International Journal on Governmental Financial Management, 2010 Volume 2 Published

For the last dozen years or so, the World Bank and donors that support its approach have dominated the public financial management reform agenda in developing countries. However, this approach has been subject to increasing criticism in recent years. Two important studies published earlier this year, one by the World Bank itself, provide further evidence that the dominant approach is not working, at least in Africa and the Middle East.

The World Bank approach is based on its Public Expenditure Management Handbook (1998). Around half of this publication is devoted to two reforms, the Medium Term Expenditure Framework (MTEF) and the Integrated Financial Management Information System (IFMIS). These have since become standard reforms to be implemented almost everywhere the World Bank has significant influence. So for example, Mat Andrews (2010), in his study of 31 countries in Sub-Saharan Africa found that “they have alarmingly similar reforms in place” (page 44), “an MTEF was implemented in 28 countries, programme budgeting in 25 and an IFMIS in 20”. As a result of these findings, Andrews calls for “less similarity of reforms and more context appropriateness”, as one of his three main recommendations.

Close reading of the World Bank Handbook shows that some criticism of what became the standard approaches is acknowledged. So this publication admits that “program budgeting has not been very successful in either developed or developing countries” (p.13). However, this became an integral approach to most MTEFs. In addition, the Handbook provides a short section on “getting the basics right” including a list of pre-conditions for what became the standard reform agenda.

Two years ago both the World Bank and the IMF held high-level seminars to review the evidence for the success (or more common failure) of their common approach to public financial management reform. One of the presenters warned that an MTEF may cause “enormous waste, frustration, and illusion—for trivial or non-existent benefits. The same is true of the informatics infrastructure for public financial management” (Schiavo-Campo 2008, p.26).

The recent World Bank paper reviewing the experience of ten countries in the Middle East and North Africa provides further support for this view. It found that two of the five most challenging public financial management reforms were medium term sector strategies and large information technology projects. A “number of countries in the MENA region are attempting to develop forward estimates as part of MTEF reforms, but none has a functioning system at present” (p.16). Similarly the level of success with IFMIS projects was found to be disappointing and one of the ten lessons of the study is to “be wary of large financial management information systems”. These have been found to include a high level of risk in both developed and developing countries. Reference is made to another study that found that “fully 75 percent of IT systems implemented in the United States failed to fully deliver in terms of their time, cost or projected functionality” (p.48).

Mat Andrews, of the Kennedy School of Governance, also emphasises that public financial management reform should be “led by an identification of problems requiring change (not the simple reproduction of technical solutions to change)” and be centred “on internal rather than external change motivation, not external coercion” (p.33).

In contrast, the World Bank Handbook introduced what have become accepted as the three basic objectives for public financial management reform:

• aggregate fiscal discipline
• resource allocation and use based on strategic priories
• efficiency and effectiveness of programs and service delivery.

These objectives are consistent with the overall message of New Public Management reforms which emphasise efficiency rather than regularity. This is acknowledged by the World Bank Handbook saying that their objectives are a “reformulation of the three functions – control of public resources, planning for the future allocation of resources, and management of resources – that have driven reform over the past 100 years” (p.17). The recent World Bank study also confirms that regularity remains important, suggesting that public financial management must be “conducted in accordance with the relevant laws and regulations; and undertaken with appropriate checks and balances to ensure financial probity” (p.1).

These two studies warn of the significant risks of implementing the currently standard approaches, for example, an MTEF or IFMIS. They also emphasise the continuing importance of control and regularity, and the importance of context and political support for public financial management reform. We have to understand the environment for the reforms, so the expert knowledge and experience of the local public financial management officials is vital, and we have to know what has been proved to work in similar environments.

That is the role of this Journal, to highlight the successes (or otherwise) of the actual experience of public financial management reforms. In the first paper of this issue, Frans van Schaik considers the issue of materiality in government auditing in the context of the development of public sector specific guidance on this subject by INTOSAI, the international body for public sector external auditors, based on the private sector standard. The paper finds significant evidence for the materiality level in the public sector to be different to that in the private sector, despite this evidence, such differences are not clearly documented in the auditing standard. In the process, van Schaik reviews the key considerations for materiality for public sector auditors.

In our second paper, Doug Hadden provides a case study of public financial management reforms in Kosovo. This post-conflict country has sequenced legal reform, improved governance, and achieved international public financial management standards under difficult conditions. Hadden points out that there are numerous lessons in the Kosovo experience linking reform to context that can be leveraged by governments around the world.

Rocky J. Dwyer argues that a credible demonstration of public sector impacts depends on understanding the distinction between inputs, outputs, outcomes and indicators. The first aim of the paper is to provide an enhanced understanding of the current literature, reports and documentation on estimating the impacts and results of government programming and policies. Secondly, it shares the definitions and guidelines used to demonstrate economic impacts. Finally, it presents current best practices in measuring incremental impacts. All of which, Dwyer contends, provides new ways of approaching measurement and accountability that are more effective, strategic, comprehensive and credible to the public.

Pawan Adhikari and Frode Mellemvik argue that developing countries have few alternatives other than to accept the rules and standards developed and prescribed by international standard setters, so as to ensure external legitimacy and financial support. Their paper explores Nepal’s move towards the implementation of International Public Sector Accounting Standards (IPSAS). This study shows an interesting case of how public sector accounting in developing countries is being influenced by international organizations, particularly the World Bank and professional accounting institutions. However, it is not clear from this study that such an approach is ensuring that public financial management reforms are focussed on the key areas in Nepal.

Similarly, in our penultimate article, Caroline Aggestam considers the need to adopt a project management perspective with the adoption of accrual based IPSAS.
Moving from cash or modified accrual based accounting to full accrual accounting under International Public Sector Accounting Standards (IPSAS) can be a challenging endeavor. Ensuring proper convergence to accrual based IPSAS entails not only a vast amount of work in the accounting arena of any given public sector entity or government but also often major changes in business processes and practices. By using a project management approach in adopting IPSAS an organization/government can make certain that, for example: the project gets necessary support from top management; a sound governance structure is put in place; communication and training plans are developed and managed; new accounting policies are written; and necessary alignment of business processes will take place in a timely manner.

In our final paper for this issue, Rizvana Zameeruddin considers new guidance on accounting and financial reporting for intangible assets from the Government Accounting Standards Board (GASB) in the USA. Zameeruddin considers that when Statement 51 is appropriately used in conjunction with existing guidance, a more faithful representation of the services capacity of intangible assets, particularly in the areas of recognition, initial measurement, and amortization results. This should improve financial reporting by clarifying the classification of intangibles as capital assets and establishing guidance for internally generated intangibles.

As usual, we end this issue with a section reviewing recent public financial management publications and other resources which we hope will be of interest to readers of the Journal. We would be pleased to receive reviews and suggestions of other resources which we should refer to in future issues.

If you would like to continue the debates raised in this issue please start thinking about contributions for the next issue of this Journal, the ICGFM blog or attend future ICGFM events. We look forward to hearing from you!

Andy Wynne
Editor

Doug Hadden
VP Communications

Jim Ebbitt
President

Slaviana Hadden
Editorial Assistant

International Journal on Governmental Financial Management 2010 Volume 2