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Public Money for the Public Good

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Public Money for the Public Good ICAEW BETTER GOVERNMENT SERIES Public money for the public good BUILDING TRUST IN THE PUBLIC FINANCES A POLICY INSIGHT PUBLIC MONEY FOR THE PUBLIC GOOD PUBLIC MONEY FOR THE PUBLIC GOOD PageForeword head ‘Public money ought to be For the government this bond of trust is INSIGHT especially important. The public needs to With the public touched with the most trust that when the government asks them for sector making scrupulous conscientiousness taxes, the monies paid over and other public up nearly half resources will be used for the public good. of the global of honour. It is not the economy, effective public financial produce of riches only, but Every country has a unique history and faces management is a of the hard earnings of distinct challenges. While there can never critical factor in the be a single approach to public financial economic success labour and poverty.’ management, there are certain universal of each and principles and factors which underpin the every country. Thomas Paine creation of trust anywhere in the world. This publication provides an overview of those Successful economies deliver sustainable factors, both cultural and technical. growth and resources to meet the needs of individuals, communities and business. With To illustrate what can be done, we have government activities accounting for nearly half included a range of case studies showing of the global economy, effective public financial how different countries have taken practical management is a crucial, yet all too often steps to build trust in public money. The overlooked, condition for prosperity. majority of these are from developing nations: lower GDP is no barrier to effective public The role of professional accountants is financial management. fundamentally about creating trust. Trust that numbers are correctly stated and that a true and We hope that this report will contribute to fair account has been produced, showing what building a world of strong economies, where money has been raised and how that money has public finances are transparent and well been used. This is equally true in business or in managed, and where public servants hold the public sector. themselves to the highest standards. Michael Izza Chief Executive ICAEW 2 PUBLIC MONEY FOR THE PUBLIC GOOD PUBLIC MONEY FOR THE PUBLIC GOOD PageContents head Foreword 2 Executive summary 6 Trust: the basis for strong economies 8 The foundations of trust 11 Culture and behaviour 12 Professional skills and ethics 14 Robust systems and processes 16 Building trust in practice 19 Insights 28 3 PUBLIC MONEY FOR THE PUBLIC GOOD PUBLIC MONEY FOR THE PUBLIC GOOD Economies can’t succeed without trust in how public money is managed. Lack of trust discourages business, deters investment and lowers tax yields. Trust grows out of a commitment to accountability and transparency which together create a culture of rigorous scrutiny. THE NETHERLANDS The IntoSAINT integrity audit PAGE 25 EUROPEAN COMMISSION The ‘Four Eyes’ concept PAGE 16 AFRICA Improving NIGERIA professional Transparency financial skills over tax liabilities PAGE 15 PAGE 24 BRAZIL Supreme LIBERIA Audit Defining Institution good financial PAGE 18 management PAGE 13 SOUTH AFRICA Protecting BRAZIL external scrutiny Participatory of public budgeting at administration local level PAGE 20 PAGE 21 PUBLIC MONEY FOR THE PUBLIC GOOD PUBLIC MONEY FOR THE PUBLIC GOOD This report describes concepts, structures and methods which have promoted trust on every continent. It is dedicated to all who have devoted their careers to building the public’s trust and looking after the public’s money. The case studies from around the world show how countries have taken practical steps to build trust in public money. MOLDOVA Analysing public financial data PAGE 23 PAKISTAN Harnessing technology to expose corruption PAGE 26 UGANDA Keeping tabs on spending PAGE 24 SINGAPORE Three pillars of anti-corruption PAGE 26 SOUTH AFRICA Asserting positive values PAGE 12 THE PHILIPPINES Citizens’ Budget TIMOR-LESTE PAGE 21 Managing commodity price risk PAGE 27 PUBLIC MONEY FOR THE PUBLIC GOOD PUBLIC MONEY FOR THE PUBLIC GOOD Executive summary INTRODUCTION These principles and factors are vital for an INSIGHT effective system Effective public financial management is Building trust essential for economic success. At its core is the Strong public financial management about public money is about need to build and maintain trust. requires transparency in how resources are putting in place raised, managed and used, together with comprehensive Trust grows out of a culture of rigorous accountability to instil confidence and promote mechanisms to independent scrutiny which enables citizens to continuous improvement. demonstrate to see that the decisions their leaders take are in citizens it is being the public interest. Strong governance and controls will ensure spent for the public officials are held accountable for the public good. stewardship of public money, with feedback KEY PRINCIPLES and sanctions when behaviour falls short of expectations. These also provide assurance that Four principles underpin trust in the public the system is operating as intended. finances: • Transparency − accurate records that show A wide range of professional skills are needed where money is raised and spent. to ensure government has the capability to undertake the financial management of • Assurance − figures and processes are large public bodies in a complex stakeholder checked by independent experts. environment. Clear guidance on ethics will help • Accountability − decision makers are clearly public servants in situations of conflict. identified and subject to strict rules and review of performance and outcomes. It is vital that robust systems and processes are underpinned by core accounting disciplines to • Objectivity − policies are based on accurate ensure financial information is relevant, reliable, information and rigorous analysis. comprehensive, complete, understandable and produced on a timely basis. Three functional factors put these principles Good financial management practicewill into practice. include clearly defined responsibilities, • Culture and behaviour − which needs segregation of duties, adherence to to support the behaviours and values documented procedures and controls, regular required of good public servants: integrity, management review, and reconciliation of selflessness, objectivity. Public money must account balances. be managed for the public good. Independent audit gives citizens confidence • Professional skills and ethics − high quality that the numbers presented by government public financial management requires highly are accurate. Internal audit should have a high developed technical skills, continuous degree of operational independence. External learning and strong ethical codes. audit should have constitutional safeguards that • Robust systems and processes − which ensure its independence from the executive. should be supported by comprehensive data collection, analysis, scrutiny and audit. 6 PUBLIC MONEY FOR THE PUBLIC GOOD PUBLIC MONEY FOR THE PUBLIC GOOD Building trust in practice has a strong social CONCLUSION dimension. A world of strong economies depends on trust It is vital to uphold the ‘social contract’. Citizens in the public finances. Public servants spend must be confident that they are protected by other people’s money and citizens and investors the law and that public institutions and servants need to have confidence that those funds will will act in accordance with it. be properly and effectively used. Governments have a duty to demonstrate that they deserve Public institutions with operational that trust. independence from political control are more likely to be trusted to act in the public interest. Chartered accountancy exists because of the need for financial data to have been scrutinised A well informed population is far more likely by skilled, independent and objective to be confident about investing for the future. professionals with a commitment to high This means both providing appropriate ethical standards and the public interest. Their information in ways that are accessible and easy qualifications ensure these professionals can to understand, and educating citizens as well as be trusted to declare that a financial statement inviting them to participate in decision making. provides a true and fair reflection of the facts. Accountancy skills are the foundation of Effective public financial management requires rigorous independent scrutiny. that decision makers, citizens and other stakeholders, are able to ‘follow the money’ The techniques developed by chartered to see how taxes were raised, why decisions accountants over many decades build to spend it were made, how the money was confidence that public finances are being actually spent and what was bought. managed for the public good. This in turn provides a key condition for the sustainable Where government plans and activities are economic growth vital to addressing the measured against expected outputs and profound challenges faced by nations in the outcomes, citizens and other stakeholders will be 21st century. able to judge the performance of government. This in turn provides the basis for feedback and Professional accountancy bodies have a valuable continuous improvement mechanisms. role to play in providing the frameworks and expertise to help government develop effective For the public to believe that public officials public financial management. This includes both will do
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