Report No.: 22223 JM ~ WORLD BANK REPORT LATIN AMERICA AND THE CARIBBEAN REGION FINANCIAL MANAGEMENT AND ACCOUNTABILITY TEAM - LCOAA JAMAICA COUNTRY FINANCIAL ACCOUNTABILITY ASSESSMENT April 25, 2001 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be disclosed without World Bank authorization. APPROXIMATE CURRENCY EQUIVALENTS Currency Unit = Jamaican Dollars US$1 = 42.0 Jamaican Dollars ABBREVIATIONS AND ACRONYMS ABREVIATION NAME AGD Auditor General's Department AcGD Accountant General's Office CFAA Country Financial Accountability Assessment FAA Act Financial Administration and Audit Act FM Financial Management FMIS Financial Management Information System FSL Fiscal Services, Ltd. GOJ Government of Jamaica LAD Intenal Audit Directorate T IT Information Technology MOE Ministry of Education and Culture MOFP Ministry of Finance and Planning MOH Ministry of Health PAC Public Accounts Committee PAMCO Project Analysis and Monitoring Company PIOJ Planning Institute of Jamaica PSC Public Service Commission PSE Public Sector Entities PSIP Public Sector Investment Program PSMP Public Sector Modernization Project VFM Value-for-Money (Audits) TABLE OF CONTENTS 1. INTRODUCTION ....................................................................1 II. EXECUTIVE SUMMARY ...................................................................1I III. PLANNING, BUDGETING, AND CASH MANAGEMENT ..........................................................4 A. BUDGETARY FRAMEWORK AND PROCESSES ................... .................................................4 B. FINDINGS AND RECOMMENDATIONS ....................................................................8 IV. ACCOUNTING AND FINANCIAL REPORTING ................................................................... 11 A. FRAMEWORK AND PROCESSES .............11....... I I B. FINDINGS & RECOMMENDATIONS ........................ 14 V. AUDITING OF GOVERNMENT ACTIVITIES ................................................................... 18 A. FRAMEWORK AND CURRENT ORGANIZATIONAL STATUS ................................................................... 18 B. FINDINGS & RECOMMENDATIONS ................................................................... 20 VI. CONCLUSION & NEXT STEPS ................................................................... 26 ANNEX 1. LIST OF INTERVIEWEES .................................................................... 28 ANNEX 2. COMMENTS ON DRAFT CFAA - DOCUMENT FROM THE GOVERNMENT OF JAMAICA ................ 29 ANNEX 3. THE BUDGET PROCESS .................................................................... 32 ANNEX 4. INTEGRATED FINANCIAL MANANGEMENT SYSTEM .................................................................. 38 Jamaica Country Financial Accountability Assessment 1 I. Introduction 1. During the period May 8-12, 2000, the World Bank carried out field work for a Country Financial Accountability Assessment (CFAA) in Jamaica. The Bank's team ("CFAA team") consisted of Carmen Machicado (Operations Analyst) of the regional Public Sector group (LCSPS), along with two members of the Bank's Latin America and Caribbean Regional Financial Management Team (LCOAA): Patricia De la Fuente (Financial Management Officer), and Daniel Boyce, (Financial Management Specialist and CFAA team leader). 2. The Bank periodically conducts CFAA's in all borrower countries. The specific objectives of the CFAA are to review the key aspects of public financial management at the national level: (i) flow of funds to government entities and Bank projects, including planning, cash management and budgeting; (ii) accounting and financial reporting; and (iii) auditing of public sector activities.' The results of a CFAA are used to inform Bank staff of the structural context in which they work, to provide guidance for the financial management arrangements in Bank lending, to identify possible capacity building needs (or analyze efforts which may already be underway), and to provide recommendations to the government for improving the effectiveness and efficiency of its operations. 3. The Bank team wishes to thank all those institutions and individuals who contributed to this work. In particular, the team thanks the Ministry of Finance and Planning for its collaboration and its help in obtaining relevant materials and coordinating the many meetings which took place. II. Executive Summary 4. This Country Financial Accountability Assessment makes the following key observations and recommendations: General Comments and Conclusions: > The Jamaican government is in the process of modernizing its operations and changing the way it conducts its business. Many of these changes are based on consultant studies of key government entities, including those entities involved in all of the key financial management functions. There is therefore a unique opportunity to move forward with the findings and recommendations of this CFAA toward real improvements in government financial management. > There is a foundation of transparency and accountability in public financial management systems. The overall structure of government financial management is Other aspects of a country's financial management framework (such as private sector accounting and auditing) may also be discussed in CFAAs. Jamaica Country Financial Accountability Assessment 2 sound, especially in comparison to other Caribbean countries, and the governmen "s accountability procedures and practices appear to be sufficient for the effective and transparent handling of international funding, including Bank adjustment loans. > However, there is a need for strengthening in a number of areas, many of which a-re being addressed under the Bank-supported Public Sector Modernization Projeat (PSMP) and other government reforms. Implementation of reforms under these programs has generally been slow, in part due to fiscal constraints, and should he accelerated. Specific Comments: i Inefficiencies in the government's planning process and its subsequent integraticrn into the budget process result in an inefficient execution of the budget, monitored mainly by cash flows rather than outputs. There is a need for a realignment of tf e functions within the Ministry that have oversight for the budget process as well s redirecting the focus of the process on the prioritization of objectives. > Current budget formulation formats are too complex and would need to be simplifie d in order to increase their usefulness and assure more accurate estimates. In additionl, there is a need for allowing more time for the budget formulation process cycle and i n parallel tightening compliance of those submissions. The government's decentralized cash management arrangements allow flexibility t.o public sector entities, but present challenges for the MOFP. For this reason, serious consideration should be given to cash management reforms which would allow for greater central control over the amount of outstanding cash balances. In addition, thd government could tighten its cash management practices - without necessarily re- centralizing the process - by taking actions to enhance the information flow between the MOFP, AcGD, and the recipients of public funds. ) The government accounting function is more advanced than many Caribbeanri countries, in that processes are generally orderly, well understood, and automated (at least to some extent). However, actions can be taken to improve it in a number of ways. Particular areas of weakness include the recordkeeping related to fixed assets, the financial skillbase within the government, the tracking of cash balances o-- government entities, and the guidance provided regarding finance and accounting, procedures. > The government produces detailed financial reports on the budget and public sectol expenditures. However, reporting should be more timely and should focus more or actual expenditures rather than only the budgeted amounts. While some efforts have been made to "modernize" the government's approach tc accounting and reporting, more dramatic moves such as that toward accrual accounting have not yet been made. In the spirit of "walking before running," thc government should at least make serious efforts to carry out relatively less dramatic reforms such as implementing a system of commitment-based accounting. Jamaica Country Financial Accountability Assessment 3 The FMIS system, which was implemented under a Bank project, has served a useful purpose in automating a previously manual system. However, as of 2000, the hardware and software is fast becoming outdated, and users report a number of problems, most related to the rigidity and complexity of the system. > The government audit function has been fully analyzed as part of the Bank-financed PSMP. Recommendations made by an international consulting firm - which involve training, technology, and other capacity building - are currently being implemented, and are in many cases financed under PSMP. The country's Supreme Audit Institution - the Auditor General's Department (AGD) - is widely perceived as being independent and fair. However, in some ways the bureaucratic processes it is subject to - particularly those related to presentation of the agency's budget and its personnel practices - serve to weaken the AGD's independence, and therefore changes should be considered. > The Government of Jamaica has reviewed this report and, with the exception of our recommendation to establish a Single Treasury Account, concurs with its contents. The Government's comments are included in Annex 2. Jamaica Country Financial Accountability Assessment 4 III. Planning, Budgeting, and Cash Management A. Budgetary Framework And Processes 5. Economic and Fiscal Background. In order to manage the afternath of tie financial sector crisis which surfaced in the mid-1990's, the Government has had progressively to tighten its fiscal stance over the past few years. The primary surplus of the public sector reached an unprecedented 12.5 percent of GDP in 1999/00, and the current (2000/01) budget targets a further increase in the primary surplus to over A percent of GDP. The immense fiscal effort is needed to put the public debt back onto a sustainable path following its rapid increase as a result of government intervention to protect deposit- and policy-holders in financial institutions that developed severe liquidity and solvency problems, threatening a crisis of systemic dimensions. Cumulative dext build-up directly attributable to the financial sector distress-which takes the form of liabilities of the Government-backed Financial Sector Adjustment Company (FINSAC)-- exceeds 40 percent of GDP, and the financial sector and debt resolution plan calls fo:r much of this to be assumed directly by the Government and serviced in cash. The fisc al tightening is reflected in severe constraints on public expenditure allocations over the past 2-3 years, with most of the burden having fallen on capital expenditures, and suw h constraints are expected to persist in the short to medium term. 6. Legal and Institutional Framework. The Constitution of Jamaica (Article 11 5 in Chapter VIII) gives the Minister of Finance the responsibility for the preparation of & e Estimates of Revenue and Expenditure before the close of the previous fiscal year and t} e presentation in Parliament of those Estimates as early as possible in the fiscal year lo which it relates. Section 116 of this same chapter confers on the House oif Representatives the sole authority to appropriate resources (Appropriation Bill instrument) for the several public services by way of the annual estimates or supplementary estimates. Section 117 of the Constitution authorizes the withdrawal of funds from the consolidated Fund through the "warrant" instrument described below ar d also empowers the House of Representatives to approve, by resolution, estimates containing a vote on account for expenditure over part of a financial year before the passing of the Appropriation Bill for that year. The Financial Administration and Aud-t (FAA) Act expands and clarifies Chapter VIII of the Constitution by providing the legIl framework for the management of funds appropriated by the House of Representative;;. The Ministry of Finance has the legal authority to amend this Act with approval of tli Cabinet. 