(Online Course) Pub Ad for IAS Mains: Financial Administration - Financial Accountability (Paper -1)

(Online Course) Public Administration for IAS Mains Exams

Topic: Financial Administration: Financial Accountability

The genesis of the current emphasis on financial accountability can be attributed to the following factors:

1. Two decades of fiscal turbulence have contributed to a substantial erosion of credibility of governmental fiscal machinery, and to a growing distrust of governments;

2. The gradual spread of global is at ion has put economic policy-makers in many developing countries and economies in transition in a reactive mood, rather than proactive; external developments that do not always lend themselves to precise identification would appear to have a greater role, or even a dominating role on fiscal policies. Information asymmetries have made the already formidable tasks of policy-makers even more complex and intractable. In the absence of crucial information, the risks faced by the policy-makers have increased significantly;

3. The change in the nature of government and its gradual withdrawal from production activities has made it take an active role in regulation which adds to the complexity of financial accountability;

4. There has been a major change in the composition of expenditures central and federal governments. Apart from sizeable outlays on the servicing of public debt and on entitlement payments, expenditures at the Central government level are increasingly devoted to contract payments, transfers to the private sector, and transfers to regional and local governments. This has contributed to a separation funding from the actual provision of services and has affected pattern of financial accountability; and

5. Over the years, the scope of financial accountability has expanded rapidly and significantly, reflecting changing tasks and expectations and an emphasis on ‘prudent macroeconomic management.’ This enhanced financial accountability requires governments to accountable for ensuring that there are adequate systems to secure and improve results and to maintain the financial condition of state (fiscal sustainability, flexibility in the use of resources, and reduced financial vulnerability.

Accountability for What?

Governments are voted out of office when the electorate loses faith their ability to deliver the services they need and when opposition promises gain sufficient credibility. In other words, governments are accountable for performance. A distinction is sometimes made between financial performance and overall performance or between financial accountability and performance accountability.

Financial accountability is served simply be collecting and spending public funds in accordance with laws (including budget laws) and regulations. While this still needs strengthening in any countries, it is a long way short of performance accountability.

How Accountability Works

Laws, regulations and codes of conduct are insufficient on their own. Their observance has to be monitored, deviations identified with those responsible and corrective and deterrent steps taken. This is the more difficult side of the coin. Monitoring is through internal controls exercised by the executive on it, and by external controls exercised by oversight (watchdog) agencies.

The IMF has set out four principles that define what transparency she be expected of a government:

1. Clarity on the structure and functions of government, responsibility within government and relations between government and the rest of the economy.
2. Public availability of comprehensive information on public sector financial stocks and flows, published at specified times.
3. Public availability of information on how budgets are prepared executed, and minimum content of budgets and financial reports
4. Financial data meeting accepted quality standards and subjected to independent audit scrutiny.

Financial accountability and control within the executive commence with the budget preparation that lays the foundation for all subsequent measures. The budget determines programme concepts and structures, modalities for implementation and costs. Budgets of various departments and agencies are reviewed in their totality and consolidated in a single document, thereby enabling the government to examine the budget in terms of legal, requirements, national economic policy and objectives and resource availabilities. Legislative appropriation is the basis or financial control. The system of appropriation is based on three principles:

1. A sum appropriated for a particular purpose cannot be spent on any another purpose;
2. The sum appropriated is the maximum and cannot be exceeded: and
3. Monies are available only for the year for which they are appropriated unless specifically provided for otherwise. However, all three principles are commonly circumvented by devices such as re-appropriations (within the executive), supplementary grants, year-end peaks of expenditure, and the transfer of funds to special accounts. The approval of the legislature is usually obtained after the fact.

After the budget is approved, its execution becomes the responsibility of the budget agency, which may require additional information from operating departments before releasing the funds appropriated by the legislature. Release may be made for the whole appropriation for the year, or in periodic installments (such as monthly warrants), or even for individual transactions. There are two separate but related fiscal control measures that occur during the execution stage:

1. The first fiscal control measure involves the examination and approval of each proposed expenditure to ensure that it is prudent, legal and covered by budget appropriation and availability of funds. This pre-audit function, which used to be exercised mainly by the treasury, is nowadays entrusted to operating departments, both to eliminate delays and to emphasise their responsibility;

2. A second measure involves the recording of actual treasury business, including the receipt, disbursement, allocation and accounting of funds. Both the recording of transactions and accounting of funds are usually done by a network of government treasuries functioning under the authority of the Ministry of Finance. The development of banking networks in most developing countries and economies transition is bringing about reforms in this area.

