Serbia: Road Map for Developing Treasury Functions and Implementing Treasury Single Accound and Finance Information Managent System

Jean-Marc Lepain Treasury Specialist

ROADMAP FOR DEVELOPPING TREASURY FUNCTIONS AND
IMPLEMENTING THE SINGLE TREASURY ACCOUNT AND THE
FINANCE INFORMATION MANAGEMENT SYSTEM IN THE MINISTRY
OF FINANCE OF SERBIA

Jean-Marc LEPAIN
TREASURY SPEACIALIST

This document is provided to the staff of the newly established treasury of the Ministry
of Finance as part of the project’s capacity building programme for familiarizing
themselves with the new treasury functions and as a roadmap to understand new
expected development.

1. Overview of Financial Management

- Defining Financial Management

Financial Management in Government covers different areas such as fiscal policy,
economic planning, public investment management, revenue and expenditure
management. Expenditure Management is not limited to treasury functions but also
includes budgeting.

In government, the activities usually associated with the treasury function, such as
cash flow management, debt management, investment and corporate budgeting, are
often carried out jointly by a number of ministries and agencies.

Financial management in departments and agencies is an important component of
what financial and programme managers do in delivering programmes within their
organisations. Specifically, in carrying out their financial management
responsibilities, the managers' role is to:

 identify and manage financial risks;
 have available, on a timely basis, relevant, accurate and reliable information
that allows them to understand the financial implications of decisions before
making them;
 report on financial and operational results; and
 protect against fraud, financial negligence, violation of financial rules or
principles, and losses of assets or public money.

Effective financial management is therefore a critical activity that helps an
organisation assess the cost of achieving its objectives, account for the results of its
operations and discharge its accountability obligations.

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A further important factor in financial management, especially in the transformation
from Socialist to Capitalist approaches to government is the need for enhanced
transparency. Good quality financial management supplies this.

1.1. Legislation

Financial Management can only be effective if it operates within a sound transparent
legislative framework.

This legislative framework must be in place at four levels:

 Constitution;
 Public Finance Legislation;
 Financial Regulations; and
 Accounting Instructions.

Once, a sound legislative framework exists, the organisation must ensure that it
operates within that framework. This requires not only sound financial management
systems but also an effective internal audit service (see below) to ensure compliance.
In Serbia, the legislative framework remains weak and undelopped. The Public
Finance Law that has been recently approved has been prepared in a context where
the devolution of authority between federal and national authorities remain unclear
and where many Serbian institutions, like the Ministry of Finance and Economy are
still in the embriyonic stage of their development.

1.2. Budgeting

The starting point for sound financial management is the budget which itself is based
on economic planning. The present budget department, with a staff of three people,
including the US Treasury Adviser and her assistant, is also at an embriyonic stage
and its main achievement has been to put in place the budget classification.

Traditional input-orientated annual budgeting has significant drawbacks and the
Government should be aiming to develop a multi-year, programme based budgeting
system.

1.3. Budget Execution

Once there is a sound budget in place, there must be a mechanism for releasing it to
the spending units. In developed countries, the norm would be to authorise spending
of the entire budgeted amount at the start of the financial year. Spending could be
reserved later in the year if need be.

In Serbia, the best option would be to release money on a, say, monthly basis based on
the revenue inflows.

The Treasury Specialist is an expert in this area and can advise the Treasury on the
best methods to implement (see below).

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1.4. Accounting

Financial management requires a sound General Ledger based system, in accordance
with international standards, where all receipts and payments pass through the
General Ledger and through a Single Treasury Consolidated Bank Account.

In addition, Serbia will have its unique Treasury Agency to be incorporated into the
overall process.

1.5. Financial Control

Ensuring that budget allocations are not overspent, nor spent on the wrong thing,
requires an effective, commitment-based, financial control system. Over time,
detailed expenditure and revenue profiles should be prepared to enable good quality
financial control to operate from early in the financial year. The sooner an adverse, or
favourable, variance is detected the easier it is to take remedial action.

1.6. Financial Reporting

Ensuring that reports are made to the right level of management as soon after the
period to which they relate as is practicable. These reports should not only contain
summaries of basic financial data for the sector as a whole and for each institution but
other key ratios and unit costs. The latter will be especially useful for comparing the
different organisations across the country. The Treasurer should take regular,
monthly, reports to the Minister detailing the current financial position and analysing
what the figures mean. If this report can be published it will go a long way to
meeting the transparency requirements.

1.7. Auditing

As indicated above a vital element in securing effective financial management in
effective auditing. Ideally, this should be good quality audit service both by an
Internal Audit Service and by the External Auditor.

The Internal Audit Service should be ensuring that the systems in place, both financial
and non-financial, are currently soundly based and remain so in future. They should
also be ensuring that the systems are actually being followed.

The External Auditor‟s traditional role is to provide an audit certificate on the annual
accounts and make a report to Parliament.

2. Budget Execution

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2.1. General Principles

The principles of Budget Execution rest on three main functions:

 The authorizing function
 The payment function
 The accounting function

In line with the Budget System Law, the division of tasks between, on one side, all
authorizing functions within the respective limits of appropriations, allocations and
commitments of funds of Line Ministries, their spending units and all budget users in
general and, on the other side, all payment and accounting functions assigned to the
treasury function has to be viewed mainly under two aspects:

1) The interaction between these entities on the different levels
(aggregated/national/Line Ministries/direct –indirect budget users) and the
Treasury services (on different levels according to the solution on
decentralization as the Treasury department MoFE, Treasury Agency and
eventual decentralized treasury units).

2) The internal organization of the Treasury, and the functionality of its IT
system, which play an important role in determining the way budget execution
is modeled in all its different aspects, such as revenue and expenditure
management and financial planning as related to all budget users. This process
requires detailed data/financial plans and decision-making for cash and
liquidity management, debt management, and all types of banking and
payment arrangements.

2.1.1. Interaction of the different processes

The Treasury should be informed first hand (Budget Information System and
monitoring of budget implementation steps) of all operations affecting allocations and
in year re-allocations of budget resources for all spending units and budget line items
(similarly operations affecting revenues). For that reason the Treasury needs to use the
same reports and financial planning as the Budget Department of the MoFE, for all
the spending units.

The Treasury should share responsibility for the approval of commitments and be
responsible for the real money flows, either concerning inflows to the State (TSA or
other constructs for receipts) or outflows from the TSA and the execution of payment
requests at the various stages and steps of payment preparation and payment
execution.

In line with the regulatory provisions under preparation for the allocation process, the
commitment process and the operation of spending limits (driven from the allocation
side/authorizing officers), The Treasury should manage the cash limits to be applied

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for the payment requests of the spending units for the respective reference periods and
expenditure items.

Needless to say, in order to avoid duplication of the IT support required for the
allocation operations and planned use of allocations, the Treasury should receive the
respective last situation of allocations, including re-allocations, by means of mirroring
the corresponding data (data bases), using a simple interface or any file transfer
device.

The process of checking fund availability, according to specific regulation and
financial policy, has to be distinguished from the Allocation Cycle. Briefly put:
appropriations-allocations-fund reservations and commitments, respecting given
spending limits for reference periods, decided according to the rules.

As regards the Allocation Cycle it is justified to speak about virtual budget money.
This “budget money” is a sort of drawing right that budget users can use to draw the
funds that have been allocated and authorized for the payment of their expenditures at
the various levels, by budget authorities (Parliament, Government, Line –Ministries,
MOFE in essence).

Financial plans and spending limits have to be adapted by the authorizing officers/
budget managers in case of strong deviation of expenditure dynamics or, in case of
anticipated, out of line, expenditure from revenue inflows and outside authorized
short-term borrowing limits and deficit targets. These adjustments, necessary to
introduce flexibility into the management of the expenditure circle, require not only a
well-defined policy, but also a set of instructions or regulations defining the different
levels of responsibility and the process to be followed. This process needs to be
achieved in complete co-operation with the Budget Department. It might require a
minimum of data exchange between the two systems, which should ideally be able to
communicate and interact. As it is understood that integration of the two systems will
not be achieved before the next two years, the Treasury Expert will have to define
other ways by which this adjustment process can be implemented.