7. Several divisions of the MOFP and certain government agencies are involved il the planning and monitoring of capital investments: (i) the Economic Division arranges the funding of the internationally funded projects and also monitors projects; (ii) the - Budget Division develops the Public Sector Investment Program (PSIP) and monitors both the financial and the physical progress of the projects; (iii) the Financial Management Division develops rules on the management of expenditures; (iv) the PIO I monitors projects and is responsible for working with the implementing ministries anti the international funding agencies to identify funding for projects; (v) Project Analysis 2 Strategic Review Ministry of Finance and Planning", KPMG, 24 September, 1999 Jamaica Country Financial Accountability Assessment 5 and Monitoring Company (PAMCO) is responsible for the monitoring of projects exceeding J$0.5 million, and (vi) the Public Enterprises Division formulates policies and arrangements for performance contracts of the 164 Public Sector Entities (PSE). 8. Budget Cycle. The budget cycle includes the budget formulation, allocation, authorization, implementation and the monitoring of its implementation. A summary of the timeline for this process is presented in Box 1 below and an outline for the stages of the Budget Process is presented in Annex 3. The following sections discuss each aspect of the cycle in detail. Box 1: Budget Cycle (Fiscal Year is April to March) July - Aug.: Preparatory activities undertaken by MOFP and Line Agency Sept - Dec.: Determination of resource envelope, issue of budget call, and discussion of estimate submissions; Dec - Mar.: Cabinet consideration and decision on scope, content and financing of Budget April - May: Presentation to Parliament and approval of Estimates. April - Mar (of the next year).: Implementation and monitoring of government operations 9. Budget Formulation. Planning is the first step of the budget formulation process. The GOJ Fiscal Year runs from April 1st to March 31. Planning begins in September of the previous year. The MOFP through its Fiscal Policy Management Unit, the Bank of Jamaica and the Planning Institute, develop the macroeconomic framework and policy targets for the following year. This is done through financial models and in some cases such as the Bauxite industry, direct inputs from the sector. Simultaneously, the MOFP in conjunction with the Planning Institute establishes priorities and directions for sectoral allocations. 10. Based on the macroeconomic targets and priorities, the MOFP issues a "budget call" to all ministries and departments requesting the submission of draft proposals of requirements for the upcoming budget. The budget envelope (which is first reviewed by the Cabinet) informs ministries of the programs government intends to give priority funding and expenditure ceilings to which they must adhere. 11. The budget call goes out in September or October and ministries and departments are given about 2 months to reply. The program budget is classified by: function, subfunction, program, sub-program, activity/project, and objects of expenditure. The initial "bid" is usually on the basis of historical expenditure levels, mainly for staff compensation costs and some zero-based budgeting for items such as stationery from which an indicative level of expenditure emerges. At the same time the budget call is made to ministries and departments, public entities submit their budget estimates in a corporate plan. 12. The corporate plan sets out the budget year objectives of the Ministries, Departments and Agencies. The components of the corporate plan include: 0 a mission statement of specific objectives for the relevant period Jamaica Country Financial Accountability Assessment 6 > a set of outcome indicators of a qualitative or quantitative nature which can be used to judge the extent to which objectives are being attained ) a list of strategies and major programs/projects related to achievement of ;et objectives > a "program structure" which groups related strategies to service a particular client or area > a financial budget and the method of recording and controlling expenditure against budget > the organization structure > work/implementation plans and description of an appropriate information system for monitoring physical/financial performance 13. Budget Allocation. The budget is divided into recurrent and capital expenditures. Recurrent expenditures are the government's "housekeeping" budget while the capii:al budget is the government's planned investment for the fiscal year. The major criteria used in deciding allocation levels for recurrent expenditures are the following > expenditure ceilings based on the GOJ's current macroeconomic policy; >' the government's stated priorities for the fiscal year; and > commitments or statutory obligations (such as debt servicing) arising from t]le continuation of programs, project and policies previously authorized by Cabinet th at are the first items of expenditure3. 14. The criteria used for capital expenditure allocations are the following: > current year projections for the PSIP, which includes projects requiring external financing; > counterpart funding for multilateral/bilateral programs; and > projects that have already started or for which commnitments have already been macie or future projects in line with government's objectives. 15. Budget Authorization. The period comprising January and February, after a[l draft proposals have been received, is the discussion period. The Budget Division with assistance from other divisions and agencies within the MOFP examine and analyze the submissions and consult with ministries and departments at various levels. Resultin g2 from these discussions a draft budget that contains ministry details, evaluation an J recommendations is prepared and submitted to Cabinet for approval. The Budget is the ai submitted to Parliament (around late March). The Standing Finance Committee ef Parliament takes about 2 weeks to study the budget. The Minister of Finance opens th - budget debate, which is followed by the Appropriation Bill. This process ends usuall y within 2 to 4 months of the beginning of the fiscal year. 16. The budget of Public Enterprises is not debated because they are self-financecl; however the "budget call" also sets parameters for their expenses. They usually receive their Budget Estimates later than the central government and the budget is sent to 3 Interest on public debt is paid first. Debt servicing and interest payments constitute 62% of GOJ's budget. (Strategic Review of Ministry of Finance and Planning by KPMG, 24 September 1999). Jamaica Country Financial Accountability Assessment 7 Parliament for approval. It is noted that GOJ's budget only includes about 50% of the 140 public enterprises.4 17. While the budget is going through the approval process a "carry on budget" for up to 4 months is approved and distributed. This budget acts like an advance and includes funding only for on-going activities. It ceases once the full year budget is approved. 18. Budget Implementation. Revisions or "virements" to the budget can be made throughout the fiscal year and require MOFP approval. Virements between type of expenditure (capital vs. recurrent) are not allowed, while virements within either type of expenditure can be done at any time but are usually only reported at the time of the supplementary budgets. Parliament generally approves a Supplementary Appropriations Budget during the last quarter of the fiscal year, although in some cases two such budgets have been approved within the same financial year. 19. Budget Monitoring. The role of MOFP's Budget Division is to oversee the national Budget process. It is placed under the Financial Secretary and divided into three units: > the Budget Unit- composed of four groups, with each overseeing the setting and monitoring of the budgets of a number of ministries and departments within the following groupings: Human Resources section; Production Section; Physical Infrastructure section; and National Security and Machinery of State; r Cash Management Division; and > Public Sector Investment Program Unit. 20. Release of Funds (the Warrant System). The Constitution states that no expenditure can be made until the Minister of Finance issues a Warrant.5 This ensures that there is a relationship between the inflow of revenues and the outflow of expenditures. All revenues are paid into the Consolidated Fund and all expenditures are paid out of this fund. The various steps in the process of issuing the warrants are summarized below: > Ministries present their annual cash flow requirements. > MOFP-Budget Division prepares warrant. The Cash Management Unit issues warrants: (i) for Recurrent expenditures on a monthly basis; and (ii) quarterly for capital expenditures. > The Accountant General's Department releases funds to ministries and departments up to the value of issued warrants. > The warrants are released to the agency's bank account. > Any balances left over at the end of the month are subtracted from next month's warrant. 4 Not all public enterprise are monitored, mostly due to lack of manpower. The Public Enterprises division has a total staff of 16 to monitor all public enterprises. 5 The warrant is the means by which MOFP gives authority to spending agencies to incur expenditures. Jamaica Country Financial Accountability Assessment 8 B. Findings and Recommendations 21. There are a number of informal practices in the government that contrast w:th established procedures. These are discussed below. In addition, KPMG in its Strate!ic Review of the Ministry of Finance and Planning (September 1999) noted a number af findings and recommendations on the budget process. These are detailed in Box 2. 