Financial Management Capability Maturity Model (FMCMM)

1. Financial Management Capability Maturity Model (FMCMM) ParminderBrar Lead Financial Management Specialist World Bank pbrar@worldbank.org East African Budget Transparency and Accountability Conference Dar es Salaam May 25, 2011

2. Content • Background • PFM Models: • Compliance • Progressive • FMCMM • Risk Assessment • Next Steps

3. Background • There has been a deterioration in performance in local governments since FY 07 as per CAG reports. Note: Unqualified, including Unqualified with emphasis on matter.

4. Background • There has been a deterioration in performance in local governments since FY 07 as per CAG reports.

5. Background • There has been a deterioration in performance in local governments since FY 07 as per CAG reports.

6. Background • There has been a deterioration in performance in local governments since FY 07 as per CAG reports.

7. Background • In the Central Government, there was a reduction in the share of clean audit opinions. Note: Unqualified, including Unqualified with emphasis on matter.

8. Background • The Consolidated Financial Statement of GoT received an adverse opinion.

9. Background • Audit reports focus at the entity level.

10. Background

11. Background • PEFA ratings in 2009 were lower than those for 2005.

12. Background • World Bank CPIA ratings between 2005 and 2009 have reduced.

13. Background • OBI ratings of can be improved through some more proactive engagement in this area.

14. Background • PFM Reform Program (PFMRP) has provided support for 13 years.

15. Background • There have been major improvements: • Roll out of IFMIS • Implementation of Electronic Funds Transfer (EFT) • Improved bank reconciliation • Shift to GFS 2001 Economic Classification • Introduction of IPSAS Accounting • Creation of an independent Internal Audit Department • Major improvement in External Audit • Proactive Parliamentary oversight • Strong procurement oversight body • Amendment of Public Finance Act to improve oversight and supervision over Local Government PFM issues. • Capacity building in PFM across the board • Zanzibar – support to MOF, Audit Office and House

16. Background • Major improvements in Participatory Planning (O&OD)

17. Background • Improved harmonization in resource flows to LGA’s.

18. Background • Clearly specified criteria for Capital Development Grants and Capacity Building Grants to LGAs.

19. Background • Clearly specified Financial Management criteria.

20. Background • Independent Annual Assessment.

21. PFM Models • Compliance Model for PFM improvements in LGs (in both Uganda and Tanzania).

22. PFM Models • Low benchmark. Around 97% of LGAs receive a “Very Good” rating. Little incentive for improving performance.

23. PFM Models • There are serious implementation issues around PFM systems given the weak capacity. Are the Central Government systems appropriate for the LG environment?

24. PFM Models • Poor incentive mechanisms affect service delivery. 88% failure rate in national Form 4 exams in 2010.

25. PFM Models • There is a sequence of PFM reforms.

26. PFM Models The initial planning process took 12 months. Platform 1 would take 15-20 months.These four platforms are to be achieved in an estimated timeframe of eight years.

27. PFM Models • It is iterative.

28. PFM Models • There are progressive PFM reform models for External Audit. • The Afrosai E Capability Maturity Model that was approved by the Governing Board of Afrosai E at its meeting in 2005. • Level 1 - The Setting-up level: • The SAI is structured as part of the governmental organization • Level 2 – The Development level • Legal provision for independence but resources are controlled by the executive • Level 3 – The Established level • Legal provision for independence and independent resources are in place • Level 4 – The Managed level • In addition to level 3, SAIs are capable of managing their core business on a cost-effective basis • Level 5 – The Optimizing level: • In addition to level 4, SAIs focus on continuous improvement and learning to increase the value of their audit products

29. PFM Models • Level 5 • Optimizing • Level 4 • Managed • Level 3 • Established • Level 2 • Development • Level 1 • Setting Up

30. PFM Models • Afrosai E has specified the requirements for Level 3: • An appropriate and effective constitutional/statutory framework exists. • Strong political will exists and the Auditor-General has full support in exercising his/her mandate. • The conditions for appointment to, terms in and removal from the Office of the Auditor-General are constitutionalised and entrenched. • All audit reports are issued within one year after financial year end. • Audit reports are issued on the sole discretion of the Auditor-General. • An effective internal audit approach based on internationally accepted auditing standards, guidelines and procedures is in place. • An internal quality control process is in place. • Financial resources are appropriated by Parliament without any involvement of the executive, including auditees. The recovering of audit fees is regarded as an involvement of auditees. • Human, administrative and other resources to execute the mandate are independently managed (staff are not public servants) by the Auditor-General and his/her Office. • An independent parliamentary process exists to oversee the activities of the SAI. The SAI or its governing body determine key policies and practices.

31. PFM Models

32. PFM Models • There are also progressive models available for Internal Audit. (e.g. from IIA). LEVEL 5 Optimizing LEVEL 4 Managed LEVEL 3 Integrated LEVEL 2 Infrastructure LEVEL 1 Initial

33. PFM Models Capability Level Key Process Area Key Process Area Key Process Area Goals Activities Outputs & Outcomes Mastery • These specify the key process areas for each level.

34. PFM Models

35. PFM Models • For core PFM systems, the Financial Management Capability Maturity Model (FMCMM) was initially developed by the Auditor General of Canada.

36. PFM Models • At a time of deteriorating PFM performance, the National Treasury of South Africa decided to introduce FMCMM and adapt it to their requirements.

37. PFM Models • At a time of deteriorating PFM performance, the National Treasury of South Africa decided to introduce FMCMM and adapt it to their requirements.

38. PFM Models • Their objectives were the following: • Measure Financial Management Capability: • To provide support for decision making • to ensure availability of timely, relevant and reliable financial and non-financial information • To make efficient, effective and economical use of resources • To facilitate a supportive control environment • Assist institutions to benchmark against best practice – key elements of effective financial management • Understand client challenges and what initiatives to implement to assist clients • Influence institutions towards a path of complete and effective financial management • Provide a good indicator of progress with financial management

39. PFM Models • The FMCMM covers the following areas:

40. PFM Models • It is a self assessment based model with quality assurance provided by Internal Audit. Focused questions with only 3 options.

41. PFM Models

42. PFM Models • Responses can be viewed at a glance.

43. PFM Models • Responses can be viewed at a glance.

44. PFM Models • Responses can be viewed at a glance.

45. PFM Models • Responses can be viewed at a glance.

46. PFM Models • Responses can be viewed at a glance.

47. PFM Models • Responses can be viewed at a glance.

48. PFM Models • Responses can be viewed at a glance.

49. PFM Models • This data is used to produce a “Heat Map”.

50. PFM Models • Departmental scores are compared against audit ratings. These are aligned.