2.1.2. The three process circles
Budget Execution requires three process cycles. These cycles demonstrate the
interaction between allocation and financial planning:

Cycle 1 for the allocation process of budget implementation
Cycle 2 for expenditure management, financial planning and management of spending
limits
Cycle 3 for the process linking financial planning to cash management steps and
payments.

The following figure visualizes, in an indicative way to be adjusted in the Serb case,
the main interactions to be considered in budget execution.

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The subsequent chart shows the different interactions between the three cycles. This
chart is purely indicative, and should be adapted to the local Treasury Model. One of
the tasks of the Treasury Expert will be to review all the steps of each cycle and to
define how these circles will interact with each other.

Cycle 1 Cycle 2 Cycle 3

Breakdown of annual Financial Plan II,
Appropriations
1 1 appropriations, 1 Adjustment Spending
quarterly,monthly Limits to cash flows
=Financial Plan I
Allocations, Increase, Blending /matching
2 Decrease, Regrouping 2 Cash flows with
Quarterly Spending Limits, deficit targets,
2 Binding indicators borrowing limits
Forecast of cash-flows,
Locking of Funds/ 3
3 Preliminary Committment
different sources
Quarterly, monthly Financial
3 Plans (daily figures) Blending / optimising
4 forecast
Commitments /
4 Release of Funds
Monthly expenditure Fixing of cash limits for
4 profiles – Supply schedule
5 payment requests upper
limits (Spending Units)
5 Order for services
Fine –tuning cash limits
Reallocations, regroupings
5 6 with forecast for cash
positions (cash
Release services (or goods)
6 management)
Fine-tuning expected cash-

7 Validation of services / 7 balances/ financing
requirements /Liquidity
invoices
Committee
Payment generation
8 (request) 8 Execution of payments o
Continuous monitoring

The IT systems controlling the three circles must be absolutely coherent with each
other. The Treasury IT system must itself focus on all the parameters that determine
payments such as the completion of the expenditure control process, validity of the
payment request, control of the cash limit based on commitments, etc. If Financial
plans are binding in terms of limits to be operated, (spending limits and cash limits)
the cross checking mechanisms have to be based on full integration of financial plans
(a requirement needed anyhow for performance measures), to compare financial plans
–daily based versions, in particular with real money flows for selected revenue or
expenditure items.

According to the desired and gradually achieved extension of the Treasury General
Ledger System to be designed and implemented and modules for cash management,
the IT support of both sides –for the Allocation Cycle (budget information system)
and money cycle (treasury information system), has to be brought in line with the
interim solutions envisaged.

As it will not be possible to bring the desired level of integration between the two
systems before several years, it is essential to focus more on cash management. In the
situation of liquidity shortage, as it is the case in Serbia, cash management policy
drives the Budget Execution process. As long as this situation lasts it will not be
possible to implement a very sophisticated Budget Execution system along the lines

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of what exists in other European countries. This situation should be acknowledged
and the Treasury Instruction that needs to be written should take that into account.

Interrelation budget implementation steps

Allocation process, expenditure management

Cycle 1 1 2 3 4 5 6 7 8

Cycle 2 1 2 3 4 5

Cycle 3 1 2 3 4 5 6 7 8

Legend:
1
Cycle 1 Budget Implementation Steps (allocative) … 8
….
Cycle 2 Expenditure Management/plans : 1 5

Cycle 3 Financial Planning, money flows
1 ….. 8

2.1.3. Accounting Treasury and legal entities

The requirements for Treasury accounting and the Treasury General Ledger system
have to be based on the bank ledger(s) records according to banking arrangements and
payment systems operated (Treasury Agency, Commercial banks and National Bank
(direct/indirect budget users), categories (budget classification/chart of accounts
items) tracking and reconciling all cash inflows and outflows of the TSA(s) and
preferably to be completed at the earliest possible moment through a sub ledger for
debt transactions and data capturing/centralizing accounts payable and accounts
receivable information from spending units, being understood that commitments are
entered and recorded by the same system.

2.2. Present Budget Execution Systems

There are a variety of Budget Execution (BE) systems currently in place depending on
whether the budget user has its own giro account and whether or not it uses the
Mutual Services Administration (MSA) for its accounting and expenditure processing

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operations. From January 2003, the situation will change with the MSA being
absorbed by the Treasury.

These have been classified as Types I to IV by the USAID Project developing the
Interim Computer System.

Type Characteristics Processing Cycle

I  No giro account 1. Invoice sent to MSA.
 Uses MSA 2. MSA process a payment request and sends it
to Budget Execution (BE) (must be transferred
from MSA‟s Oracle System to BE‟s Access).
3. BE approves the request in part of in full and
sends approval to “Room 37”.
4. “Room 37” processes the request and sends
payment order to ZOP.
5. ZOP reports back to “Room 37” when
payment is made.

II  No giro account 1. Invoices come directly to the budget
 Does not use MSA beneficiaries which prepare payment requests.
2. Payment Requests and Invoice sent to BE.
3. BE approves the request in part of in full and
sends approval to “Room 37”.
4. “Room 37” processes the request and sends
payment order to ZOP.
5. ZOP reports back to “Room 37” when
payment is made.
III  Has own giro account 1. Budget User requests monthly allocation
 Uses MSA according to the financial plan.
2. BE transfers lump sums on a monthly,
weekly or daily basis, depending on funds.
3. MSA pays invoices from the Budget User‟s
giro account.
IV  Has own giro account 1. Budget User requests monthly allocation
 Does not use MSA according to the financial plan.
2. BE transfers lump sums on a monthly,
weekly or daily basis, depending on funds.
3. Budget User processes its own invoices and
the requests of its organisational sub-units and
indirect budget beneficiaries.

Thus, it is clear that the Budget Execution Sector is responsible for preparing the
payment on invoices for budget beneficiaries of Types I and II and for ordering the
bank transfers to the giro accounts of budget beneficiaries of Types III and IV.

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Transaction volumes vary from day to day. A normal day involving some 5,000
transactions with double this on salaries payment days.

BE indicates that 50% are processed initially by the MSA and transferred
electronically with the other 50% being submitted on paper directly to the BE.

Each payment request is individually approved for immediate or delayed payment,
based on the availability of funds. After approval, the request is processed by staff
located in "Room 37" of the Ministry of Finance and Economy (MoFE) and the
resulting payment order forwarded to the ZOP, electronically for those requests
originating in the MSA computer system and via standard paper payment slips for the
others.

2.3. Budget Execution and the Budget Systems Law

The Budget Systems Law indicates that Budget Execution and the use of quotas to
limit expenditure must take place but is silent as to how this should happen.

When the economy is fully developed, it will be possible to enable ministries and
agencies to spend up to their approved budget limits without the need to control the
pattern of expenditure during the year. The Cash Management system will be such as
to match revenue with expenditure by short-term borrowing and lending.

Until this situation prevails, however, the Treasury will have to control spending by
means of a quota system. This involves establishing how much money is available
for spending and authorising expenditure, in accordance with government priorities,
up to this limit.

It is a time-consuming process and there should be as few quotas used as possible.
Ideally, quotas should be for no shorter period than one month.

The actual notification of quotas can be done using either an informal or formal
system.

Under the informal system, spending units are notified of the amounts they can spend
by memorandum. It is a quick, flexible system but is prone to error as total amounts
approved may not be readily available.

A formal system does not have this disadvantage and is, thus, much more
transparent. The classic formal system uses a variety of “warrants” – official
documents signed by the Minister under powers contained in the Budget Law or
Regulations made under that Law.

These warrants have different purposes but have one thing in common – in the
absence of the Minister‟s signature on a warrant expenditure is illegal. With an
effective computer system it can be made impossible for spending agencies to incur
commitments in the absence of warranted approval.