22. The Corporate Plan. The "corporate plan" is seen as separate exercise from tile budget process. The Budget division is constrained in establishing consistency betwe. n the budget and corporate plans because the format of the corporate and operational plaiis do not link to the program budgeting format. As such, the information system does not provide the output information necessary to quantify and monitor plans effectively. Planis are often submitted after the budget submission and even after the budgets are approved 23. The Warrant System and Cash Management. Due in part to the tight fiscal situation of the government in recent years, the warrant is normally not fully released it the beginning of each month. Instead, ministries and departments often receive their budget variably throughout the month. Capital expenditures are often severely cut when the budget cannot be fully funded. The gradual release of funds allows for greate,r efficiency in the utilization of government resources, because it reduces the amount :)f cash sitting idly in agency bank accounts, which can have a high cost in a tight fiscal environment. However, it also creates uncertainty in these agencies, which impairs tl-,e planning and execution of government activities. The government should continue lo seek ways to give agencies a more certain cash flow stream, while also ensuring that cash is utilized efficiently. Box 2: Budget Process Related Findings and Recommendations of Strategic Reviewv by KPMG Findings: Within the organizational structure of the departments within the MOFP dealin, with the budget process there are overlaps and duplication of functions andl dispersion of oversight and policy making responsibilities, resulting in inefficiencie s in the use of limited resources, added procedural burden to the ministries andi depaitments, and a lack of coordination amongst the related departments Weaknesses in the govemment's corporate planning process, and its insufficient integration into the Budget process form critical constraints to the achievement of the~ Ministry's objectives. E "Program budgeting" format is complex , not well understood within the GOJ anci i may not reflect all cluster of activities which could be identified as programs. All o which reduce the value of the tool and reduce the transparency and usefulness o:F Budget Estimates. * Budget ceilings notified in the "budget call" act as a performance constraint. Due to; Jamaica Country Financial Accountability Assessment 9 low budget ceilings unmotivated ministries will not commit time and energy to compiling corporate plans until ceiling are announced; however, ceilings are set several months after the corporate planning process should have begun. The late issue of the "budget call" also limits the time available for checking of the budgets and the review and negotiation of the budgets by the Budget Division. A significant amount of Recurrent expenditure is classified as Capital expenditure because ministries do not include these in the post-completion plans of projects. This distorts the reality of expenditure patterns and undermines GOJs macroeconomic planning and undermines the capital investment program. Recommendations: Creation of Public Expenditure (PEX) Units and Policy and Coordination Units. The PEX units would bring together the current "oversight' responsibilities of the Budget, Financial Management and Public Enterprise Division and (PAMCO). The creation of central units responsible for public expenditure policy and coordination, separated from the monitoring activities of the PEX Units. These units would cover the existing policy functions of Budget, Financial Management and Public Enterprises Divisions and PAMCO, including that for FMIS and other MOFP financial or assets management systems, policy aspects of the FAA Act Unit. Financial Review Unit and the Executive Agencies Unit. ase the focusonrioritizn by requesting plans and budgets for a range of financing options and on core outputs by requesting targets and performance indicators from each Ministry, department, division and program. Design of a new budget formulation format or simplification rationalization and updating of the current format * MOFP develop a revised plan and budget call which requires plans and budget based on an appropriate range of financing options * Issue the budget call by earlv September and set the deadline for submission of budgets by late November to ensure enough time for preparation and negotiation of budgets . Revision or rationalization of the legal and regulatory framework in the areas of tax, capital projects, financial institutions, FAA Act, Public Sector Entities, legislation governing public servant' terms and conditions; pensions. I . A review of definitions for recurrent and capital expenditure and assure that projects prepare forecasted recurrent budgets before completion of project 24. Cash Management: Procedures The cash management unit of the MOFP reviews the demands for cash made by the Ministries and reconciles the requests for funds as reported by the Accountant General's Department (AcGD). They also have Jamaica Country Financial Accountability Assessment 10 responsibility for determining the distribution of funds to the heads of Ministries and advise the AcGD on the amounts required for salaries. 25. The AcGD is responsible for issuing the warrants based on the requests receix -d by the Ministries. The AcGD and the MOFP Budget Unit rely on the informatimn reported by the Ministries to assess the cash balances and funding requests. However, as of November, 2000, the MOFP also reported having on-line access to 90% of all Minislry and Departmental accounts, with efforts to access the remaining 10% being in proce.s. Both the MOFP Budget Unit and AcGD monitor these accounts to ensure that they are not funded until replenishments are required. 26. Cash Management: Accountability Performance contracts have been signed w:.th all accounting officers within the Central Government. Each accounting officer is therefore responsible for, and accountable for the performance of his/her Ministry/Department. Key performance indicators are established for each Ministry/Department within their Corporate and Operational Plans. 27. Based on our review, it becomes apparent that the AcGD and the MOFP Budget Unit overlap in their monitoring duties. The following list of findings and recommendations takes this overlap into consideration and proposes a realignment of responsibilities. Findings: > Unused Funds - Often large amounts of cash sit in non-interest bearing accounts or are invested, in some cases in high risk instruments, because of the line Ministrie,' lack of faith that the MOFP will have the ability to fund future cash needs. > Lack of Transparency in Cash Management - The lack of faith exhibited by the linre Ministries is further aggravated by the perception held by many line ministries of a lack of transparency in the allocation and management of funds by the MOFP. > Overreliance on Manual Procedures - Both AcGD and the MOFP Budget Unit hav- not sufficiently automated their processes. This limits the ability to quickly analyz and manipulate data and increases the chances of errors. Recommendations: > Tighter Control of the Treasury Account6 - As has been recommended by the International Monetary Fund (IMF), serious consideration should be given to cash management reforms which allow for greater control over the amount of outstandini; cash balances. This reform would have two components. First, the closing of a] I agency bank accounts, and placing of all government moneys under the control oF the Treasury, i.e. the Accountant General's Department (AcGD). The AcGD could allow the central bank to operate the consolidated fund account through one or more commercial banks, who serve as fiscal agents, but these accounts would also be under the control of the AcGD and not the spending agencies. Second, all 6See Annex 2 for the government's response to this recommendation. Jamaica Country Financial Accountability Assessment 11 expenditure transaction flows would need to be routed through the AcGD or its sub offices in the provinces. The spending agency would send the expenditure transaction to the appropriate AG sub office and this office would then send it to the nearest bank, where a consolidated fund account exists, for payment. The bank would pay directly to the vendors' bank account. While this general model has become the "best practice" in OECD countries, and is also used in many Caribbean countries, of course such a re-centralization could also have costs in terms of increased administrative expenses and payment delays; these potential costs should be weighed against the benefits of such a scheme as reforms are considered. > Regulation and Enforcement of Cash Balance Maintenance - Ministries should be required to justify amounts in all their accounts, financial instruments, investments and cash before receiving a funding request. > Implement or Develop IT Modules or Systems - Either a system or a module within a system should be developed to assist the Budget Division in managing cash and revenue information and assist AcGD in the management of the consolidated fund and warrant system. > Increase Transparency of Cash Management - The MOFP should explain the basis of funding decisions and cash allocations. The AcGD should also report to the Ministries on the availability of cash. IV. Accounting and Financial Reporting A. Framework and Processes 28. Legal Framework. The following laws and regulations are the primary legal instruments that provide the guidelines and procedures for the accounting and reporting of the use of Public resources by the GOJ, including IBRD loans. > Constitution of Jamaica, chapter VIII ("Finance"), covers administration and auditing of GOJ finances. > Financial Administration & Audit Act, FAA Act, originally Law 34, most recent amendment, Act 13 (1992). The FAA Act expands and clarifies chapter VIII of constitution and contains provisions for the responsibilities of accounting and the accounting officers. > Bretton Woods Agreement Act, originally Act 1 until amended in Act 53 (1968). This act ratifies Jamaica's entrance as an IBRD member and expands Jamaican law to include provisions of the Bank's Articles of Association. > Loans Act (World Bank), originally Act 1 until amended in Act 20 (1966). Defines the legal framework that GOJ and Statutory bodies should use when borrowing funds and obtaining guarantees from the World Bank. 29. Accounting Process. The GOJ uses the cash method of accounting. Each Ministry is responsible for preparing cash flow projections and presenting them to the Jamaica Country Financial Accountability Assessment 12 MOPP for warrant allocation. Once the funds are received from the warrant system, each ministry is required to enter the funds into their accounting system and track the usage based on categories that are broken down by object. All ministries are required to use he FMIS system to track their receipt of funds and expenditures based on the cash basis of accounting. From the FMIS, the Ministry can generate payments and monthly reports 3n expenses. 30. With regard to payroll, while it is accounted for in FMIS, payroll processing is decentralized, and is either manual or done on stand-alone software packages. Each Ministry or Department prepares its own payroll and subsequently these expenses are journalized and accounted for on the FMIS, The Accountant General's Department is tlle only Department that has a centralized payroll system. 31. Reporting Procedures. The MOFP produces consolidated Financial Statements and Revenue Estimates for each fiscal year-end. These statements are prepared from the individual statements submitted by the different ministries on a monthly basis. The statements reflect figures based on disbursements made and do not necessarily reflect commitments for future expenses. Furthermore, although all of the Government s Ministries use the same automated financial management system, FMIS, and this system is used to generate the financial reports and statements required for submission to MOF1P', for internal purposes each line ministry tends to use their own systems, usually Microso 't Excel, to prepare their financial reports. 32. The MOFP is responsible for distributing the budget templates and other reportin g templates to the Ministries and Agencies. The main reports required by the GOJ are th. following: > Exception Reports - report significant financial and managerial issues to th Financial Secretary. > Monthly Financial Statements (MFS) - report financial information for each Ministry based on predetermined categories established in the budget. > Monthly Bank Reconciliations > Monthly Report on Receipts and Payments These reports must also be reviewed by the Accountant General's Department. 