Can strong financial management in the public sector achieve political, economic and social goals? This guide from the Institute of Democratic Strategies seeks to show the elements of an integrated financial management system (IFMS), provide suggestions for their elements and structure and give examples from experience with Latin American governments.
Strong financial management in the public sector is a tool for achieving political, economic and social goals. Government is realising that many of the same techniques and approaches that allow private sector firms to grow and provide returns to shareholders can be adapted to the public sector to increase return on public spending.
Traditionally control over funds was sufficient for public financial management. Emphasis was placed on compliance with financial regulations, not performance. Today audit is no longer good enough: Accountability in its broadest sense is required.
A conceptual framework of an IFMS needs to consider the following issues:
- A systems approach: IFMS is first and foremost a system, its parts cannot effectively function or exist in isolation. It should grow and evolve from a solid foundation and must be constantly fed, updated and not allowed to become static.
- Entity based management: The entity structure defines the parameters and purposes of an IFMS. Defining the entity and sub-entities is crucial. An entity may be defined as a single operating unit without regard to the rest of the government.
- Normative centralisation, operational decentralisation: Defining standards centrally ensures information from all budget centres can be aggregated, integrated and compared. Delegating implementation of the standards to lower operational units ensures the financial system is tailored to their needs.
- Different levels of decision-making require different levels of information aggregation: In IFMS, the interfaces between the various units and agencies must be designed so that the correct level of aggregation is available at each managerial level.
- Unified responsibility: The entity-based foundation of IFMS implies that there are clear and unified lines of responsibility at each level and that financial reporting corresponds to those levels.
Every integrated financial management system shares certain core components, these are looked at in detail. The key elements are:
- Budgeting: This is a core element of an IFMS, it determines the kind of information needed and the classification system of revenue and expenditure accounts. The budget also provides a primary internal managerial control over the expenditure of government funds.
- Accounting: This is the primary provider of financial information linked to the operations of the government. It is the function in IFMS that records and integrates the results of financial transactions that occur.
- Cash Management: This function must be proactive in consolidating the cash resources of the government and planning for required cash disbursements and have a strong capacity for developing cash flow projections based on expected receipts and expenditures.
- Public Debt Management: This is one of the smaller functions of IFMS but is of high importance as properly managed debt can yield big dividends in government savings on interest.
- Information System: This is what ties all components together in IFMS. The system cannot be designed apart from individual analysis of each of the components. But, the information system supersedes any single component.