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The types of Fund Warrants issued by the Minister of Finance include:
 Appropriation Warrant: under the annual budget law the Minister shall
issue Chief Finance Officers with an Appropriation Warrant specifying the
level of expenditure approved by Parliament for each spending unit or sub-
unit under specific budget classifications;
 Allocation Warrant: by this warrant, the Minister will authorize Chief
Finance Officers to spend up to the amount detailed in the warrant. It is
likely that these warrants will be issued on a monthly or quarterly basis,
depending on funds available for spending.
 Virement Warrant: by this warrant a Chief Finance Officer may move
funds from one expenditure item to another provided the reallocation does
not exceed an agreed maximum of the total of the appropriation being
reduced. This Warrant shall also be used to transfer money from reserves
to spending organizations;
 Contingency Warrant: the Minister has the right to increase the amount
available to a Chief Finance Officer by way of a Contingency Warrant.
Any amounts provided by way of Contingency Warrant must be taken to
the next session of Parliament by way of the Budget Law or
Supplementary Budget Law.
 Development Project Warrant: the Minister will issue a Development
Project Warrant to Chief Finance Officers executing Donor funded
projects notifying them of a project‟s approval and the total expenditure
that can be made under that project, usually for the life of the project; and

 Development Project Allocation Warrant: the Minister will issue a
Development Project Allocation Warrant to Chief Finance Officers
responsible for the progress, control and monitoring of a Donor funded
project notifying them of the funds that are currently available and which
can be spent up to the amount detailed in the warrant.

Funds Warrants are usually issued on special stationery setting out the details and
conditions of the release of funds, signed by the Minister or his delegate, and recorded
in the Treasury General Ledger.

They are usually copied to the Auditor-General or equivalent; again as part of the
openness of the transactions.

- Action Required from Treasury

To ensure that there is an effective system of Budget Execution – the release of funds
to spending agencies – to ensure that spending does not exceed revenue collection.

- Action to be undertaken by Treasury Specialist

To work with Treasury staff on the design and implementation of such a system.

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3. Cash Management

3.1. Preliminary remarks

The following remarks are based on the experience that system driven approaches (IT
support through cash management systems) to support the core function of the
Treasury as the cash management function fail, if they are not embedded in an output
oriented approach defined from the perspective of the needs to manage financial
resources of the state: in particular those of decision makers and financial managers
which carry the responsibility on the aggregated level (Government/respectively
Ministry of Finance, its Treasury department or State treasury)

3.2. Centralised cash management – basic/mandatory requirements
1. The treasury service in charge of cash management has, first of all, to rely on
timely and reliable data concerning cash flows on a daily basis, regardless of
the payment system and given banking arrangements.

2. On the basis of observed cash flows in the past and anticipated cash flows
(forecasts) together with data from financial planning and budget execution
data (allocated, committed and regular recurrent expenditures and obligatory
expenditures based on legal obligations) a coherent set of operative statements
has to be provided to allow for rational decision making of cash management.

3. Whilst cash management can be considered an art, the mechanisms of the
payment system are of a purely conventional and technical nature reflecting
the possibilities offered by the stakeholders involved and notably the banking
sector and the possible quality of IT support.

4. The accounts management in terms of accounts of spending units as held by
some treasuries and the management of bank accounts (TSA and /or
commercial bank accounts) can only be performing, if the information on cash
flows is based daily and covers at least estimated cash flows for the next 30 to
60 banking days for a sufficiently differentiated number of items (see example
below).

5. Similarly, these data are required for liquidity management and short-term
borrowing or for the adjustment of cash limits when required. Basically these
data are needed for cash flow smoothening, i.e. adjustments of cash inflows
and outflows to spending requirements and to commitments to be executed.

6. In a decentralized treasury system, the distribution of cash to spending units or
field treasuries based partly on an important flow of physical cash is a
subordinated task of cash management and can be considered as resultant of
centralized cash management and decision-making on the basis of a constantly
updated overview on the financial situation in budget execution.

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7. In this order of ideas one common practice of cash management in central
treasury departments is to rely on centralized information of cash flows and to
base decisions on an overridingly important operative statement: the
“Statement on daily aggregated cash flows”, reflecting the daily position of the
state. According to practice in EU Member States, and in most candidate
countries, the number of items retained in such a daily statement varies
generally between 20 and 50.

8. The items relate to cash inflows and outflows, generally of the previous day,
for the main revenue and expenditure categories, cash balances, financing
requirements, flows from and to financial markets (investment and
borrowing), resulting debt stock data and financial assets.

9. In case where a performance approach is followed, the statements indicate the
difference between real money flows and estimated flows for some of the
items.

10. Forward estimates of the same cash flow data cover at least 22 banking days in
advance for the items considered in the operative statement.

11. The statement is used for different purposes and by different users. It is
available to all financial managers on the central level on a daily basis.
Coherence of the data must be ensured through cross-checking different
sources of data (TSA, payment system, other data bases recording real cash
flows).

3.3. Application of requirements and criteria to the Serb situation

1. Whether interim or final solutions for business processes and budget
execution, limited or high tech integrated IT support systems, differentiated
payment systems for indirect budget users or direct budget users, many sub-
accounts of different “Single Accounts”, whether the TSA is located in the
National Bank or a virtual one of several commercial bank main accounts or in
case of Serbia part of payments are processes/managed through the “Treasury
Agency” (adapted ex ZOP): the task of financial managers in the cash
management department/division on the central level and in view of the
necessary centralized cash management function - being a standard feature
today - definitely requires information on cash flows as outlined before.

2. The constraints of information and information flows on money flows, must
be overcome as a first priority: if cash flow data are available in different
forms, cash management modules must provide for solutions to integrate this
information through a “component management solution” up to the moment
the components are part of a generalized treasury information system or
budget management system or Financial Management Information System,
perfectly linked to the payment system, the TSA and banking arrangements
supporting integrated systems.

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3. Even more the requirement postulated or better observed in today‟s practice
for centralized cash management has to be seen independently from the
treasury model as a “must condition” and supported by an appropriate TSA
solution.

In the case of Serbia and according to actual orientations and decisions, it means
that:

 A virtual TSA structure must be operated in the Central Treasury (or the
Treasury Agency if outsourced) combining the cash flow data from the
operations recorded by the Treasury Agency (using its own “TSA” data)
and the cash flow data as recorded on the TSA of the National Bank, in
order to have a complete daily picture of cash flows for all items
considered (20-50) and their estimates for the same structure

 Given the impact of structural changes- economy, new taxes/tax system,
changing expenditure patterns and priorities, inflation, changes in deficit
financing- only to mention a few - cash management to be performing on
the central level cannot rely only on observed cash flows in the past
(time series and their extrapolation), but must rely heavily on the
information obtained on financial plans of spending units and their
continuous update, spending and cash limits operated in line with
commitments approved in the past and becoming effective spending.

 Accordingly application rules for budget execution referring to these
issues must be prepared and decided on in a binding form and cannot be
of an indicative nature only. (In line with the organic budget law and
subsequent rules)

 Furthermore it is essential to centralize information on all accounts
receivable and all accounts payable of spending units

 Regarding IT support, priority efforts should be directed to a cash
management module for the Central treasury (Treasury department of the
MoFE taking into account the criteria described)

 Once the Treasury General Ledger System has been designed and
implemented, at least its main components, coherence and to some extent
integration with the cash management module can be achieved

 Serb decision makers and financial managers are in urgent need for such
a cash management module if decisions shouldn‟t be taken “blindly”

Items to be retained (summary) on the daily operative statement (daily
aggregated cash flows/daily financial position of the State (indicative
only):

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(Please note: statement reflects aggregated real money flows as daily
recorded in the payment systems/TSA or other main accounts)

Taxes
.
.
Other revenues
.
.
Surplus of State enterprises
Difference to estimate
Cash revenue total

Tax refunds
Wages
Pensions
Other current expenditures
Transfers/subsidies
Municipalities
Households
Industry
Financial investments
Other expenditures
Difference to estimate
Total cash expenditures

Cash surplus I

Payments from the National Bank
Interests on state debt
. Dinar
.Currency
Interest on money market investment

Cash surplus II

Items issues on securities
Bonds
T bills
Others
Repayment of State debt total

Gross financing requirement

Treasury bills

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Others
Growth of State debt total

Cash surplus III

Variation(growth) of money market investments
Redemption of investments “
Change in money market investments

Transfers National Bank
Change in cash

Beginning cash
End cash

(Cash on main revenue account, commercial banks, others/0 balancing)

Deviation
Interest rate%
Internal interest
Accumulated interest
Cash
End cash total

Money market investments
Total liquid assets

Debt of central government

Needless to say, the output of the cash management module to be built is
demand driven and will stay the same regardless of the IT solutions
chosen in the future, or the treasury model followed.

4. Treasury Accounting

4.1. Introduction

An effective accounting system (1) collects, processes, maintains, transmits, and
reports data about financial events, (2) supports financial planning or budgeting
activities, (3) accumulates and reports cost information, or (4) supports the
preparation of financial statements.