33. Automated Accounting & Reporting Systems. The GOJ Financial Managemen: Information System (FMIS) is the main IT system for processing payments anc. accounting for public expenditure. The development and installation of FMIS is currently financed under World Bank Public Sector Modernisation Project (PSMP) loan. The project employs fifteen technical staff members, with administrative decisions made b) the Administrative Reform Programme (ARP) Secretariat. Software development began in 1991 and implementation in line Ministries began in 1993. Fifteen sites now have FMIS, with an estimated total of 400 users. The use of FMIS is mandatory for central rninistries, but executive agencies and Public Sector Entities choose their own systems, The design is based on a fully relational structure and makes use of a relational database management system (Informix). Jamaica Country Financial Accountability Assessment 13 34. The FMIS system is currently maintained by a group of consultants. This maintenance will transfer to the Fiscal Services Limited (FSL) Company of the MOFP during fiscal year 2000. FSL is a government company whose CEO reports to the Financial Secretary (in MOFP). FSL is primarily dedicated to systems development and support for the Revenue Services. However, on request from MOFP, FSL has also developed JABIS, the Automated Pensions System and the Debt Management Unit's Securities Management System. 35. The GOJ, in order to coordinate the systems developed under PSMP and FSL, has initiated the integration of systems, the Integrated Financial Management System (IFMIS). IFMIS aims to integrate the following; > FMIS > JABIS (Jamaica Budget Information System and cash management module) > ICTAS (Revenue Service IT System) > Project DataBank (maintained by the Planning Institute of Jamaica - PIOJ) > CSDRMS (Commonwealth Secretariat Debt Recording Management System) > Other debt management systems ; AcGD's Treasury Management System 36. The progress of the IFMIS has been constrained by a lack of compatibility between the system applications developed by PSMP and FSL. For example, the design specifications for FMIS were not available while JABIS was being designed. It is thus unclear if the structures of the databases will allow full integration. 37. In addition, two Wide Area Networks (WAN) were developed, one by the Administrative Reform Project under MOFP's direction to provide the links for the IFMIS and one by FSL to link the revenue earning divisions and departments. It is as yet unknown whether the WANs will interface to allow the integration of the expenditure and revenue systems in WIvllS, and thus provide the efficiency gains anticipated. 38. Executive Agencies. Some government entities have been formally designated as an Executive Agency in accordance with the provisions of Section XX of the Public Sector Reform Act. An Executive Agency is an organisation where operational activities can be performed separately from policy activities and where it is believed that improvements to economy, efficiency, effectiveness and customer service delivery can be achieved by granting greater, financial and human resource management responsibilities to a Chief Executive Officer whose actions are governed by a performance contract. In exchange for delegated managerial autonomy, the Chief Executive Officer of each Executive Agency is held accountable for achieving stated results economically, efficiently, and effectively. The financial year for all Executive Agencies runs from April 1St of one year to March 315t of the next year. Currently there are 4 entities designated as Executive Agencies with 7 more expected in the near future. 39. The Executive Agency must ensure that systems and procedures are in place to identify the full cost of (i) all its key services and products, (ii) activities or cost centres, and (iii) improvement projects (such as efficiency projects or new business processes). This facilitates identifying what should be the fee or charge levied for a particular good Jamaica Country Financial Accountability Assessment 14 or service. Traditional cost accounting, as used by the Government of Jamaica, ignores many costs which are not readily identifiable in cash terms, for example the cost "or value) of a building constructed several years ago. 40. Where an Executive Agency earns income above the level of the approved appropriation-in-aid, it will be allowed to retain 50% of that additional income provided that: > the Agency has substantially achieved its Key Performance Indicator (KPI) targets; and > the expenditure to be financed by the retained additional income is in accordance w.ith the approved corporate plan. 41. The Chief Executive Officer will prepare a statement showing the amount Df additional income which has been earned above the level of appropriations in aid aiAd which he/she seeks to carry forward. This statement will be submitted to the Auditor General for certification and he will then submit it to the Financial Secretary. 42. Authorization to spend the retained income will be given by way of a supplementary estimate which will be laid before Parliament during the next financial year immediately following the year in which the income was earned. This arrangeme-;t provides an incentive to Executive Agencies to increase the income they generate; in turn it is designed to reduce the level of budgetary support they require in subsequent periods. 43. Executive Agencies are required to substantially achieve all of their KPI targets. If in any year they do not, the Financial Secretary may review the level of transf,.r effected in relation to that year and may require the Executive Agency to repay, in a subsequent financial year, such proportion of the transfer as he/she thinks fit. Such repayments may be effected by reducing the level of transfers made in a subsequen-t financial year or years. Before determining the level of repayment, if any, the Financial Secretary will consult the Chief Executive Officer of the Agency and allow him/her the opportunity to make representations which the Financial Secretary will take into account B. Findings & Recommendations 44. Accounting: The accounting functions of the Ministries rely highly on manual procedures performed by staff that do not always possess sufficient technical backgrountd to perform their tasks. Furthermore, due to a general shortage of funds (please refer t) Budget section for elaboration on this topic), the warrant allocations usually do not matcl the funding requests. Therefore line ministries and agencies have started to over-estimate cash needs in order to obtain more funds to cover shortages when they occur. The following lists additional findings based and recommendation, based in part on the KPMG strategic review: Findings: > Use of Cash Basis Accounting - This method of accounting provides a very limited picture of financial activity which could adversely affect the decision making, process. Jamaica Country Financial Accountability Assessment 15 > Incomplete Recording of Assets and Liabilities - Assets and liabilities are not fully recorded in the Ministries nor are they adequately tracked by the MOFP's Asset Management group. Although the Asset Management group performs random reviews, they do not have the staff nor the recording capabilities to offer sufficient coverage of the GOJ assets. > Inadequate Financial Skills - Due to more competitive salaries in private industry, the GOJ has had difficulty retaining staff with sufficient skills to perform basic accounting functions. Furthermore, this lack of skills has cast doubts on the Government's ability to move towards accrual accounting. > Lack of Knowledge of Ministry/Department Cash Needs - In the absence of a method to track future capital expenditures or other financial commitments, the line ministries and agencies have started over estimating their cash needs to accumulate funds for possible shortages. > Lack of Financial Management Guidance - There are no up-to-date financial procedures or accounting manuals. Staff receive- one-on-one instructions for the detailed, practical knowledge needed to perform their tasks. Recommendations: > Action Plan to Implement Accrual Accounting - The action plan should include consideration for strengthening the financial skills of GOJ personnel to ensure proper accounting of resources. > Early Application of Accrual Accounting to Capital Projects - In the absence of capital charging, funding of capital expenditures remain unrecorded and represent unchecked funds for Ministries. Accrual accounting would force the recording of the actual cost of capital projects and thus maintain transparency and accountability. > Prompt Implementation of the FMIS Commitments Module - In order to forecast cash needs more accurately a commitments module has been developed. The module is in the pilot stages at the Ministry of Water. > Strengthening of the Asset Management Group - This would include the use of an automated system, versus the manual system, currently used to track and maintain GOJ's assets. Appropriate staffing, in terms of both quality and quantity, should also be a priority and concern. > Prepare a Current Accounting Manual - The manual should cover the new procedures and systems currently used by the GOJ and consider regular training for staff to ensure consistent application of accounting procedures. 45. Reporting: The GOJ has tried to move towards a more results based form of reporting with an increased emphasis on performance measurement. However, the current arrangements for reporting of financial and operational performance do not support this aim. The following box lists the findings and recommendations presented by Jamaica Country Financial Accountability Assessment 16 KPMG as key constraints to the efficient and effective reporting of the use of pub:ic resources by the MOFP. Box 3: Reporting: Key Findings and Recommendations of the KPMG Strategic Review Findings: Gap between High Level and Detailed Reporting:- The high level results for revenue, expenditures and liabilities are available immediately after the fiscal year end while the detailed results are not available until twelve months later, in tlc estimates of the following year. High Level Reporting should represent t1ie accumulation of Detailed Reports and therefore both should be availablc simultaneously. m Delayed Reporting of Actual Transactions - Actual expenditures are usual]y recorded a year after they occur, lending little or no usefulness to the informatioll. The use of estimates as opposed to actual amounts prevents holding the ministrics fully accountable for the financial results and does not encourage efficient Cr improved performance. Recommendations: * Review of Stakeholder Reporting Needs - The stakeholders that use the financidl information should be queried to determine the optimal format, tim6liness, amount of detail, and focus of the financialstatements. - Production of Transparent Financial Statements - Financial statements shoultd disclose all financial results and the entity's financial position of any one year together and prwovide a basic level of financial analysis. Involvement of Line Ministries and Agencies in the Production of Financial Statements - This would increase thed sense of shared accountability. * Direct Responsibility for Annual Reporting by Line Ministries and Agencies - Th,;, MOFP is currently responsible for annual financial reporting of the GOJ. ThiP centralized form of reporting prevents the reporting of specific performance since, each Line Ministry and Aoency's mandate and accomplishments may not always be measured using the same indicators. Development of Effective Means to Monitor Achievement - Line Ministries anc Agencies should develop monitoring indicators to effectively measure the degree o0 their performance. This would increase the sense of accountability and foster a sense of ownership over results. Jamaica Country Financial Accountability Assessment 17 46. Automated Accounting and Reporting Systems: There are serious concerns surrounding the capabilities of the FEMIS system. The consultant study referred to above has recommended a review of the system as a whole, and that the government consider implementing an entirely new system. The CFAA's findings support these recommendations. The following list summarizes some of the key complaints and restrictions of the FMIS encountered in our review: > The system's rigidity and cumbersome screens negatively impacts staff efficiency. This lengthens the time required to process and analyze data. > The system processes data very slowly. The implementation of an upgrade is currently in progress. > The system cannot interface with other PC-based applications such as Microsoft Excel. Therefore manipulation and analysis of information must either be in the reporting formats offered by FMIS or it must be manually exported to other applications. > The screen layouts do not facilitate the review or printing of large reports. The reports appear across multiple screens and the reports are printed on a special printer that uses oversized paper. > The system does not s,upport self-reliance as the users cannot cancel reports locally or change their passwords without ARP assistance. > The system contains multiple codes and levels. > The system does not track future cash commitments. A module has been created and is being piloted at the Ministry of Water. 