Topic Guide: Public Financial Management

PFM involves highly complex, technical tasks and processes, including macroeconomic forecasting, budget allocation, accounting and auditing. The complexity of such processes limits public scrutiny and provides many opportunities for corruption. The risk of corruption varies between and within the different stages of the budget process. Although corruption primarily manifests itself in forms that involve illegal money transfers at the budget execution level, other steps of the budget process may create opportunities for corruption at other stages of the PFM process[1].  

The government forecasts expected revenue and expenditure and plans the use of resources based on policy priorities. At this stage of the budget process, it possible to prepare for future embezzlement by planning the allocation of resources according to biased criteria. Corruption can take the form of political corruption, using discretionary budgetary powers to give preferential treatment to certain groups or to allocate budget resources to projects or areas based on political affiliations or rent-seeking opportunities.

The budget is debated and approved by the legislature. At this stage of the process, corrupt parliamentarians, backed by political parties or businesses, may deliberately amend the budget proposal to set funds aside for later misuse or to secure favourable treatment for their constituencies. Special interest groups may also unduly influence parliamentarians to overturn the proposed budget, or to safeguard an allocation or subsidies. The risk of lobbying growing beyond public control and leading up to state-capture is especially high in this stage of the PFM process.

Resources approved at the budget formulation stage are disbursed to pay the salaries of public servants, running costs of the administration, provision of public goods and services to citizens, public works and infrastructure, debt management, and so on. Budget execution also covers the collection of taxes, duties, and fees. This stage of the process is the most vulnerable to corruption as the money becomes tangible and a large number of individuals are involved with monetary transactions in various ministries and public institutions and at various levels of the administration.  

Corruption can manifest itself in various forms, including bribery, kickbacks, embezzlement and theft. In particular, public investment projects can be distorted, both in size and in composition, for rent-seeking purposes. Bribery and kickbacks in public procurement, bid-rigging and other forms of undue advantages to certain providers of services, goods and works are also common forms of corruption at this stage of the process. The tax and customs administrations may also be misused to pursue rent-seeking and corrupt practices. Money can be stolen or used for expenditures which benefit certain individuals and their business or political allies.

Together with disbursing or collecting money, spending agencies record and account for their expenditures or revenues collected. Financial reports are subject to internal audits to ensure that the rules and regulations at the department or ministerial level, in terms of procurement processes, contract management and other basic requirement, have been enforced. Financial reports from spending agencies are later centrally consolidated by the Ministry of Finance which issues a report to show how the budget has been implemented and which is subject to external oversight. Weak, flawed or opaque reporting and accounting practices are likely to increase the corruption risk at other stages of the execution process, by reducing the chances of corruption to be adequately prevented and detected. Turning a blind eye, or allowing for “creative accounting” to cover corruption schemes may also be done deliberately.

Extra-budgetary accounts for specific types of expenditure or revenue are common in many countries. While they may be set up for legitimate purposes (pension and social security funds, or stabilisation or reserve funds managing surplus revenue from, for example, the sale of natural resources), their implementation, control and oversight is often not subject to similar PFM standards and instruments than “on-budget” funds. Some off-budget funds may be set up to reduce the political and administrative controls that typically regulate budgetary spending. Extra-budgetary accounts can represent an important share of government expenditures and the relative lack of scrutiny over these funds may provide many opportunities for corruption.

External audits are typically undertaken by supreme audit institutions (SAIs) who have the mandate to ensure the accountability of public funds in general. Legislative oversight is normally ensured by the parliamentary public accounts committee. The budget execution of the executive is endorsed in a parliamentary debate and becomes the legal basis for the work of the government for the future period. Limited legislative scrutiny, lack of resources, capacity and leverage, and poor executive follow up are likely to hamper external oversight of public accounts. However, in recent years, parliaments, civil society and donors have shown an increased commitment to participate in the process and strengthen external oversight.