The system must exhibit effective internal control to ensure it cannot be abused in any
way. The accounting system should include all or most of the following principles:

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 Segregation of Duties: No one person should be responsible for the recording and
processing of a complete transaction;

 Organisation: Treasury should have a plan which defines and allocates
responsibilities; identifies lines of reporting; and clearly specifies the delegation of
authority;

 Authorisation and Approval: All transactions should require authorisation or
approval by an appropriate responsible official;

 Physical: Access to physical assets should be limited to authorised personnel
only;

 Supervision: All actions by all levels of staff should be supervised;

 Personnel: There should be procedures to ensure that people are competent to
carry out the jobs assigned to them;

 Arithmetic and Accounting: These are the controls within the recording function
which check that the transactions to be recorded and processed: have been
authorised; are all included; are correctly recorded; and are accurately processed.
Such controls include: checking the arithmetical accuracy of the records;
maintaining and checking of totals, reconciliation, control accounts and trial
balances; and accounting for documents; and

 Management: These are the controls exercised by management outside the day-
to-day routine of the system. They include: overall supervisory controls; the
review of management accounts; comparisons with budgets; internal audit; and
any other special review procedures.

The areas to be addressed in this section are:

 Treasury Single Account and General Ledger ; and
 Treasury Agency.

4.2. General Ledger Accounting

General Ledger Accounting in Government is designed to produce accurate and
timely information on the amount and type of expenditure incurred and revenue
collected, measurement of this against that authorised and budgeted and the recording
and control of the financial assets and liabilities generated in the course of operations.

There are two main reasons behind government accounting:

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 Stewardship: Relates to supplying evidence that the assets, under one‟s control,
have not been misappropriated. It focuses on the security of resources and not
their use; and

 Accountability: Financial accountability refers to the responsibility for actions
undertaken which utilise the resources under one‟s control. It is usually associated
with measures of success.

Stakeholders include:

 Legislative Bodies;
 Oversight Bodies;
 Management;
 Donors;
 Investors;
 Taxpayers;
 Vendors;
 Employees; and
 Voters.

There are both External and Internal requirements associated with government
accounting:

 External Requirements:
- Statutory requirements;
- Evaluate spending policy; and
- Evaluate performance.

 Internal Requirements:
- Know where the money was spent;
- Show financial position;
- Monitor against budget;
- Information for planning and budgeting;
- Information to analyse projects; and
- Performance measurement.

4.2.1. Background to General Ledger Accounting

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Receipts and payments charged against appropriations given by legislature are known
as above-the-line.

Those which are made under some other authority of the legislature are below-the-
line (anything not covered by voted income and expenditure or money received on
behalf of third parties which do not belong to Government).

There is a responsibility on Government to produce annual accounts which reflect the
financial position of Government and which show both actual and authorised
expenditure.

A typical set of Government Accounts will include the following records:

 Cash Books;
 Budget Books;
 General Ledger; and
 Journal.

The Basic Rules for General Ledger Accounting are:
• All transactions (except Journal entries) recorded in the cash book. Each entry
supported by the appropriate voucher.
• Vote Controller provided with details of income and expenditure recorded. These
are reconciled with the Votes Register.
• Below-the-line transactions can only be with a third party. No suspense accounts
or account containing expenditure which should be charged above the line should
be opened.

4.2.2. General Ledger Detail

As indicated above, there must be an “appropriate voucher” for every entry (income
and expenditure) which passes through the Cash Book to enter the General Ledger.
There must also be a “journal voucher” for making entries and adjustments to the
General Ledger which do not pass through the Cash Book. These are discussed in
the paragraphs below.

Receipts

The first appropriate voucher should be a receipt for money handed paid to
Government. If there is not a specific licence issued, which performs the function of
a receipt, what can be termed a General Treasury Receipt (GTR) must be issued.
As policy matters come under the purview of the Treasury (see below), it will be up to
the Treasurer to determine the format of the GTR.

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Financial Regulations must state that a revenue collector must immediately issue an
Official Receipt, in the prescribed form, for each sum of money paid to him for the
account of Government.

In order to properly control revenue collectors must maintain a Cash Book in the
form prescribed by the Treasurer, in which all receipts shall be entered daily and in
which all payovers to the Public Revenue Authority (PRA) or other prescribed office
shall be entered immediately any such pay-over occurs.

All receipt entries in the revenue collector's cash book shall include the following
details:

 Date of the receipt;
 Number of the receipt;
 Name of the payer;
 Amount collected on the receipt; and
 Revenue code to be credited.

The pay over of collected revenue to the PRA or other prescribed office shall be in
accordance with directions issued by the Treasurer from time to time.

However, such directions shall not prevent more frequent pay-ins or paying in at any
time where the level of cash held poses a security problem. Where a handing over is
scheduled to take place, it shall be the responsibility of the handing over officer to
attempt to pay to the PRA or other prescribed office, all revenue in his possession
immediately prior to the hand over.

The pay over of collected revenue to the PRA or other prescribed office shall be
supported by a Pay Over Slip and a Schedule of Receipts, both in the form
prescribed by the Treasurer and with the totals agreed to each other, together with the
duplicate copies of General Treasury Receipts and Licences.

The Pay Over Slip shall include the following details:

 The Total Revenue being paid over;
 Details of the numbers of General Treasury Receipts and Licences issued; and
 Suitable analysis of the total revenue collected into the revenue codes to which the
collections should be credited. The total of the sums allocated between codes
should equal the Total Revenue being paid over.

The Pay Over Slip shall be signed and dated by the revenue collector responsible for
making the pay over.

The Schedule of Receipts shall be a detailed daily analysis of all GTRs and Licences
issued. Each schedule shall be added and cross balanced and the total of all schedules
supporting a pay over to the PRA or other prescribed office shall agree with the total
collected revenue shown on the pay over slip. The Schedule of Receipts shall be

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certified, in the format specified by the Treasurer, by the revenue collector responsible
for the pay over.

At the time of paying over collected revenue to the PRA or other prescribed office,
each revenue collector shall Balance his cash book by adding up the amounts recorded
in his cash book as revenue receipts, ruling off the cash book and showing the total
revenue collected and no hand since the last pay over.

He shall ensure that the cash on hand agrees with the cash book balance and shall pay
over this sum in full.

Under no circumstances whatsoever shall a revenue collector retain any part of
revenue that has been collected, receipted and brought to account in his cash book.

When paying over the cash collected, the revenue collector‟s cash book will be
checked by the person receiving the payment.

A revenue collector shall, when paying over collected revenue to the PRA or any
other prescribed office, present his cash book duly balanced and ruled off, together
with his current unused (or partly used) GTR and Licence books to the collecting
officer.

The cash book and the used/partly used GTR and Licence books shall be presented
upon the schedule days for the pay over of collected revenue even if no revenue has
been collected since the previous pay over.

It shall be the responsibility of the collecting officer at the PRA or other prescribed
office to contact any revenue collector who fails to report on the scheduled day.

When a revenue collector pays over collected revenue and presents his cash book and
other documents, the collecting officer at the PRA or other prescribed office shall
make the following checks:

 That all General Treasury Receipts and Licences have been accounted for since
the last pay over and that there are no breaks in sequence;

 That all GTR and Licences issued since the last pay over have been entered
correctly in the cash book and on the Schedule of Receipts; and
 That the cash book has been added and balanced correctly, that the particulars
entered on the pay over slip are correct and agree with the cash book and that the
total cash, or its equivalent, being paid over agrees with the cash book and the pay
over slip.

The collecting officer shall initial and date the pay over entry in the cash book and
immediately issue a GTR for the total collected revenue paid over.

The revenue collector shall be responsible for ensuring that he obtains an original
GTR for all collected revenue paid over and he shall immediately attach the GTR to

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his cash book as evidence that the collected revenue has been duly paid over.

The Treasurer shall keep, or have cause to be kept, revenue charts or collection
statistics for each collector and point of revenue collection. As a minimum these
should record the monthly takings by each collector and at each point.

The Treasury shall, if he considers it to be necessary, authorise a revenue collector in
writing to pay his collected revenue direct to a bank or bank agency for credit of a
prescribe government bank account.

