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Public Financial Management Good Practice Government Resource Planning Anti Corruption
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Public Financial Management
Good Practices
PFM Domain ANTI-CORRUPTION
Good Practice LEVERAGING GRP TO REDUCE CORRUPTION
Applicable DEVELOPING NATIONS, EMERGING ECONOMIES
2. what is the linkage Governments implement Government Resource Planning (GRP) or Integrated
between “anti- Financial Management Information Systems (IFMIS) to improve fiscal
corruption” and management and governance as part of Public Financial Management (PFM)
GRP? reform
GRP systems and PFM reform have been found to improve governance where
governance is the door to anticorruption
Countries with better-performing PFM systems have lower corruption
perception indexes because robust PFM systems raise the risk of detection and
the cost for bad behavior
The reduction of corruption is the result of a committed desire to change and
the use of appropriate tools, like GRP, to affect change
There are no systematic assessments of the impact of IFMIS impact on
corruption but the literature considers that IFMIS can have a deterrent function
on corruption by increasing the risks of detection and the absence of an IFMIS
is considered an enabling factor for corruption
GRP addresses three principal-agent framework dimensions of institutional
structure that are most critical in reducing opportunities for corruption: (1) the
monopoly power of officials; (2) degree of discretion that officials are
permitted to exercise; and (3) degree to which there are systems of
accountability and transparency in an institution
The computerization of public financial management processes can create new
opportunities for corruption by monopolizing information access and control,
so additional institutional and capacity factors are needed to leverage GRP for
anti-corruption efforts
GRP systems when combined with the proper institutional environment
augments anticorruption efforts although not all forms of corruption can be
detected by these systems
The anticorruption capabilities of GRP systems are augmented when leveraged
via e-governance transparency portals and it has been suggested all types of
petty bureaucratic corruption can be diminished through the increased
transparency achieved by using modern electronic media
what is the linkage Governance: the manner in which government acquires and exercises its
between authority to provide public goods & services
“governance” and Corruption: the use of public office for private gain and is an outcome – a
“anti-corruption”? consequence of the failure of accountability relationships in the governance
system
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3. what is the The relationship between sound and orderly PFM systems and reduced levels of
consensus on the corruption is also receiving increased attention. Mapping freedom from corruption
role of PFM for anti- (using Transparency International’s (TI) Corruption Perception Index (CPI)), against
corruption? the quality of PFM (using the World Bank’s Country Policy and Institutional
Assessment (CPIA)), suggests that higher quality PFM systems correlate with lower
perceptions of corruption (Dorotinsky and Pradhan 2007). Heilbrunn (2004) argues
that the creation of anti-corruption commissions is a token effort that lacks
substance, if reforms in PFM do not take place.
GRP has a significant effect on financial institutions and investor corruption and is an enabler for reducing
corruption by executives. Based on the World Bank study in 2000 , GRP has a possible positive effect on
more than half of attributable corruption in developing countries.
what are the a one-point increase in the corruption index reduces tax revenue collected by 2.7
corruption effects percent of GDP
on public finances? estimated $400 Billion lost worldwide through procurement corruption because
the procurement of goods and services by public bodies amounts on average to
between 15 and 25 percent of a country’s Gross Domestic Product (GDP)
estimates of annual worldwide bribery of about US $1 trillion dollars annually
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4. where are the PFM There are numerous corruption PFM vulnerabilities throughout the government
vulnerabilities to budget cycle including:
corruption? Budget Execution: is considered fertile ground for corruption because it provides
opportunities to undertake transactions and for money to exchange hands
through gaps between formal processes and informal practices
Budget Preparation: vulnerability for corruption is considered to be low at the
stages of planning and preparation but is important to have full budget coverage
Extra-budgetary accounts: or “off-budget” accounts funneled through foreign
aid or other methods
Payments: includes authoring officer withholding the issuance of a payment
order on account of cash flow shortage while in effect, his real reason is
expectation of a bribe and in the form of payments to ghost companies or
workers, for the delivery of no goods or services, queue jumping, retention of
payment in return for kick backs, transfer of less than the stated amounts and
pocketing the balance, and favoritism in approving eligibility
Payroll: including “ghost employees”, dead pensioners and demands by
managers for payroll kickbacks
Procurement: is a common source of corruption and can include violation of
procurement laws and regulations, ordering of unauthorized goods and services,
exceeding budget ceilings, bid-riggings, orders addressed to fictitious companies,
acceptance of inflated prices
Public Investment Projects: as a special case for procurement where some
individuals or political groups [gain] opportunities to receive “commissions” and
executives have significant degree of discretion in influencing the scope of these
projects
Tax Administration: can be a major problem to tax and customs administrations
including bribes to reduce or evade tax
Treasury: The manipulation of bank accounts outside the control of the Treasury
how do GRP GRP systems are used to detect corrupt activity through:
systems detect Audit: audit trails in GRP tools identifies who entered, adapted and approved
corruption? every step in a government process enabling fraud pattern recognition
Exceptions: identifies exceptions to normal operations
Reporting: GRP reporting tools and analysis by internal and external
stakeholders detects fraud
Transparency: publishing of budget plans and budget reporting opens up
information to civil society scrutiny
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5. how do GRP Internal controls within institutions are considered the most effective for GRP anti-
systems prevent corruption:
corruption? Controls: through automation to ensure legal processes are followed and
appropriate approvals used to eliminate opportunities for corruption because of
the link to the transaction cycle, the circumvention of procedures and blurring of
cash disbursements ,and the use of informal practices
Decentralization: of functions to impede centralized corruption
