The success of government is dependent on the management capacity of its agencies. ‘Spending agencies’ (ministries, departments, and policy making and implementation agencies) are the instruments through which government seeks to implement its fiscal policies. This chapter, in ‘Control of Public Money’, looks at the issue of financial management in spending agencies, with reference to the UK, USA, Western Europe, Australia and New Zealand, India, and Latin America.
Although spending agencies receive mandates from constitutional and extra-constitutional (international financial institutions or donors) authorities, their financial management does conform to a ‘uniform pattern’. Many factors influence the nature of financial management, one of which is the type of budget system that operates in a country: (1) An executive budget system; (2) a legislative budget system; (3) a centrally planned economy or (4) a corporate organisation. Their formal structures and norms influence the interactions between government and agencies and can dictate how much control an agency has over financial management. Controls on agencies were traditionally seen as a good thing. But is this really the case?
The observance of internal controls has been counterproductive. A rigid preoccupation with operating procedures has become the central activity of agencies: A triumph of ‘process’ over ‘purpose’. The main findings were that:
- In the countries surveyed, except the British-based systems, financial managers were mostly concerned with verification controls (payment and accounting functions). This created a division between themselves and the programme managers, who were focused on the effective delivery of services
- Internal controls are too expensive to maintain given that they are counterproductive, and too many internal controls are exercised by too many agencies. Control requirements are not always uniform across departments and this needs to be taken into account when designing them
- The way internal controls have been implemented has contributed to overcentralisation, which does not promote an economic and effective use of resources
- Excessive internal controls have meant that spending agencies have lost their ‘entrepreneurial zeal’ for innovative administration
- There are risks when implementing a budget. Budget assumptions are fragile and can change when the economy changes. Risks differ between spending agencies
- The public sector is generally risk averse: It focuses on legal compliance, rather than an exploration of these risks, which may bring about lower costs or more efficient provision of services.
The economic use of resources, and not just a preoccupation with compliance, should be encouraged:
- A change of culture is required. More authority and enhanced accountability should be given to spending agencies as this will enhance their sense of responsibility and encourage innovation
- Central agencies should also be empowered. This will not contribute to overcentralisation
- Internal controls in spending agencies should vary depending on the nature and scope of the organisation
- Computer technology means that payment activities can be contracted out to the corporate sector. This will reduce the focus on verification controls
- The identification and management of risks should become part of government administration and should not be viewed as a discretionary activity.