Where such written authority is issued, the collecting officer at the PRA or other
prescribe office to whom pay over of the revenue is normally made, shall accept the
copy of the bank deposit slip, duly receipted by the bank or bank agency, in lieu of the
actual cash collected for the purposes of recording of the collected revenue.

Where written authority has been issued to a revenue collector to pay his collected
revenue direct to a bank or bank agency, he shall prepare a bank deposit slip in
triplicate. The original copy shall be retained by the bank or bank agency, the
duplicate and triplicate copies being returned to the revenue collector at the time or
paying in, duly receipted by the bank or bank agency.

The revenue collector shall present the duplicate copy of the bank paying in slip, in
lieu of cash, to the PRA or other prescribed office when presenting his cash book, pay
over slip, schedule of receipts and used or partly used GTR and Licence books.

The revenue collector shall attach the triplicate copy of the paying in slip securely to
his cash book as evidence of having paid over the collected revenue to the bank or
bank agency unless the triplicate is part of a bound paying in book, in which case it
must stay in the book.

Bank Deposit slips prepared by revenue collectors shall show the serials numbers,
amounts and drawers of cheques and bank drafts paid in and the serial numbers,
amounts drawers and offices of issue of money orders, etc., together with any details
required by the bank or bank agency,

If the above system for receipting funds is scrupulously followed then all revenue
collected on behalf of government will be banked. The Double Entry principle behind
the General Ledger will be followed with the amount of cash appearing on one side of
the ledger being balances by the total of the various revenue sources appearing on the
other.

4.3. Expenditure

This basically involves two systems:

General Payment System: this is for all payments other than those made through the
payroll system; and

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Payroll System: payment of salaries, wages and associated payments.

All payments of public moneys through the General Payments System must involve
the use of a General Payment Voucher which shall be in such form as the Treasurer
shall prescribe from time to time

General Payment Vouchers shall be made out in favour of the person, persons or
organisation to whom the money, detailed in the voucher, is due.

General Payment Vouchers may only be certified and signed for payment by an
Accounting Officer, or an officer authorised to sign on his behalf.

Any General Payment Voucher not so signed must not be paid.

Any officer signing and certifying a General Payment Voucher without due authority
is personally and financially responsible, together with any checking officer, cashier
or sub-accountant responsible for the checking or disbursement of public moneys
against the voucher, in the event that an irregular payment of public moneys shall be
made following unauthorised issue.

The certifying and signing of a General Payment Voucher by an Accounting Officer,
or his authorised signatory, shall be taken as evidence that the signatory confirms the
accuracy, validity and content of the Voucher.

Under no circumstances whatsoever may an Accounting Officer, or authorised
signatory, certify or sign any blank or incomplete General Payment Voucher.

In certifying and signing a General Payment Voucher the Accounting Officer, or
authorised signatory, is responsible for ensuring:

 that uncommitted funds for the expenditure are available from the code number
stated on the voucher;
 that the authority and warrant quoted on the voucher are current and valid and
have not been cancelled or withdrawn;
 that all prices and rates charged for goods delivered or services rendered are fair
and reasonable and are in accordance with any contract, agreement or other terms
that have been arranged between the payee and the Government;
 that all goods supplied or services rendered are correct and the person, persons or
organisation legally entitled to receive payment, or shall be an authorised third
party entitled to receive payment;
 that all arithmetic additions, extensions and other calculations have been verified
and are correct;
 that any deduction that the Government is entitled to by way of discount, rebate or
counter claim, etc. has been made and a suitable note has been made on the
Voucher regarding such deduction; and

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 that the relevant Purchase Order or Indent (the procurement system to be used is
outside the scope of this section of the report; however, the need for endorsement,
etc… is the same regardless of the procurement system in place) has been
endorsed with the Payment Voucher number, date and amount; he shall
countersign the Order or indent as proof of his check.

The original top copy of a General Payment Voucher will be typed or completed with
a ball point pen and carbon paper shall be used to reproduce all copies. Officers
completing General Payment Vouchers must ensure that every copy is legible and
complete. If any copy is found to be illegible or incomplete, all copies must be
destroyed and a new set issued.

Entries on a General Payment Voucher must not be erased or altered in any way by the
use of correcting fluid or any other substance. Any minor incorrect entry shall be ruled
through neatly, so that the original entry can still be read, and the correct entry inserted
neatly above and the correction initialled by the Accounting Officer or an authorised
signatory. If an extensive alteration to a voucher is necessary it should be destroyed and
a new set issued.

The Accounting Officer, or authorised signatory, shall sign the original of the General
Payment Voucher in ink or with a ball point pen. Facsimile signature stamps must not
be used on the original of the voucher but may be used on all other copies if preferred.
Alternatively, all copies may be signed or initialled by the officer.

The Accounting Officer, or authorised signatory, shall add, immediately below his
signature on the original of the General Payment Voucher and immediately beneath the
signature, facsimile signature or initials on all other copies of the voucher his name and
title in block capitals or by means of a rubber stamp impression.

The General Payment Voucher shall show the authority for the expenditure incurred by
quoting the reference of the appropriate Accounting or other Warrant; or in the case of a
re-imbursement, the original receipt number. Where possible the original receipt should
be stapled to the payment voucher.

The General Payment Voucher shall show clearly the code number to which the payment
will be charged.

As far as is convenient, a separate General Payment Voucher will be prepared for each
item of expenditure allocated to a single code number at a time. Where, however, such
an action will create unnecessary and excessive documentation, particularly in the case
of payment to one supplier covering a series of invoices or claims and where such
invoices or claims are to be allocated to a number of different code numbers, it shall be
in order to issue one General Payment Voucher only.

Where the allocation of one General Payment Voucher is to more than one code number,
the analysis of such allocation shall clearly be shown on the face of the voucher or, if
necessary, on a supplementary sheet which will be firmly stapled to, and be considered
part of, the General Payment Voucher.

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All General Payment Vouchers will be completed in such a manner that full particulars
of the goods supplied, services rendered or other types of expenditure incurred can be
fully ascertained from the voucher without unnecessary reference to any other separate
file, contract or similar document.

The full particulars will include all details of numbers, weights, volumes or other
quantities, identifying marks, rates or other information relating to the goods supplied,
services rendered, etc that can be checked against any invoice, claim delivery note or
other documentation rendered by the payee or supplier. Originals of all available
documents will be firmly stapled to the original copy of the General Payment Voucher in
support of the payment.

Full details of the General Payment Voucher will be entered on the relevant Order or
Indent.

Journal Vouchers

Adjustments to Government accounts not involving the actual transfer of cash shall be
made using Journal Vouchers.

Loose leaf journals in a form prescribed by the Treasurer or a bound Journal Book in the
same format may be used.

Examples of transactions requiring the use of Journal Vouchers include:

 the correction of previous posting errors;
 transfers of deposits to revenue heads;
 allocation of charges in respect of services rendered by one Government Department
for another and the consequent revenue item; and
 allocation of any rents, dues or fees payable by one Government department to
another and the consequent revenue item.

Journal Voucher entries will be used to effect any adjustment or amendment to any
Government account which is required prior to the closing of the accounts at the end of
the financial year.

Journal Vouchers will normally be completed in triplicate. The original and one copy of
the Journal Voucher, together with any additional copies required, will be forwarded to
the Treasury and the second copy filed by the Accounting Officer responsible for the
issue of the voucher after entering it in his Vote Book or Register of Revenue.

Where any entry on a Journal Voucher affects an accounting code controlled by another
Accounting Officer, sufficient additional copies of the Journal Voucher will be prepared
to allow the distribution of a copy to each affected Accounting Officer.

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Where a Journal Voucher is prepared by the Treasury, sufficient copies will be prepared
to allow for distribution of a copy to each affected Accounting Officer.

Journal Vouchers will be completed legibly in ink and in such detail as to easily identify
the reasons for the adjustment or transfer and the code numbers affected by such
adjustments or transfers.

The allocation of each debit and each credit entry shall be shown clearly and separately
line by line on the Journal Voucher.

The narrative to the Journal Voucher shall give a full and detailed reason for each entry
on the voucher and shall, where necessary, refer to any previous vouchers, journal entries
or accounts affected by the adjustment or transfers within the current Journal Vouchers.
All such previous vouchers, etc affected by the journal entry shall have a note put on
them, cross-referencing them to the Journal and noting its effect.