47. Executive Agencies: Executive Agencies are currently supervised by the Executive Agencies Monitoring Unit in the MOFP, staffed by a single individual. The MOFP anticipates that the staffing needs will increase in the future. Therefore the Monitoring Unit should begin preparing TORs and presenting the MOFP with estimated dates that they expect the staffing needs to increase. This was not done at the date of this CFAA. 48. Others: * Communication of Application Laws and Regulations: The FAA Act and other regulation requirements are communicated to the Accountable Officers (AOs) in an appointment letter. If the AOs defer from the regulations, the FAA Act allows the assessment of a penalty up to the amount of loss created if applicable. However, as noted in the KPMG report, despite the appointment letter most AOs remain unaware of their responsibilities. Furthermore, actions are rarely taken when deviations are encountered and the penalties are minimally exercised. In order to strengthen its enforcement, the responsible agencies within GOJ, such as the FSL, need to strictly Jamaica Country Financial Accountability Assessment 18 carry out periodic visits to the line ministries to determine the actual amount of deviations. When encountered, these deviations should be penalized to the full extent to provide an increased incentive for the AOs to be well informed of th'; ir responsibilities and to adhere to the regulationg. * Websites: The GOJ has in place several web sites, such as the MOFP, the Ministry 3f Commerce and Technology, the Ministry of Education and Culture, the Ministry .f Health, the Ministry of Foreign Affairs and the Ministry of Industry and Investment. These sites provide general information about each Ministry's purpose, leadir.g officials, and in some cases regulatory information. These tools are not being used o the fullest extent, however, as they do not contain key financial information, law s, and reports. GOJ should make available such documents as the FAA Act and tIle Constitution, as well as government financial statements and AGD audit reports, io inform the general public, as an informed public is a critical link in the process :f transparency and accountability. V. Auditing of Government Activities A. Framework and Current Organizational Status 49. This section discusses the entities involved in the audit process, summarizes the current institutional framework for the auditing of government activities, details reforris to be carried out in the near future, and makes recommendations to improve the audit process. 50. Legal Framework. Auditing is discussed in Part IV of the FAA Act. Stateil briefly, this act: > Gives the Auditor General's Department (AGD) full access to documents, evidence, physical and monetary stocks, and government personnel, as is reasonably required; > Requires the AGD to annually examine and certify the statements and accounts which are submitted to it by the various government entities, and report on this examination no later than December 31 following the financial year. The reports are addressed to the Speaker of the House of Representatives, but transmitted to the House via the appropriate Minister; if the Minister does not transmit the report to the House within two months, the AGD can deliver them directly to the Speaker of the House; > Allows the AGD to appoint other (e.g. private sector) auditors to carry out the audit function; > Allows for the establishment of an Audit Committee within a ministry or department, and briefly describes the role of such a comnmittee; > Requires the establishment of an internal audit function in each department "for examining the financial transactions and accounts of the department;" > Requires the internal audit officer to submit regular reports to the accounting officer, and quarterly reports to the Financial Secretary; and Jamaica Country Financial Accountability Assessment 19 > Gives the AGD full access to any reports prepared by the internal auditors. 51. The FAA Act forms the primary basis for the government audit function, which is discussed in more detail below. 52. Internal Audit. Internal audit units (IAUs) are present in all government nministries, and in most agencies. Units in the larger ministries generally contain 10-25 auditors. The internal audit function is legally supported in the FAA Act, but in this legislation the role of the IAUs is merely to examine transactions and accounts. As the function evolves into a more management-oriented approach, the need for further legislation may arise. 53. The Internal Audit Directorate (IAD) was recently established in the MOFP to provide support and training to the IAUs. It does not have supervision responsibilities over these units, but instead has a monitoring and strengthening emphasis. The IAUs are required to report to the IAD on a quarterly basis - not with financial statements, but instead via reports which summarize their findings, conclusions, recommendations, and areas audited during the period. 54. Through the PSMP, internal auditors have participated in a variety of training courses. The training provided as of May, 2000 has focused on: (i) basic computer skills; (ii) implementation of new workpaper documentation techniques (e.g. indexing, coding, referencing, audit programs); (iii) computerized auditing; (iv) auditing of information technology; and (v) value-for-money (VFM) auditing. Much of this training was recommended by the Cowater study (see Part B below). 55. Auditor General's Department (AGD). The AGD is the principal auditor of government activities. Its role is to carry out an annual audit of all central government ministries and departments.7 The department also has the authority to carry out audits and special investigations of local governments and certain parastatal companies ("statutory bodies"). As a result of its audit activities, the AGD produces an Annual Report, which is tabled in Parliament by the end of the calendar year (after which it becomes a public document).8 56. The AGD has approximately 175 staff; 150 auditors and 25 support staff. As of the mid 1990s, only a few employees had university qualifications, but that number has now reached 70-75% of AGD professional staff. About five staff are internationally certified (ACCA), and 15-20 are expected to obtain this distinction in the near future. The increase in professionally qualified staff is partly attributed to the government's approval, in 1996, of a new salary structure for individuals with certain qualifications. AGD salaries are still low relative to those in the private sector, but due to the recent problems in Jamaica's financial sector, AGD auditors have had limited opportunities 7 Some entities, such as parastatal enterprises, are only audited every 3 years. The AGD itself is audited by the MOFP, in accordance with Article 122 (4) of the Constitution. The MOFP's reporting on the audit of the AGD follows the same procedures as those followed by the AGD when it audits other agencies. s See the later discussion of the role of the Public Accounts Committee (PAC) for further information on the presentation of the Annual Report. Jamaica Country Financial Accountability Assessment 20 outside of government service. Therefore, in recent years the department has been able to retain most of its professional staff. 9 57. Public Accounts Committee (PAC). The PAC also plays a critical role in tlie audit process. The PAC is composed of (usually nine) members of Parliament, and is chaired by the leader of the opposition party. Based on the results presented in tie AGD's Annual Report, the PAC calls agencies in front of it, to address any significait issues. The Accounting Officer of each ministry or department represents his/her agem:y in front of the PAC. The MOFP also reports back to the PAC regarding actions taken zo address issues identified in the prior year. Once this process is completed, the PAC presents the Annual Report to the full Parliament, along with the results of i ts deliberationsl' and recommendations for future action. B. Findings & Recommendations 58. Internal Audit: The Cowater study included a separate report on the internal aud it. function. As shown below in Box 4, the recommendations of the study include the strengthening of the IAD (which currently has only 2-3 staff), training for auditors in the IAUs, a change in the audit approach, a greater use of technology in the audit process. and an increased amount of auditing of information systems. Implementation of these recommendations is important for maintaining a proper control environment in the government, and therefore the CFAA team was pleased to note that many are bein implemented via the PSMP. Box 4: Internal Audit-Related Findings and Recommendations of the Cowater Study Findings: z Audit tended to be focused on compliance with laws, regulations, and procedures r Audit reports tended to focus on individual errors or omissions rather than the larger control environment: "auditor is concerned with errors however small" The Auditor General's Deparment does not rely on the work of IAUs 2 Staff of IAUs are not always highly regarded by management-level officials i t The government's FMIS system - both at the ccntral implementation unit and in individual agencies - has never been audited Recommendations: L Strengthening of IAD to 5 professional staff, including 2 IT auditors > Training and other capacity building in IT auditing and Value-for-Money audits j Upgrading of technology used by auditors: better hardware and implementation oi cornputer-assisted audit techniques | Greater focus on materiality and risk, including an increased use of modem audit 9 Most of this information was obtained in an interview with the current AG, Mr. Strachan, and was not independently verified. 10 The deliberations of the PAC are open to the public, and are closely watched by the Jamaican press. Jamaica Country Financial Accountability Assessment 21 sampling techniques > Review by IAUs - in collaboration with each other - of the larger FM systems in place in their ministry or department r IAUs, in conjunction with the IAD, should carry out a review of the FEMIS Updating of the audit procedures (audit manual) Upgrading of the reporting systems: from IAUs to IAD and from IAD to MOFP Implementation of 3-year audit planning, rather than annual planning Upgrading of report-writing procedures: focus on materiality/risk, management perspective (clearer description of how to correct control weaknesses) r Establishment of an Audit Committee in each ministry/department' > Some small changes to the legal framework Improved personnel procedures, including revision of job titles and job descriptions r No outsourcing of audits, with the possible exception of IT auditing 59. Auditor General's Department: Relative to some of its counterparts in other ex- English colonies of the Caribbean, the Jamaican Auditor General is well-established and respected. Still, issues remain as to its capacity and independence. These issues were studied by Cowater, whose findings and recommendations appear in Box 5. 