Payments: eliminate cash payments through secure cheque printing and
electronic funds transfer making financial transactions fully traceable and
reducing cash fungibility including use of the Treasury Single Account to prevent
manipulation
Reporting: knowledge that fraud patterns can be uncovered in reporting, or
audit, changes the behaviour of politicians and public servants
Segregation: of duties for processes across many people reduces the ability of
any one person to commit fraud
Countries with low perceived corruption enjoy higher human development
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6. what forms of Accrual Accounting: prevents hiding arrears and assets that are possible in cash
corruption are accounting
restricted through Asset Management: reduces theft of public goods by cross-reference of asset
the use of GRP? inventories with equipment purchase
Audit and Reporting: reduces theft of public funds through fraud detection and
automatic exception alerts
Human Resources: reduces nepotism, ghost employees through audits, kick-
backs by tracking payments, comparing addresses, using national identification
cards, cross-referencing birth and death records, civil service and executive
financial disclosure, coherent alignment of salary scales to responsibilities and
recruitment controls
Procurement: controls aimed to detect and deter corruption and can provide
feedback about irregularities from competitors through on-line reporting
Revenue: controls show full revenue collected for fees, fines and taxes, the
introduction of computerized support for the processing of customs documents
provides the opportunity to implement standardized procedures that leave little
to the discretion of the officials
Tax Administration: reduces tax fraud through land ownership and vendor
records and rent-seeking from revenue collectors
Tendering: reduces “contract steering” fraud by cross referencing employee and
vendor information and quotes from fake vendors
what factors in the Comprehensiveness: the GRP system is covering a significant portion of the PFM
GRP system are system otherwise fraud will occur in manual and non-integrated systems and
necessary for anti- most common standards, rules and procedures, with the view to reducing risks
corruption? of mismanagement of public resources
Integrity: the GRP software and underlying database have maintained data
integrity where the technology identifies data manipulation attempts
Reconciliation: GRP sub-systems like bank statements, tax administration or
payroll need to be frequently reconciled to trap fraud
Secure: the GRP system provides good access controls on secure networks to
reduce data manipulation
can we put Although there has been a strong narrative about corruption in developing
corruption in countries, it should be noted that under much more propitious conditions, the
perspective? rampant corruption in the United States that spanned from the late nineteenth
century through the early twentieth century was presided over by the industrial
robber barons and Tammany Hall leaders and took decades to overcome and some
PFM reforms in these countries have taken up to two centuries to evolve.
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7. how does The ability of the public to review the full performance and financial statements of
transparency and e- government entities leads to confidence and trust in the public sector and roots out
governance reduce corruption. PFM transparency should be considered a major force to animate civil
corruption? society engagement and protest by turning on the capacity of the society to interact
with data:
Bribery: transparency minimizes the opportunities for public officials to
monopolize access to relevant information and to extract bribes from clients
Comparability: budget transparency enables civil society to compare
expenditures across multiple years to identify corruption patterns
Freedom of information: along with open data, enables civil society to act as
corruption watchdogs, credited with combatting corruption
Monitoring: civil society leveraging transparency to identify where and how
corruption is actually taking place
Independent reporting: through social media enables the public to uncover
corruption patterns and augment government auditing
Procurement manipulation: competitors and civil society can object to
fraudulent tendering, find collusion between vendor and procurement officer,
identify patterns of bribery, favouritism, patronage systems and bid rigging
Surveys: Public Expenditure Tracking surveys, when made public and linked to
public information campaigns, can contribute to reducing leakages
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8. what additional Autonomous audit: can have a critical role in strengthening government
factors are needed accountability if structural dysfunctions in the system of fiscal control are
to achieve anti- eliminated
corruption Capacity: ICT, PFM, investigative services and legal capacity among public
potential for GRP? servants and citizen education to leverage transparent government information
Civil service reform: create a culture of professionalism and ethical values with
instilling meritocracy while providing workers with salaries comparable to the
private sector
Decentralization: effects on anti-corruption largely depend on the design of the
fiscal transfers from the central government
Discretion limitation: where politicians have limited discretionary authority
Institutional practices: internal audit, external audit, anti-corruption
commissions and strong rule of law are needed to make corruption accountable
Internet access: internet access is positively associated with reductions in
corruption
Legislative oversight: by the strengthening of the rights of members of
parliament in the budget preparation process
Media competition: ensures good quality of information provided to citizens to
help reduce public acceptance of corruption
Mobile infrastructure: mobile and social media enables rapid organization to
create critical mass of protesters and closes the digital divide
Political will: clear commitment of authorities and effective political motivations
are required to ensure capacity building and relevant institutional practices
Revenue de-concentration: separation of functions is a trend in revenue
administration to organise activities by function e.g. audit services, collections,
rather than by tax type e.g. Value Added Tax (VAT) or Income Tax, in the belief
that this increases collections and reduces the potential for corruption
Risk management: risk mitigation strategies that results in changing processes
Rule of law: legal ramifications and accountability when corruption is detected
Tax simplification: reduces discretion in tax collection and reduces exemptions
what is the linkage Corruption and lack of transparency, which erode public support, impede
between corruption effective resource mobilisation and allocation and divert resources away from
and aid activities that are vital for poverty reduction and sustainable economic
effectiveness? development. Where corruption exists, it inhibits donors from relying on partner
country systems.