Journal Vouchers shall be signed by the Accounting Officer who is responsible for
ensuring that the contents of all Journal Vouchers are correct and necessary and that the
Journal Voucher is numbered and dated.

All Journal Vouchers will be checked within the Treasury for accuracy, relevance and
necessity. In particular, the checking officer must ensure that no previous Journal
Voucher issued by another Department or Ministry has the effect of duplicating the
proposed present adjustment or transfer.

The checking officer shall inspect any previous voucher, journal or account referred to in
the Journal Voucher and shall, where the current transfer or adjustment is valid, endorse
such documents so as to cross-reference the new entries in the accounts.

In particular the checking officer must ensure that the proposed debits and credits equal
one another. Only the Treasurer may put through an unbalanced Journal Voucher.

When the checking officer is satisfied as to the content of the Journal Voucher, he shall
place a Treasury reference number on all copies of the voucher, together with the month
of the account in which the alteration will be effected.

The Journal Voucher will be approved and counter-signed by the officer prescribed by
the Treasurer and entered in the Journal Register.

The original Journal Voucher will be retained within the Treasury and will be part of the
accounting documentation for the month in which it was issued. Any copies will be
distributed as required, including returning a copy to the issuing officer.

Upon receipt of a copy of a Journal Voucher from the Treasury, Accounting Officers
will make any necessary entries to their Vote Ledgers or Registers of Revenue. The
issuing officers shall check that the entries made by him have not been changed by any
adjustments made to the voucher by the Treasury.

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Summary

The above “appropriate vouchers” should be used for making entries and
adjustments to the General Ledger which pass through the Cash Book and the
“journal voucher” should be used for making entries and adjustments to the General
Ledger which do not pass through the Cash Book. This will ensure an effective
General Ledger Operation.

5. Reporting
5.1. General Principles

The data produced by sound budgeting and good accounting and financial control
systems is only of value if reports are produced for action to be taken by senior
Treasury management, the Minister or the Government, as appropriate.

In the private sector, management spends money in order to generate money. The
measures used to monitor money spent versus money generated, such as net profit,
return on investment and increased share values, are key performance indicators for
managers that are closely monitored by them on an ongoing basis.

However, in the public sector, money is raised through taxes so that it can be spent to
achieve the objectives of the government. For the public sector manager, money is
one of several resources that are blended and brought to bear on programme
objectives. Traditionally, such financial information has been used much like a fuel
gauge - something to be consulted occasionally, and more often near the end of the
trip to be sure that there will be enough fuel left to make it to the petrol station.

This attitude of a bottomless pot of money to provide for the planned spending has to
change. It is the function of the Treasury to ensure that it does and to introduce much
tighter financial discipline on public spending.

5.2. Levels of Reporting

There are basically three levels of reporting:

 High Level: this provides summary data for use by the Minister and Government.
Typically, it will provide summaries of the main sources of revenue and
expenditure on a ministry or agency basis. Such a report would normally be
available monthly;

 Medium Level: this provides summary data for finance managers at a ministry or
agency level and would also be used for budgetary control purposes within the
Treasury. Such a report would show the expenditure and revenue on a code by
code basis for each accounting code and would be produced weekly; and

26


 Low Level: this provides a full item by item history for each code number. It is
used primarily by the Vote Controllers at ministry and agency level to compare
the Treasury accounting records with their own vote books. It is there job to
reconcile these on a weekly basis and this report will be a weekly one.

In addition to those three reports, there will be reports is specialist areas. For
example, areas such as Cash Management must have daily reports produced as
overnight lending or borrowing decisions must be made every afternoon.

When the Permanent Computer System is introduced, all these reports will be
generated automatically. There should also exist the facility to generate any ad hoc
report required by management.

In the interim, the Treasury Specialist will be working with Treasury staff to provide
an effective reporting system (see below).

- High Level

As indicated above, this is very much a Financial Summary Report. The Minister,
Cabinet and other elements of government are not normally interested in the detail of
individual revenue or expenditure items. Of course, these can be supplied if required.

- Medium Level

The key report here could be called the Available Funds Report. It shows how
much was budgeted (profiled); how much has been released; how much committed;
how much spent and, thus, the available funds for every code number.

This report will be used by Treasury staff in its overall monitoring operations. It will
let them know of potential problems (under-collection or over-spending) at an early
date when corrective action is easier.

The computer system should “flag” items of revenue and expenditure where the
variance between what was expected and what has occurred exceeds a pre-
determined amount or percentage.

As well as recording the raw data in its reports, the Treasury must undertake an in-
depth variance analysis to determine the causes of the variance.

From this analysis, the Treasury must then determine what action, if any, is required
to correct the situation. It might be that the variance is merely caused by timing
differences and that it will correct itself in subsequent periods. However, if it is
regarded as a fundamental variance alternative courses of corrective action must be
devised and implemented as soon as possible.

27


The earlier that a major variance is identified and the sooner corrective action is taken,
the less traumatic the effect to the government‟s spending plans and policy
implementation.

Apart from Treasury staff, this will be the most important report for senior managers
in each ministry or agency. Of course, they will only be interested in their own
section of the data, not the whole report as will be the case with Treasury.

They can use the data to manage their own operation. If they can see potential
problems before the Treasury, they should advise the Treasury. Or it could be that
they wish to vire money from one area of activity to another as a result of changed
priorities or timing differences for service provision.

Appendix B illustrates the general format which could be used.

- Low Level Reports

This term is not meant in a pejorative sense. Such a report could be called the Ledger
Detail Report. These are the reports which contain the full detail of movement in the
period for every code number. By examining this report one can see exactly every
payment which has been made to build up to the total expenditure on each and every
code number.

This report is normally used by the accounts staff at ministry or agency level. They
should have the responsibility of reconciling the Treasury records with their own vote
books. This ensures that posting errors, mis-codings etc. are picked up and corrected.
The vote controllers should provide Treasury with a weekly certificate confirming that
they have completed the reconciliation and providing a list of any code numbers and
amounts which need correcting.

- Special Reports

The above three reports provide the back-bone of financial control under any Treasury
based system. In addition, there will be other reports for use by specialist staff. There
will also be ad hoc reports extracted for a specific, one-off, purpose.

One example will be in the area of cash management. The officer responsible for this
will require daily reports of the cash balances shown in the accounts so that these can
be reconciled to the daily bank statements obtained from the banks.

This data will also be used as the basis of overnight banking or borrowing decisions.

The officer responsible for debt management will also have a specific regular report
tailored to his individual needs.

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-Reporting Requirements/List of Reports

We put in the annexes a table detailing the reporting requirements and a list of
standard reports. It is not possible to implement all the reports within the project
timeframe. The list is intended to be a basis for discussion in order to select the
standard and non-standard reports that can be implemented during the project.


Based on the above recommendations, a detailed schedule be prepared and agreed of
all reports required from all systems.

The period, detail, circulation, person responsible for report production, etc. must all
be specified.

There must be a mechanism in place for ensuring that the non-production of any
report is immediately known and action taken to ensure that it is prepared.

The Treasury staff responsible for the monitoring process must be trained in the
interpretation of the reports as should ministry personnel.


Based on the models proposed, the Treasury Specialist will work with Treasury staff
in determining what reports are required, their format, what they should be used for
and how they should be interpreted.

A list of all necessary reports will be agreed with all stakeholders.

Similarly, all stakeholders will be consulted on what data they need from each report
which will then be designed to ensure that this data is available in the format needed
by the report users.

For each report, the structure will be determined and the mechanisms for inputting the
necessary data agreed. Draft reports will be tested on the intended recipients and
amended as required.

The Treasury Specialist will help produce the first reports and, by on-the-job training,
ensure that Treasury staff can continue the process.

He will also ensure that staff know how to interpret and use the data contained in the
various reports.

6. Auditing

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As indicated above, effective auditing is a cornerstone of sound financial
management.

However, in the case of Serbia, internal auditing is being developed under a separate
project rather than as part of the mainstream financial management activity.

Nonetheless, it is essential that there be close co-operation on systems development
both with the internal auditors and with the external auditors.

Internal Audit should be undertaking the following activities:

- Financial Controls
These are:
 Budgetary Control: internal audit will be looking for the existence of a long term
Vision of where the State expects to be in five to ten years time; a medium term
Strategic Financial Plan and short term Tactical Financial Plans for achieving
that vision. If the State does not know where it is going how can it possibly get
there cost-effectively?