60. The actions to be taken under the Bank-financed Public Sector Modernization Project (PSMP) mainly involve training to staff and the purchase of modern equipment, and thus are focused on building the capacity and increasing the efficiency of the department rather than changing the structure of the organization. While the PSMP does not specifically attempt to make the AG more independent, the Cowater report does state that this is a worthy long-term goal. With this in mind, the following section provides an evaluation of the independence of the AGD. Box 5: Findings and Recommendations of the Cowater Study of the Auditor General's Department Findings: - While some changes can be made to the AGD's legal framework, there is sufficient legislative basis to proceed with the implementation of institutional strengthening . measures for the agency. i The AGD is generally seen by other agencies as being fair, reasonable, and independent Note: Many other findings mirrored those found in the firm's review of the government's internal audit function - see Box 4 above for that discussion, and see related recommendations below. Recommendations: "Provision for the establishment of Audit Committees can be found in Section 33 of the FAA Act. Jamaica Country Financial Accountability Assessment 2 t Preparation of an AGD Mission Statement, to give direction to the organization * In the lon run,changes to legislation and regulations in order to: (i) assignmcre responsibility to accountable officers for the maintenance of intemal control systerris; and (ii) allow for greater organizational independence (see the next two points). . A comparative study of audit mandates, to reveal legislative options for Jamaica i More control for the AG over the staffing and funding of the department; .o accomplish this, discussions should be entered into with the Public Servic:e Commission (PSC) to obtain its agreement to have the powers of hiring ard disciplining personnel within the AGD delegated to the AG *P A; general review by the AGD of government financial management in Jamaica r Review of the FMIS to determine its strengths and weaknesses Strengthening of audit activities: (i) traditional audit areas, e.g. via statistical sampling and improved report writing: (ii) introduction of Value-for-Money auditing; (iii) IT auditing: and (iv) use of Computer-Assisted Audit Techniques * Purchase of hardware - such as laptops - and software to improve staff efficiency ; A clearer statement of audit objectives prior to an audit, and a statement (aftewardw>) as to whether these objectives were achieved ' A change in "mind set," to place greater emphasis on materiality and to have more cf a management perspective r Development of long-term audit plans Recruiting and training of IT auditors > "Just-in-tirne" training and methodology support > Establishment of Functional Leader positions, to allow for greater guidance of thi process of change in the department, especially in IT and VFM audits , > A costing study, to determine hourly rates and thus assist in deterrninng audit Costs I In the Human Resources area: (i) a slightly more structured approach to recruitment and selection of staff; and (ii) improved employee orientation I Improved assessment of employee training needs, and a sufficient budget allocation for such training i More explanation and structure in the Annual Report 61. AGD Independence: The independence of a Supreme Audit Institution (SAI) i, always a factor to consider when examining a country's accountability framework. Bow 6 below provides a guide to examining the Jamaican AGD's independence. ThW information presented suggests 5 criteria for measuring SAI independence:12 1. As an entity, does the SAI report to the Executive branch? the Legislative? Or does it have no particular reporting authority? 2. How much authority does the SAI have over its own agency budget? In particular, does it manage its own human resources, including determinations of hiring, firing, and salary levels? 12 While these are not the only criteria, they do provide a concise - yet fairly comprehensive - means to study the autonomy of a particular SAI. Jamaica Country Financial Accountability Assessment 23 3. How does the SAI pass its budget request? Through the Executive (e.g. Ministry of Finance)? Through some other body, such as a Public Accounts Committee? Or directly to the legislature? 4. To what extent does the SAI have access to public documents, personnel, and other information sources? Is this access specifically limited in any way by the constitution, or by other laws or regulations? 5. What is the official term in office of the SAI head? What has been the actual term in office in the past 30 years or so? 62. Regarding the first question, the AGD is constitutionally de-linked from all branches of government. This is expressed in Section 122 (3) of the Constitution, which states that the AG "... shall not be subject to the direction or control of any other person or authority." As mentioned earlier, its annual reports are submitted to the legislative branch and is closely scrutinized by the Public Accounts Committee. 63. The AGD can be considered to be lacking independence with regard to questions 2 and 3 above. First, the AGD's budget requests pass through the MOFP, which has the power to modify this request before submitting it to the legislature. Secondly, although the AG's salary is protected (it cannot be reduced while he/she is in office), in other ways the department does not control personnel actions; that control is substantially maintained by the Public Service Commission (PSC). Regarding these issues, the Cowater study concluded that: Aside from interference with budget and staffing, the AGD is seen to be independent so this is not an urgent issue, but it should be dealt with when the legislation comes up for review. We believe it would be wise to rectify the problem with legislative amendment. In the meantime, the MOFP could provide appropriate financial resources and the Services Commission could delegate its staffing responsibilities to the Auditor General.13 13 Cowater report, page 2-3. Jamaica Country Financial Accountability Assessment 24 Box 6: The Components of SAT Independence'4 Supreme Audit Institutions (SAIs) are often responsible for providing the th,rd party review that is an essential aspect of a modern, transparent public sector. ro provide a truly independent view, the SAI should have sufficient autonomy to carry out Iits assigned mission without having to be conceemed with political, budgetary or ot er pressures. The concept of SAI autonomy has been largely discussed in literaw e, conferences, industry newsletters, and professional meetings. In 1977. at a meeting in Lima, Peru sponsored by the International Organization of Supreme Audit Institutions (INTOSAI), the "Lima Declaration of Guidelines on Auditing Precepts" was drafted aiid approved. The so-called "Lima Declaration" included the following statements: (i) Althoug,h state institutions cannot be absolutely independent because they are part of the state as a whoeI, the Supreme Audit Institutions shall have the fDunctional and organizational independence required to fulfill their tasks.'5 (ii) With regard to their professional career, the auditors of Supreme Audit Institutions may not be exposed lo influences by the audited entities and may not be dependent on such entities.'6 (iii) If required, Supreme Audit Institutions shal Ibe entitled to apply directly for the necessary financial Tmeans to the public body deciding on the national budget.'7 (iv) Supreme Audit Institutions shall be entitled to use within their own framework of responsibility the funds allotted to them under a separate budget head.'8 While item (i) makes a general statement, items (ii) - (iv) suggest specific criteria I for measuringi a particular SAl's independence: the extent to which SAI employees are accountable to an agency other than the SAX; the extent to which the SAT is able to apply directly to the entity which ultimately decides on the national budget: and the extent to which the SAI is able to control its own allotted budget. Additional criteria are used in practice when making a determination as to the independence of the SAI. These include: (a) the statutory authority of the SAI to review documents of other government departmcnts; and (b) the length of the term in office c f the SAI head. The latter is borrowed from the literature on central banks, in which thc official term in office of the Central Bank President is often considered to be ai important measure of independence. 64. Additionally, the consultants pointed out a number of cases in which the nation;.l auditor has gained greater independence from the executive branch. These included th.e UK, Sweden, New Zealand, and South Africa (the only developing country mentioned). 14 Taken from the in-progress doctoral dissertation of Daniel Boyce, an author of this CFAA. '5 Lima Declaration, paragraph 5.2. 16 Ibid, para. 6.3. 17 Ibid, para. 7.2. 18 Ibid, para. 7.3. Jamaica Country Financial Accountability Assessment 25 65. In terms of questions 4 and 5, the AGD does meet the strictest criteria for independence. First, as mentioned in the 'Legal Framework' discussion above, The FAA Act gives the AGD full access to all potential sources of information for the reasonable conduct of its audits and investigations. Regarding term in office, the Constitution of Jamaica provides for the AG's appointment by the Governor General (i.e. the English Crown's representative) on the recommendation of the Public Service Commission, and the AG then is allowed to serve until the age of 60, or up to 65 by agreement with the Public Service Comrnission. The current AG, Mr. Adrian Strachan, has been in office for more than 20 years. 66. Therefore, the above analysis suggests two ways in which the AGD could become a more independent third-party reviewer of public sector activity. These would be to: (i) have greater control over its resources and personnel practices; and (iii) have the ability to present and defend its budget directly to the legislature (or, to receive some kind of automatic allocation). An additional measure would for the AGD to no longer be involved in the warrant process (currently the AGD "authenticates" budgetary withdrawals, ensuring that no withdrawals are made without a warrant from MOFP approved by Parliament), since this involvement places the AGD into the process in which it later audits.'9 67. In the discussions held with the CFAA team, the current AG (Mr. Strachan), stated that greater formal and informal autonomy was not a high priority of the office, as such rights have generally not been granted to such offices in developing countries. Instead, the goal of the office was to improve its technical abilities in the short term, and to seek greater independence as a gradual, long-term goal. Therefore, while it is the conclusion of this CFAA that a more independent AGD would enhance transparency and accountability in the government, neither current modernization efforts nor the desires of the AG himself are moving the entity in the direction of greater autonomy, except to the extent that a more capable AGD can be considered to also be a more independent one. 68. Public Accounts Committee: The Jamaican Public Accounts Committee appears to be a vibrant arm of the legislature. It is made up of nine members - normally six "back benchers" (Members of Parliament's ruling party who are not Ministers or Deputy Ministers) and three legislators from the opposition party - and is headed by one of the opposition members. The PAC is responsive to the reports prepared by the Auditor General's Office and its deliberations, and its reports receive a great deal of public attention.20 In this way it serves as an example to other countries in the region, many of which do not have active PACs. The CFAA therefore makes no general recommendations regarding the PAC, except to encourage its continued functioning. 