Topic Guide: the Budget Process

Budget execution includes the collection of tax and other revenue, the processing of the various budget expenditures as well as the accounting and reporting of revenue collected and money spent. At this stage of the process, public procurement, tax and customs administration are considered the most vulnerable to corruption, due to the volume of cash transactions, large number of involved officers and the high level of individual discretion involved. Recognising their key importance, the donor community increasingly uses these issues as entry points for anti-corruption activities in developing countries. They will be developed in a separate section of this topic guide.

Budget execution covers payments which are based on long-term commitments and contracts: salary payments to public employees, all forms of rent and utility bills for objects of public infrastructure, and repayment of debts. There are many opportunities for corrupt practices at this stage of the process, with corruption risks increasing with the degree of data fragmentation in individual accounts for disbursements and collection. Such fragmentation makes it easier to abuse public funds. For example, payrolls may contain ‘ghost workers’ or monthly allocations to a public school may never reach the school in the full amount. Anti-corruption approaches and tools may include a set of measures:

Consolidating data through the use of technology.

Single treasury accounts (STA) and IT-based integrated financial management information systems (IFMIS) are widely applied as a central component of PFM reform and they may positively impact on anti-corruption efforts if applied in the right context. The main features of STA and IFMIS are that they avoid information from being spread over a large number of individual bank accounts and reporting and accounting files by integrating all data into one system. Consolidation of data and real-time access to it reduce the possibilities for money being stolen or misused and this going unnoticed. For this to work, however, the huge amount of data involved requires introducing powerful IT-systems. The complexity of such a system may open new possibilities to circumventing it, thus contradicting the anti-corruption potential of such tools.

Public expenditure tracking systems (PETS).

PETS are often considered to be an effective tool to improve accountability in public finance and service delivery. They measure the amount of funds received at each point of the public service delivery chain from a nation’s treasury down to the service delivery unit[1]. This approach has been useful in detecting irregularities in budget execution in the form of money allocated but “disappearing” on its way to the actual service delivery. The public, as the legitimate recipient of public services, can be involved in the process by monitoring the quality and quantity of services actually being delivered. This approach has been popular after initial model projects have been successful. However, the effectiveness of such approaches depends on a large number of factors, such as the methodology used for conducting the assessments, independence and capacity of the institutions involved in the exercise and the political will to accept the findings and recommendations for reforms, among others.

Financial reporting, accounting and internal audit and controls refer to a system for recording, classifying, summarising and reporting financial transactions. Also, it is a prerequisite to prevent fraud, corruption and negligence related to financial transactions within the respective government organisation that spends the budget. Accounting contributes to ensuring that public funds are being used for their intended purposes in compliance with rules and regulations. As such, accounting and reporting practices are of crucial importance for the performance of a PFM system. Traditional PFM literature and international organisations promoting PFM reform, along with general anti-corruption agreements (like the UNCAC) unanimously refer to reliable and timely accounting, in accordance with international standards as a key requirement for better PFM as well as for combating corruption. The most relevant corruption risks at this stage are weak, negligent, or “creative” accounting and reporting which contribute to hiding corruption, fraud and theft.  

Anti-corruption tools at this stage of the process aim to improve accounting and reporting standards and to strengthen the skills to implement them. This aspect of PFM is technically demanding and therefore not considered the most suitable entry point for public oversight and monitoring. A central aspect of the PFM reform debate focuses on the advantages and disadvantages of traditional cash-based accounting versus accrual accounting (which accounts for assets and liabilities in addition to cash). However, no clear assessment can be drawn on whether either of these types of accounting is more suitable for detecting and preventing corruption. While there is a consensus that accounting is an essential tool for PFM reform as well as for combating corruption, the impact of accounting and financial reporting alone must not be over-estimated.