Donors are more likely to fund projects “off-budget” when there is high
perceived corruption. This increases transaction costs for reporting and
introduces inefficiencies because of the lack of coordination and harmonization
among donors and with governments.
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9. why should donors Country GRP systems can reduce aid fungibility when the whole of the state’s
use “country revenues should be accounted for in its official budget.
systems”? The Paris Declaration on Aid Effectiveness, the associated emphasis on the use of
country systems… placed PFM reform in centre stage, both from a poverty reduction
and sustainable peace (in post-conflict countries) perspective. For donors, the
importance of sound PFM systems in recipient countries also relates to concerns
about funds not being used for intended purposes and the associated impact on
development effectiveness and their own reputation.
When donors avoid using government systems designed to guarantee a degree
of integrity, this provides the opportunity for corruption. This has been especially
true in countries with a large donor presence
There is a lack of evidence to show that corruption lessens when expenditures
use a donor’s PFM system rather than reasonably strong PFM systems of a post-
conflict country. In fact, there are numerous cases of well-publicised abuses
when donors deliver aid directly.
There is an international donor commitment to use country systems, including
GRP, to improve aid effectiveness.
what are some real- Afghanistan: around seven signatures were needed for every payment in the
life examples of paper-based system and each signature required a small bribe. This avenue for
GRP anti-corruption corruption was eliminated with the implementation of the Afghanistan Financial
success stories? Management System. To date, only one case has been reported where there was
an allegation of improper use of the system and the individual was caught. It
should be noted that the vast majority of corruption found comes external to the
Afghanistan Financial Management Information System. A transparent financial
system guarantees fast economic growth of a nation. AFMIS provides controls,
delegation of authority and audit trails that limits the opportunity for corruption
to informal systems. The AFMIS has helped the government in the management
and execution of budget, control of public expenditures, reduction of corruption,
collection of revenues and on-time payment of salaries to government
employees . The Ministry of Finance publishes an accounting manual and regular
monthly budget reports to improve transparency in public finances. The
beneficiaries of manual financial system in Afghanistan were the corrupt officials.
Morocco: 225 wage suspensions and about 363 radiations between 2005 and
2007
Sierra Leone: the introduction of IFMIS and subsequent improvement of record
management helped uncover anomalies in personnel records of 2000 civil
servants, leading to 16% of the subset employees being immediately suspended
from the payroll as a result
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10. what are some Many corruption indicators are based on public perception surveys. There is growing
useful corruption concern among anti-corruption agencies that perception-based indexes are not
indicators? accurate measures. There is also some evidence that there can be gaps between
informal procedures and technical PFM reforms leaving room for discretion and
corrupt practices. Good corruption and transparency indices include:
Global Integrity Index
Open Budget Survey
Revenue Watch Index
Transparency International Corruption Perceptions Index
World Governance Indicators: Control of Corruption
what are some of Cost and Failure: can be high costs of automation, and there is a high failure rate
the problems with among automation projects, particularly in government
GRP-enabled anti- Graft shifting: corruption can move from the procurement officer level to those
corruption? with control over the new automation system
ICT sophistication: civil servants with superior ICT skills could manipulate
systems
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11. how can GRP anti- Data Integrity: in back-end databases and validation for data input and data
corruption issues be imports identify transaction manipulation
overcome? Oversight ICT training: so that auditors are capable of managing system audits
in addition to financial audits
Patterns: through the development of fraud patterns that produce alerts and are
used in exception reporting
Phased implementation: through approaches to FMIS implementation that
reduce the risk of failure, and build capacity and to allow absorption of key
government reforms
Security: through encryption, controlled audit trails, integrated controls and
tying user permissions to the government organizational structure and chart of
accounts
Systems configuration: rather than customized or custom-developed GRP that
can introduce poor practices
what GRP good Conclusions
practices aid anti- 1. GRP systems can be leveraged to reduce corruption through controls, audit and
corruption efforts? reporting.
2. GRP systems can be a foundation for anti-corruption activities but must have
additional factors to be of significant use.
3. Effective country GRP systems reduce aid fungibility associated with off-budget
donor funding.
4. GRP systems can become the cornerstone for fiscal transparency to enable citizen
oversight to reduce corruption.
5. Properly designed GRP systems do not introduce significant new corruption risks.
There are very few “best practices” but many “good practices” in Public Financial Management.
FreeBalance, a global provider of Government Resource Planning (GRP) software and services
shares good practices from experience with developed and developing country governments
around the world.
www.freebalance.com
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