 Legitimacy of Income and Expenditure: a more straight forward area. Internal
audit must ensure the existence of adequate financial legislation and that all
income and expenditure is in accordance with that legislation;

 Security of Assets: again fairly straight forward. Internal audit will ensure the
existence and accuracy of asset registers and that management exercises proper
control over portable and desirable items such as laptop computers, mobile
„phones, etc.; and

 Accounting Controls: again, a “traditional” area of internal audit concern. As
part of its review of systems, internal audit will test check that transactions are
correctly recorded, accurately processed and that effective control accounts are
maintained.

- Other Controls

These are:

 Objectives: it is not the role of the auditor to be involved in the setting of policy
objectives. However, it is a legitimate concern of auditors to ensure that no only
do managers have all the necessary information on which to base their decisions
but, also that these decisions were correctly made on the basis of the then known
information. However, the auditor must avoid criticising decisions based in data
obtained subsequent to the event which could not have been known when the
decision was made;

30


 Procedures: as part of the audit process, internal audit will ensure that the
“vision” and plans have been communicated to all staff and that they have detailed
written instructions on how to carry out their duties to achieve the objectives;

 Organisation: internal audit must also comment where the structure of a ministry
or department seems confused and where staff do not seem to know what they
should be doing or why;

 Management Information: this is a key role for internal audit. Unless
management has relevant and up-to-date data it cannot manage its function
properly. It would be expected that management would itself know of the
shortcoming and welcome internal audit‟s assistance in trying to rectify the
problem;

 Supervision: the systems of supervision and internal check lie at the heart of
systems auditing. Any sound system must provide adequate divisions of duties so
that no one person can, for example, make an illegal payment without colluding
with someone else. The system must provide for the independent checking of
work as part of the system, not as a separate, stand alone, function. The system
must provide for some feedback as to the quality of service provided. All of these
must be checked as part of the internal audit process; and

 Review of Operational Effectiveness: management should regularly review the
effectiveness and efficiency of operations under its control and consider their
continued relevance in the light of changing circumstances. It is for internal audit
to ensure that it does so. This is the area of value-for-money or performance
auditing where the auditor will looking to see whether or not the service should
still be provided and, if it should be, what alternatives are there, if any, to the
present method of service provision.

- Summary
The overall objective of the internal auditor‟s examination of the system is to arrive at
an opinion which can provide the basis of a comprehensive report to management.
Thus, Internal Audit is no longer, if it ever were, an integral part of the internal check
process. It should not be part of any routine payment, collection or recording process.
Its job is two-fold:
 Sound systems: to ensure that every system is soundly based, properly
documented and appropriate for its purposes; and

 Systems followed: that the systems as laid down are actually followed by
everyone – politician or public servant.

The main difference between Internal and External Audit is the mandate under
which they operate.

31


The External Auditor usually has a mandate which is enshrined in the Constitution.
No one can direct him in his work and he reports to Parliament so no one can hide his
reports.

Another key difference is that the External Auditor will undertake the audit of the
Annual Accounts and produce a report and certificate thereon.

In the areas of Compliance Audit and Value-for-Money (or Performance Audit) the
roles of the Internal and External Auditor are similar and it is essential that they co-
operate and co-ordinate their activities to avoid wasting scarce audit resources.

The External Auditor will examine the effectiveness of the Internal Auditor as part of
his audit process. The better the Internal Audit is, the more the External Auditor will
rely upon it and the less direct checking he will need to do himself.


The Treasury must develop a good working relationship with both the Internal Audit
Service and the External Auditor-General.

Initially, this should be through involvement in the development of the various
financial systems. The advice of both, but especially, the External Auditor should be
heeded as he will be reporting to Parliament on the government‟s overall financial
management performance not just on the annual accounts.


The involvement of the Treasury Specialist will be similar to that of the Treasury. As
he develops systems they will be discussed, or even developed jointly, with the
auditors to ensure that they meet the required standards.

32


7. Summary of Action Required by the Treasury and of the Treasury Specialist’s
Proposed Activities

7.1. Action Plan (high level)

The table below summarises the points raised in the main sections above and
represents an action plan for the duration of the project:

Section Treasury Action Treasury Specialist Action

Legislation  Adopt Accounting  Work with Legislation
Instructions/Operational Specialist on any proposed
Manuals as developed; changes to Constitution, Budget
 Ensure that all relevant Systems Law or Financial
staff are aware of and Regulations; and
trained using the  Work with treasury staff to
manuals. produce Accounting
Instructions/Operational
Manuals

Budget To ensure that there is an To work with Treasury staff on the
Execution effective system of Budget design and implementation of such
Execution – the release of a system.
funds to spending agencies –
to ensure that spending does
not exceed revenue
collection.

Treasury Complete any outstanding  Work with treasury on any
Accounting work in establishing the TSA outstanding aspects of the ITSA;
and
 Develop the Interim General
Ledger

Reporting  Develop schedule of Work with Treasury staff in
required reports; and developing the Reporting System by
 Monitor output contained determining what reports are
in reports. required, what they should be used
for and how they should be
interpreted.

Auditing Develop good working Similar to the Treasury. As systems
relationships with both the are worked on by the Treasury
Internal Audit Service and Specialist, he will discuss them with
the External Auditors. both internal and external audit.

33


7.2. Immediate Action

The key areas on which the Treasury Specialist will work for the first six months of
the project include:

 Legislation: work with the Legislation Specialist by commenting on the
proposed changes to the Budget Systems Law; indicating what is required to
be included in Financial Regulations to be made under the Budget Systems
Law; assist with the Accounting Instructions;

 Interim Computer System: to work with the USAID and Treasury staff on
the implementation of the ICS, especially from the aspect of data produced for
reporting purposes (see below). To assist in trouble-shooting problems as they
arise with the operation of the system;

 Interim Single Treasury Account: to work with the Treasury on any
remaining steps required to implement the physical aspect of the ISTA
including bank accounts, money transfer systems, office routines, etc. To
assist in trouble-shooting problems as they arise with the operation of the
system;

 Budget Execution: to work with the Treasury in developing an effect method
of Budget Execution;

 Interim General Ledger/Reporting: I think that this is my key role. To
ensure that there is an adequate mechanism (probably spreadsheet-based) for
capturing all actual revenue and expenditure data. This will come in part from
the ICS (see above) for the Direct Budget Beneficiaries and in part from the
Treasury Agency offices for Indirect Budget Users and Municipalities.
Initially, I would expect to be involved in ensuring that a sound system exists
for the later areas.

Once captured the data must be compared to the budgeted data. It is likely
that this will involve the development of a simple spread-sheet based financial
control system for use for 2003 and 2004. Ideally, some for of profiling
should be developed for both income and expenditure.

7.3. Summary of Key Deliverables

The Key Deliverables in respect of Treasury Operations are:

34


 Accounting Instructions: to produce detailed Accounting Instructions
(Operating Manuals) for key financial systems;

 Budget Execution: to prepare an effective system for Budget Execution;

 Interim General Ledger: to detail the system required for an effective
Interim General Ledger;

 Interim Reporting System: to detail the system required for an effective
Interim Reporting System;

 Permanent Computer System: develop specifications for the main computer
system; and

 Integrated Financial Management System: develop the reporting
requirements of the IFMS.

7.4. Detailed Timetable and Content of Deliverable

Accounting Instructions/Operating Manuals: to produce detailed Accounting
Instructions (Operating Manuals) for key financial systems.

The first stage is to agree the Framework for each system. A possibility is:

 Title: the system under review;

 Objective: what is the overall purpose of the system (this, of course, should
be congruent with the overall Ministry aims and objectives and, ultimately,
with the Government‟s Vision);

 Legal Performance Targets: where the headline law, regulations made
under that law or other government regulations apply, the system must
comply with that law;

 Occupational Performance Targets: these are non-legal, administrative
targets set by management in order that the system can achieve its objective;

 Strategies and Actions: this section will contain the detailed operational
manual. It must be in the form of a basic, step-by-step illustrated guide to
enable new staff to perform their duties as soon as possible. Yet, it must
contained sufficient detail to ensure that senior managers can use it to produce
the level of reporting required for future decisions and action to be taken. It
will also aid auditors, both internal and external in their systems assessment
work; and

35


 Performance Indicators: this sections will detail the measures to be used to
determine whether of not the systems are performing properly. They are a
vital part of the overall process. Where a Performance Indicator is not met, an
investigation is required to find out why. This may reveal system defects,
staff defects or, rarely, that the target was impossible to meet with given
systems and resources.

