Session 4 May 28 afternoon (2)

1. Session 4May 28 afternoon (2) Legal framework for budget execution, fiscal reporting and external audit in OECD countries

2. Topics Covered Legal framework in OECD countries for Budget execution Treasury operations, including government banking arrangements Government accounting Fiscal reporting Internal audit External audit

3. Budget execution Once the annual budget is adopted, the government is usually entrusted by parliament to execute the budget. USA is an exception, reflecting the budget power of Congress. Budget execution is mainly governed by Regulations, not Law. However, Parliament wants to know how budget was executed: hence law(s) usually elaborate on budget execution reporting requirements. Parliament may also clarify delegation and responsibilities for budget execution in law. External audit is often established in the Constitution. A separate law is adopted.

4. Budget execution: Which areas are covered by law in OECD countries?

5. Budget execution: Three areas covered by law in several OECD countries • Cancellations and transfers (virement) of budget line items • Unallocated spending for contingencies • Treasury Single Account – Government Banking Arrangements

6. Cancellations and transfers (virement) of budget line items The BFMSL may allow government some flexibility in budget implementation by: • Allowing cancellation of budget authority(e.g., France, up to 1.5%, after informing Parliament; Germany, by blocking specific expenditure commitments; Sweden, MOF may cut agencies’ appropriations; USA: Executive has little flexibility: “rescissions” must be enacted by Congress). • Cancellation is disallowed for mandatory spending e.g., social benefits, interest payments. • Permitting supplementary budgets (to reduce or raise spending, in the event of lower/excess revenues) • Restrictions on transfers (between Ministries) and virement (between line items)—may be specified when appropriations structure is very detailed (e.g., Germany) or between broad categories (e.g., France, asymmetric salary/non-salary virement; Australia, Denmark Finland, Norway, Spain: capital spending can not be transferred to current spending).

7. Unallocated spending for contingencies • Emergency spending. Germany’s Constitution allows excess spending when “compelling” reasons. • Contingency Funds. Japan’s Constitution allows for the CF to fund spending unforeseen in budget; the MOF controls requests of spending ministries. United Kingdom has a CF, established by law in 1974, used for making advances for spending not yet approved by Parliament; several USA States have “Rainy Day” funds, off-budget (which undermine transparency). • Unallocated spending lines. These are permitted by law in some countries e.g., France has a program entitled “provisions”[=reserve], for contingencies; in contrast, USA federal budget has no reserve.

8. Treasury Single Account – Government Banking Arrangements Government banking arrangement usually left to Regulations, except: • A “consolidated [revenue] fund”e.g., UK’s 1866 Exchequer and Audit Act, requires account to be held at Bank of England. • Authority of Minister of Finance to open/close bank accounts. New Zealand Public Finance Act allows department’s to have accounts “as the Minister of Finance may direct” Also, the Central Bank Act may specify that the central bank is required to provide banking (and other) services to the State, with agreements specified in protocols, e.g., France’s Monetary and Financial Code requires this for the Banque de France. But not all countries require only central bank to perform this role: commercial banks are permitted by law to be used for government treasury operations.

9. Government Accounting and Fiscal Reporting—Provisions in Laws in OECD countries Constitutions of Denmark and Norway require annual accounts to be submitted to parliamentary auditors, no later than 6 months after end-year (4 months in Sweden’s PF law) Government Accounting Laws. A few have been adopted in OECD countries. Japan’s 1947 Public Accounts Act contains principles for consolidating treasury funds, account-keeping by ministries; the law prohibits spending from own revenues. United Kingdom’s Government Resources and Accounts Act 2000 elaborates on some details of the new accrual accounting framework. The Netherlands Government Accounts Act 2001 requires formal “discharge” of ministers’ accounts. Fiscal Responsibility Acts. These are recent in a few OECD countries.

10. Fiscal Reporting Requirements—Finland’s State Budget Act, 1988 1. Report on the State annual accounts, including: The State annual accounts, together with information on the most important factors on the operational performance of the State’s operations. The report shall incorporate income statements and balance sheets on State public enterprises and extra-budgetary funds. 2. State annual accounts, comprising: A statement on budget implementation, by section, chapter and item. An income and expenditure statement on revenues and expenditure. A balance sheet illustrating the financial position at end-year. A cash flow statement. Notes to the accounts needed to provide true and fair information on compliance with the budget, on State revenues and expenditure, on the State’s financial position, and on performance.

11. Internal Audit—Provisions in OECD countries Internal Audit is an independent, objective, assurance and consulting activity designed to add value and improve an organisation’s operations. It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes No laws/regulations:UK, Canada, Australia, France Law or Regulation:USA, Netherlands, Sweden Important provisions needed for: Independence (of operations, reporting) Organisational structure (critical mass needed) Drafting /adopting international acceptable internal auditing standards Central coordination of IA policies and methodology (MoF) Competent staff Agreement with Manager (independence, access to information, reporting, in Audit Charter)

12. Internal Audit—Provisions in new EU countries IA Laws or Public Internal Financial Control laws Main provisions: General provisions (responsibility manager, definitions, objectives, principles of IA) Nature, Scope and organisation (Assignments, structure, independence, Audit Committee) Requirements for appointment (eligibility) Right and duties Head of IA unit and staff (access to information/premises/top-management, principles of confidentiality, conflict of interest , reporting on activities) IA activities (planning, performance, reporting, follow-up) Coordination and Harmonisation of IA (Resp. MoF, special unit, developing policies and methodology, training, supervision IA units, reporting to MoF, CoM and parliament).

13. External Audit Laws in OECD countries—their main provisions Independence:institutional, financial, managerial and operational Appointment and removal:Auditor-General/Chairman, Deputies/Board-members, staff; Types of audit: Mandatory regularity audits of (certification of the financial accounts); further performance audits/IT audits/Procurements audits; Scope: all public financial operations, including revenues, subsidies to private firms; in EU payments from EU budget Powers: access to information, premises Staff requirements: education, qualifications, skills, integrity Relationships with Parliament and Government: Committee for Budget or Economy and Finance, Internal audit;