• Records of fixed assets should contain an identifying description, responsible budget-holder,
value, date of purchase and expected life.
• Periodic physical checks against records should be carried out.
Stores
• Full stores records should be maintained of: orders, receipts, issues, returns, and write-offs.
• Periodic checks of physical stores against stores records should be made by persons other than the
storekeeper.
Salaries
• Control should be exercised by designated persons on the number of employees, their gradings,
their duties, hours worked etc.
• Independent verification of the existence of payees should be obtained from time to time.
1
These principles are consistent with international audit guidance established by organizations such as the Chartered
Institute of Public Finance and Accountancy (CIPFA) and the International Organization of Supreme Audit
Institutions (INTOSAI),
8. Procurement (Ordering Goods and Payment of Invoices)
• Only authorized officers may order goods and ordering stationery must be controlled.
• Payment procedures must provide for checks on: quantities delivered, quality, delivery of
services, part orders, duplicate payments, and taking of discounts.
Cashiers and Income
• Two persons must be present when the post is opened and cash received and recorded.
• All cash paid out must be authorized by someone other than the cashier and must be signed for.
Information Technology (use of computers in accounting and budgeting)
• Systems of physical security should cover secure accommodation for computers; separate storage
of back-up files; and staff training.
• Operating systems must log all transactions by user and terminal and prevent malicious or
accidental destruction / misuse of data.