The second stage will be to Identify the Key Systems and then Determine Priorities
within those systems.

The Treasury Specialist has identified nine key areas for which detailed systems
specifications must be prepared:

 Budgeting and Budgetary Control;
 Accounts and Reports;
 Cash and Bank Management;
 Expenditure Control;
 Grants;
 Procurement and Stores;
 Asset Management;
 Revenue Enhancement; and
 Departmental Human Resource Management.

The third stage will be to undertake the actual system specification work. It is likely
that the Treasury Expert will oversee the operation of this activity by the short term
experts, as well as undertaking some work himself.

Progress will be measured by the production of draft systems specification in
accordance with the agreed timetable (see overall summary timetable below).

Success will be measured by the adoption and successful use of the Operating
Manuals.

Budget Execution: to prepare an effective system for Budget Execution.

The Law requires the use of a quota system but does not indicate how the actual
notification of quotas should be done. It can, in fact, be done using either an informal
or formal system.

Under the informal system, spending units are notified of the amounts they can spend
by memorandum. It is a quick, flexible system but is prone to error as total amounts
approved may not be readily available.

A formal system does not have this disadvantage and is, thus, much more
transparent. The classic formal system uses a variety of “warrants” – official

36


documents signed by the Minister under powers contained in the Budget Law or
Regulations made under that Law.

Thus, the first action is to prepare a paper on the pros and cons of each method and to
obtain a decision as to which should be used.

If the warrants system is selected, the second stage will be to design the various
warrants required. These are:

 Appropriation Warrant: under the annual budget law the Minister shall
issue Chief Finance Officers with an Appropriation Warrant specifying the
level of expenditure approved by Parliament for each spending unit or sub-
unit under specific budget classifications;
 Allocation Warrant: by this warrant, the Minister will authorize Chief
Finance Officers to spend up to the amount detailed in the warrant. It is
likely that these warrants will be issued on a monthly or quarterly basis,
depending on funds available for spending.
 Virement Warrant: by this warrant a Chief Finance Officer may move
funds from one expenditure item to another provided the reallocation does
not exceed an agreed maximum of the total of the appropriation being
reduced. This Warrant shall also be used to transfer money from reserves
to spending organizations;
 Contingency Warrant: the Minister has the right to increase the amount
available to a Chief Finance Officer by way of a Contingency Warrant.
Any amounts provided by way of Contingency Warrant must be taken to
the next session of Parliament by way of the Budget Law or
Supplementary Budget Law.
 Development Project Warrant: the Minister will issue a Development
Project Warrant to Chief Finance Officers executing Donor funded
projects notifying them of a project‟s approval and the total expenditure
that can be made under that project, usually for the life of the project; and

 Development Project Allocation Warrant: the Minister will issue a
Development Project Allocation Warrant to Chief Finance Officers
responsible for the progress, control and monitoring of a Donor funded
project notifying them of the funds that are currently

Progress will be measured by the production of a report and, if required, warrant
forms (see overall summary timetable below).

Success will be measured by the adoption and successful use of a sound and effective
method of quota release.

Interim General Ledger: to detail the system required for an effective Interim
General Ledger.

37


Receipts and payments charged against appropriations given by legislature are known
as above-the-line.

Those which are made under some other authority of the legislature are below-the-
line (anything not covered by voted income and expenditure or money received on
behalf of third parties which do not belong to Government).

The Basic Rules for General Ledger Accounting are:
• All transactions (except Journal entries) recorded in the cash book. Each entry
supported by the appropriate voucher.
• Vote Controller provided with details of income and expenditure recorded. These
are reconciled with the Votes Register.
• Below-the-line transactions can only be with a third party. No suspense accounts
or account containing expenditure which should be charged above the line should
be opened.

There must be an “appropriate voucher” for every entry (income and expenditure)
which passes through the Cash Book to enter the General Ledger. There must also be
a “journal voucher” for making entries and adjustments to the General Ledger which
do not pass through the Cash Book. These are discussed in the paragraphs below.

- Receipts

The first appropriate voucher should be a receipt for money handed paid to
Government. If there is not a specific licence issued, which performs the function of
a receipt, what can be termed a General Treasury Receipt (GTR) must be issued.
As policy matters come under the purview of the Treasury (see below), it will be up to
the Treasurer to determine the format of the GTR.

- Expenditure

This basically involves two systems:

General Payment System: this is for all payments other than those made through the
payroll system; and

Payroll System: payment of salaries, wages and associated payments.

All payments of public moneys through the General Payments System must involve
the use of a General Payment Voucher which shall be in such form as the Treasurer
shall prescribe from time to time

- Journal Voucher

38


Adjustments to Government accounts not involving the actual transfer of cash shall be
made using Journal Vouchers.

Progress will be measured by the production of a effective GL with all required
vouchers and systems in operation (see overall summary timetable below).

Success will be measured by an effective general ledger proving data for reporting
and control purposes.

Interim Reporting System: to detail the system required for an effective Interim
Reporting System.

As indicated above and detailed in Appendices A to C, there are basically three main
types of report;

 High Level: this provides summary data for use by the Minister and Government.
Typically, it will provide summaries of the main sources of revenue and
expenditure on a ministry or agency basis. Such a report would normally be
available monthly;

 Medium Level: this provides summary data for finance managers at a ministry or
agency level and would also be used for budgetary control purposes within the
Treasury. Such a report would show the expenditure and revenue on a code by
code basis for each accounting code and would be produced weekly; and

 Low Level: this provides a full item by item history for each code number. It is
used primarily by the Vote Controllers at ministry and agency level to compare
the Treasury accounting records with their own vote books. It is there job to
reconcile these on a weekly basis and this report will be a weekly one.

The first phase is to prepare and agree all reports required from all systems.

The second phase is to determine the period, detail, circulation, person responsible for
report production, etc. must all be specified. There must be a mechanism in place for
ensuring that the non-production of any report is immediately known and action taken
to ensure that it is prepared.

The third phase is training the Treasury staff responsible for the monitoring process in
the interpretation of the reports as should ministry personnel.

Progress will be measured by the production of regular, timely reports which meet
stakeholder needs. (see overall summary timetable below).

Success will be measured by effective financial control with no over-spending or
under-collection without management being aware that it was coming and being given
the chance to take corrective action..
Permanent Computer System: develop specifications for the main computer system.

39


Before the Permanent Computer system can be put out to tender it is necessary to
provide specifications of the volumes of data it will be expected to handle, the reports
to be generated and so on.

The first stage of this process will be for the Treasury Specialist to draw up a schedule
of items on which data should be provided. This has not been done at this stage as
this work will not take place until the end of 2003 (see summary timetable).

Once this has been agreed with government, the data itself will be gathered.

This is a vital part of the process for acquiring the permanent system as, if the data
handling requirements are misstated the whole system could fail.

Progress will be measured by the production of a detailed specification which can be
used in the procurement process for the Permanent Computer System (see overall
summary timetable below).

Success will be measured by the new computer system performing to specification
and delivering stakeholder requirements.

Integrated Financial Management System: develop the reporting requirements of
the IFMS.

This is related to the previous point and concerns what reports the new system is
required to produce. These will be developed from those produced by the Interim
System.

Progress will be measured by the production of regular, timely reports which meet
stakeholder needs. (see overall summary timetable below).

Success will be measured by effective financial control with no over-spending or
under-collection without management being aware that it was coming and being given
the chance to take corrective action..

8. Logframe Matrix

LOGFRAME MATRIX FOR THE FMIS PROJECT

PROJECT INDICATORS MEANS OF ASSUMPTIONS
DESCRIPTION VERIFICATION
1. Goal
Create a sound and EU and other Internal and external Continued political
viable basis for the international Institutions audit support is provided to

40

Serbia: Road Map for Developing Treasury Functions and Implementing Treasury Single Accound and Finance Information Managent System

Serbia: Road Map for Developing Treasury Functions and Implementing Treasury Single Accound and Finance Information Managent System

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