After the end of the fiscal year, the accounts are closed for the period submitted for audit. This involves the post mortem examination and verification of completed transactions and their related accounts by the supreme audit authority of the country. The form of audit varies from one country to another. In some francophone countries, the audit body is endowed with judicial powers and can impose penalties. Most state audit bodies are engaged in a posteriori compliance audit. The arrangements for the audit of state enterprises and public bodies vary considerably. In a few countries, audit may be called upon to provide an ‘opinion’ on the accounts. Similarly, the timetables for audit and actions thereon vary. Although practices vary, the real issue relates to the extent to which transparency and related accountability are effective in fulfilling the tasks for which they were designed.

Only after audit does the legislature get a chance to review the execution of the budget. The audited accounts and audit report are submitted to the legislature for review. The legislature (the lower House in a bicameral legislature) commonly establishes a Public Accounts Committee (PAC) from amongst its members to undertake the review and report to the full House. In Westminster style governments, the chairmanship of the PAC traditionally goes to an opposition member, so that the PAC is seen to be independent of the party in power. For the same reason, members who hold executive office, such as ministers, are excluded since they cannot be expected to bring an independent view to bear. In principle, the PAC examines the public accounts and reports of the state audit institution with a view to ensure:

1. That the expenditures shown in the account as disbursed were legally available for the purpose on which they were spent;
2. That the expenditures conformed to the authority governing them;
3. That every re-appropriation was made in accordance with the rules; and
4. That all revenues were brought to account.

For this function it can call on the heads of departments or other officers who are legally responsible for financial administration, The PAC holds hearings taking up the audit objections and reports back to the legislature. Reports may also go to the respective heads of departments and to the Ministry of Finance for follow up. In practice, the PACs in many developing countries, where they exist at all, are weak: they may fail to meet, or be unable to work together, or fail to issue reports, or their reports are ignored.

Fiscal Prudence in India: FRBM Act, 2004

The FRBM Act was enacted by the Parliament in 2003 to bring in fiscal discipline. It received the President’s assent in August the same year. The United Progressive Alliance (UPA) government had notified the FRBM Rules in July 2004.

How will it Help in Redeeming the Fiscal Situation?

The FRBM Rules impose limits on fiscal and revenue deficit. Hence, it will be the duty of the Union government to stick to the deficit targets. As per the target revenue deficit, which is revenue expenditure minus revenue receipts, have to be reduced to nil in five years beginning 2004-05. Each year, the government is required to reduce the revenue deficit by 0.5% of the GDP. Similarly, the fiscal deficit is required to be reduced to 3% of the GDP by 2008-09. It would mean reduction of fiscal deficit by 0.3 % of GDP every year.

The FRBM Act prohibits Government to borrow from the RBI after April 1, 2006. The Act requires that on a quarterly basis that Government would have to place before both the Houses of Parliament an assessment of trends in receipts and expenditure, The Government also has to annually present the macro-economic framework statement, medium term fiscal policy statement and fiscal policy strategy statement. The three statements would provide the macro-economic background and assessment relating to the achievement of FRBM goals.

The medium term fiscal policy statement will contain a three-year rolling targets for key fiscal parameters that underpin the Government’s fiscal correction trajectory. A statement on this is proposed to be present along with forthcoming Union Budget for 2004-05. Through the FRBM disciplines the Government is also committed to undertake an intra-year assessment of the achievement of its budgetary targets. At the end of the second quarterly assessment, if the non-debt receipts are less than 40 per cent of the Budget Estimates or there venue or fiscal deficit is more than 45 per cent of the Budget Estimates, the Government would not only be required to take corrective measures, but the Finance Minister shall also make a statement in both the Houses of Parliament.

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