19 See the government's response to this suggestion in Annex 2. 20 The PAC's deliberations are often reported in by the Jamaican media - see for example "Shaw Chides Government Agencies" (The Jamaica Gleaner, January 25, 2001). This is one of many stories involving the PAC that can be found via a search of The Gleaner's website. Jamaica Country Financial Accountability Assessment 26 VI. Conclusion & Next Steps 69. The text of this study focussed mostly on weaknesses in government financial management, with the goal of pointing out where improvements could be made to improve the GOJ's handling, recording, reporting on, and auditing of public funds. In spite of these weaknesses, it is concluded that there is a foundation of transparency and accountability in Jamaica's public financial management systems. This conclusion is based partly on the presence of a number of well-established institutions and also on the fact that, where weaknesses are present, they are in many cases minor when compared to countries of similar income levels. Additionally, the government's accountability procedures and practices appear to be generally sufficient for the effective aild transparent handling of international funding, including Bank adjustment loans. 70. This CFAA has relied heavily on two sets of documents - those prepared ]:>y KPMG as part of its Strategic Review of the Jamaican Public Sector and those preparn,d in conjunction with the Bank-financed PSMP. These documents are critical because th .,y represent the ongoing program of public sector reform, which has a wider aim of improving the value for money delivered by the public service. This reform program has not been proceeding at the pace originally anticipated, due in part to fiscal constraints, b Jt its continued implementation is important for the government's managerial health. 71. Under the Strategic Review program, reviews of 4 key ministries - Finance, Health, Education and National Security and Justice - have been undertaken. The goal of the reviews is to clarify the purpose and strategic objectives of ministries in the context of the government's priorities, in order to ensure that available resources are targeted on core functions and critical areas of necessary public expenditure. The specific goal of the review of the MOFP was to identify the key issues to be addressed in order to improxe performance and to consolidate the reforms initiated under the Bank-financed Administrative Reform Project. 72. Terms of Reference are being prepared for the restructuring of the MOFP. Work is expected to begin in October 2000. TORs for the upgrading of the FMIS systems, th - computerization of the Accountant General and self regulation of the financial sector ar- also in preparation. Consultants also conducted a 3 month study of 132 publi enterprises, and the reports containing recommendations on the reorganization or privatization of these are under review by the MOFP. 73. In order to strengthen its Financial Management functions and capabilities, the GOJ has already taken steps to address the major weaknesses identified in the strategic review performed. Now the next steps require that the GOJ, through a government widt strategy and timetable, prioritise and determine where immediate versus long term effort: are needed. This should include modification of existing systems and procedures and thW implementation of new methods, staff and system(s) to lend further transparency and:1 reliability to the management of funds. 74. Many of the steps taken in recent years to improve public financial managemen: in Jamaica have been carried out under the PSMP. This project is still under implementation, with the Bank's loan scheduled to close on June 30, 2002. While it has 21 Public Enterprises are owned 51% by GOJ. Jamaica Country Financial Accountability Assessment 27 recorded some definite achievements, the PSMP has been stalled in many ways, in part because of the government's fiscal constraints. However, given that these reforms now have some degree of momentum, it is hoped and recommended that investments to improve public sector financial management will continue to be made, under PSMP as well as any other modality that the government may have at its disposal. Jamaica Country Financial Accountability Assessment 28 ANNEX: 1 LIST OF INTERVIEWEES NAME POSITION MINISTRY Bowie, Margerite Permanent Secretary Ministry of Education Bryan, Dunstan Project Officer Ministry of Finance Budhan, Reginald Director Policy & Projects Ministry of Industry & Inve stment Cooper, Karen Internal Audit Directorate Ministry of Finance Cunningham, Sandra Internal Audit Ministry of Industry & Inve ,tment Dias, Lorraine Accountant General Ministry of Finance Duncan, Norma Asset Management Ministry of Finance Edwards, Berome Director Financial Review Unit Ministry of Finance Gordon, Jacinth Director of Projects Ministry of Education Grey, Ralda Director of Budget Ministry of Finance Henry, Rose Deputy Financial Secretary - Budget Ministry of Finance Johnson, Dean Director of Debt Service Ministry of Finance Jones, Carol Deputy Financial Secretary Ministry of Finance Leight, Julian Project Director KPMG Peat Marwick Logan, Nigel Principal Finance Officer Ministry of Health Lucie-Smith, Jacqueline Principal Finance Officer Ministry of Education Marshall, Joan Deputy Accountant General Ministry of Finance Martin, Claudette Director of Project Finance Unit Ministry of Education Martin, Everett FMIS Manager Ministry of Industry & Inve~ tment Martin, Robert Deputy Financial Secretary - FM Ministry of Finance McKay, Rose Deputy Accountant General Ministry of Finance Miller, Sharon InterAmerican Dev. Bank Ormsby, Ida Director External Finance Unit Ministry of Finance Pratt-Harrison, Patricia Diector of Procurement Policy Implementation Ministry of Finance Rowe, Devon L. Deputy Financial Secretary Ministry of Finance Strachan, Adrian Auditor General Auditor General Thompson, Kathryn Director of Financial Management Division Ministry of Finance Vidal, Errol Accountant Tech III Ministry of Industry & Investment Walker, Morris Accountant Tech m Ministry of Industry & Investment Wilson-Cross, Olive Director - Project & Planning Ministry of Health Jamaica Country Financial Accountability Assessment 29 ANNEX 2 COMMENTS ON DRAFT CFAA DOCUMENT FROM THE GOVERNMENT OF JAMAICA Copies of the draft CFAA were provided to the Ministry of Finance and Planning, and the Planning Institute of Jamaica, for their review and comment. In a letter dated November 15, 2000, the government provided its official comments. The Bank's CFAA team divided the letter into three types of comments: (i) statements that served to summarize certain findings or recommendations of the CFAA; (ii) statements providing further information or clarification on specific issues, for which changes were made directly to the CFAA document; and (iii) overall conclusions about the document, updates regarding events occuning subsequent to the CFAA fieldwork, and statements of opinion that may have fully or partially contested the findings or recommendations of the CFAA. The following represents those comments falling into category (iii). Where quotes and italics are used, this indicates that the statements are copied verbatim from the government's correspondence. General Comments: "The document can be considered acceptable for its purpose in outlining the general principles of public financial management in Jamaica. Notably, the conclusions accurately identified the critical areas for improvement and also indicated that Government was already making efforts to remedy weaknesses identified." Cash Management: Accountability: The MOFP disagreed with the CFAA recommendation of adopting a Single Treasury account, citing the benefits of a decentralized approach. "Any move towards centralizing the operations of Ministries/Departments, for example, reverting to all bank accounts being controlled by the Treasury would be a retrograde step. This conflicts with Government's current effort to make Ministries more accountable for the use of budgeted funds. In addition, the government is already far advanced in terms of decentralizing responsibilities. The increased administrative cost associated with this suggestion conflicts with Government's intent to streamline public sector operations and current move towards greater efficiency. " Cash Management: Technology: "The reference to KPMG's report in respect of the FMIS being outdated is noted. The acquisition of a new FMIS is contemplated and studies are being done to acquire a FMIS which will provide the GOJ with the flexibility that will be required. However the timing of this project is crucial. The new FMIS will be required to integrate all the various systems developed under PSMP and FSL. In particular HRMIS would be linked to a new standardized payroll system for GOJ which would form a module to the new FMIS. Therefore, the IFMIS would integrate: HRMIS JABIS ICTAS Jamaica Country Financial Accountability Assessment 30 Project Data Bank CSDRMS Accountant General's Treasury Management System All systems will now be developed by FSL and the MOF thus facilitating compatibil'ity and interface between applications." Financial Management Information System (FMIS): "The comments with respect to the IFMIS are being addressed within the restructuring of the MOFP with iJhe establishment of an IT Strategy Unit. This Unit is mandated to develop an IT policy for standardization of all IT systems within the wider public sector. The objective will be to allow interface and integration of the revenue and expenditure systems and to provide l-he efficiency and gains expectedfrom the modernization program. ... The full implementation of the FMIS commitment module is targeted for April 1, 20(111. This will enable the Government to more accurately forecast its cash needs. Accrual accounting is being introduced through the creation of Executive Agencies within Central Government. However, to use accrual accounting for core Ministries at this time is not feasible. Training programmes are being currently developed to strengthen the financial skills of public officers. Since the completion of the [CFAA] Report, many of the comments in respect to the FM FS report have been addressed. For example, processing time for documents has improv!!d because of upgrading of the system. The assistance received from Fiscal Servic?s Limited (FSL), the new providers, have enhanced the timeliness of information provid,d by the FMIS. " Auditing: "A number of recommendations in respect of Internal Audit have been implemented. The process is ongoing despite the restructuring programme presemniv taking place at the MOFP. The strengthening of Internal Audit Units and the Internal Audit Directorate (IAD) will continue. All other recommended improvements will he implemented. " Auditing: Independence of the Auditor General: "Interpretation of the [Cowate r] report suggests that the issue facing the Auditor General's Department relates io capacity and not to indlependence or lack thereof as is suggested [by the CFAA]. De-linking the Auditor-General from the process of authenticating approved budget withdrawals from the Consolidated Fund would remove an essential element of control during the execution of the budget process and create an additional layer during audit s. In essence, the Auditor General's role could be seen as being moved to that of a reviewer after the fact instead of supporting controlfeatures in a real time manner. " Websites: "Reference is made to inadequacy of information provided via the internet on Government websites. Though this statement could be considered partially true, capacizy requirements and costs related to website maintenance are ignored. The reality is that the use of the internet is growing, however persons with access in Jamaica is still very Jamaica Country Financial Accountability Assessment 31 low. Until the transition to greater technology usage is complete, a combination of web and paper based information will have to continue. " Conclusion: "The MOFP acknowledges the findings and recommendations of the Report and is working towards addressing the issues raised. Although the progress may not be as timely as planned because of budgetary constraints, the Ministry is committed to any recommended improvement which will see a more efficient public service. " Jamaica Country Financial Accountability Assessment 32 ANNE, 3 THE BUDGET PROCESS Government's budget shows the amount it expects to receive (revenue), the amoun: it expects to spend (expenditure) and the amount it expects to save (surplus/deficit) during the fiscal year. The budget serves three important purposes as: * an instrument of economic policy; * a tool of accountability for public funds; and * a management tool. The budget is more than a statement of revenue and expenditure, instead designed to achieve the economic and social objectives of Government. The budget, representi -g fiscal policy, works in combination with monetary policy (i.e., BOJ operations) to achieve national objectives. Legal Authority The Constitution of Jamaica gives the Minister of Finance the responsibility for tle preparation of the Estimates of Revenue and Expenditure before the close of the previo 1s fiscal year and the tabling in Parliament of those Estimates as early as possible in tile fiscal year to which it relates. The Minister exercises his responsibility for the Estimalt-s of Revenue and Expenditure through the Ministry of Finance and its departments. Budget Formulation In Jamaica, where the private sector is the main engine of growth, Government has :o allocate scarce resources to areas that require urgent attention and to areas that are like y to foster economic growth. The total resources available to Jamaica (domestic plus n -t external flows) must be shared between the private and public sector. Even within the public sector, the resources have to be allocated between Central Government and the Selected Public Enterprises. As part of the strategy to control mone y supply and achieve price stability, Central Government may be required to generate a budget surplus. The resources available to Government are not freely available for spending orn socioeconomic programs. The first charges on resources are statutory obligatiolns such as debt servicing. After providing for this, the remaining resources are allocated between sectors and programs according to national priorities. These priorities are established as part of Government's planning process. Plannin g involves the determination of national objectives along with the policy instruments and inputs Jamaica Country Financial Accountability Assessment 33 required for achieving these objectives as efficiently as possible. Ideally, planning occurs over the medium-term as well as on an annual basis, i.e., the national medium-term plan and the annual corporate plans of ministries and departments. The annual plan is the link that provides continuity and allows changes to suit year-to-year situations. The annual budget reflects financial provisions for strategies identified in the annual corporate plan. Budget Preparation and Approval Process Government's fiscal year runs from 1st April to the 31st March of the following year. As preparation of the estimates takes considerable time, it starts well before April. The process usually begins in September of the previous year. The Ministry of Finance, Bank of Jamaica, and Planning Institute work together to develop the macroeconomic framework and policy targets for the following year. The framework is prepared through the economic or financial programming exercise. The macroeconomic framework guides development of the budget envelope (available resources, required surplus/deficit, etc.). Simultaneous to this, the Ministry of Finance in conjunction with the Planning Institute establishes priorities and directions for sectoral allocations. Based on these macroeconomic limits/targets (the budget envelope) and sectoral priorities, the Ministry of Finance issues the "Budget Call" to all ministries and departments requesting the submission of draft proposals of requirements for the coming budget. The Budget Call informs ministries of the programs Government intends to give priority funding in the next fiscal year and expenditure ceilings within which ministries and departments are expected to operate. Ministries and departments are usually given about two months to reply. Upon receipt of budget submission from ministries and departments, the Budget Division, with assistance from other divisions and agencies within the Ministry of Finance, examines and analyses the submissions in detail. Several meetings take place with the ministries and departments at various levels. From this process the draft budget is prepared. Cabinet's approval is sought for the draft budget, which is then submitted to Parliament. After submission, the Standing Finance Committee of the House studies the document. The budget debate follows with the presentation of the Appropriation Bill, which sets out the allocations for each ministry, and department of Government for the fiscal year. The budget debate closes with the approval by Parliament of the Appropriation Bill - ideally by early May. Criteria Used in Allocation of Funds As mentioned before, the first charges on resources are statutory obligations such as debt servicing. After providing for this, the remaining resources are allocated between sectors and programs according to national priorities. A distinction is made between recurrent and capital expenditure. Recurrent refers to Government's housekeeping budget while capital refers to Government's planned Jamaica Country Financial Accountability Assessment 34 investment for the fiscal year. For recurrent expenditure the major criteria used in deciding allocation levels are: [1 Expenditure ceiling based on Government's current macroeconomic policy. [1 Government's stated priorities for the fiscal year. For example, in FY 1994,95 priority areas included; primary education, primary healthcare and procurement of drugs and pharmaceuticals, youth programs, national security and tourism. [1 Inescapable commitments arising from the continuation of programs, projects and policies previously authorized by Cabinet. Government has already committed to this expenditure. This expenditure includes interest on public debt, salaries, rent and public utilities. Interest on public debt is statutory and must be paid first. For capital expenditure the major criteria used in deciding allocation levels are: O Current year projections for the Public Sector Investment Program (PSIP). The PS IP is prepared in line with the policies included in Government's medium-term economic program and is consistent with Government's macroeconomic objectivr; s, sectoral strategies and policies. The program is dis-aggregated into Central Government and Public Enterprises. The PSIP includes project requiring exten al financing for which creditor agencies have been approached and projects suitable for external financing for which creditor agencies have not yet been approached. T ie first year of the PSIP becomes the capital budget. [ Multilateral/bilateral programs. Priority is given to providing the counterpart funding for multilateralfbilateral programs because they offer a good method to access concessionary financing that Government would in any case, have to provitle for developmental activities. In addition, foreign exchange inflows are received. O Implementation status of the project. Priority is given to projects that have started )r for which firm commitments have already been made. Priority is also given to tho,e projects that are desirable for achieving the government's objectives but for which rio commitments have been made Post-Approval Process There are four important phases in the overall budget cycle that follow the passage of the budget, namely: The Ministry of Finance issues warrant and Accountant General releases funds. Th-te Constitution states that no expenditure can be made until the Minister of Finance issues a Warrant. This ensures that there is a relationship between the inflow of revenue and tl.e outflow of expenditure. All revenues are paid into the Consolidated Fund and expenditure flows out. The Accountant General's Department releases funds to ministries and departments up to the value of issued warrants. a Departnments record expenditure. Each Permanent Secretary, as head of a ministry, ;s held responsible for the operations of his/her ministry and the accounting of i':s Jamaica Country Financial Accountability Assessment 35 expenditure. He/she is required by low to submit final accounts (Appropriation Accounts) to the Ministry of Finance and to Auditor General by July of the following fiscal year. D The Auditor General audits the records. The Auditor General's Departments audits the accounts of all Government departments. It performs the function of an external auditor. The Auditor General is answerable to Parliament. [ Parliament reviews the records. The Public Accounts Committee (PAC) is a select committee of Parliament, with members from both sides of the House, chaired by the Shadow Minister of Finance. The Auditor General under the Financial Administration Act is required to submit to Parliament each year a report on the Appropriation Accounts of Ministries and Departments. The PAC examines both the Appropriation Accounts and the Auditor General's Report and based on these, questions accounting officers on how they have discharged their responsibilities. Jamaica Country Financial Accountability Assessment 36 THE BUDGET PROCESS Economic & Financial Programme Development 17 2 Parliament reviews records Expenditure Celing 'et through PAC 16 3 Auditor General Audit Budget Call issued to Records & Presents Audit to Ministries Parliament 15 4 Departments Receive Funds Draft Budget returned to & Record Expenditure MOF 14 5 Accountant General releases Review Process in MC =P funds 13 6 Ministry of Finance Follow up Issues Meeting with Warrants Ministries 12 7 Parliament Draft Budget Approves Finalized & Appropriation Bill Submnitted to Cabinet 1 I8 Budget Debate Cabinet Approves Draft Budget 10 9 Standing Finance - Budgeted Tabled in Committee Exarnines the Parliament Budget Jamaica Country Financial Accountability Assessment 37 STAGES OF THE BUDGET PROCESS 1. ECONOMIC & FINANCIAL PROGRAMME DEVELOPED 2. EXPENDITURE CEILING SET 3. BUDGET CALL ISSUED TO MINSTRIES 4. DRAFT BUDGET RETURNED TO MOF 5. REVIEW PROCESS IN MOFP 6. FOLLOW UP WITH MINISTRIES 7. DRAFT BUDGET FINALIZED & SUBMITTED TO CAGINET 8. CABINET APPROVES DRAFT BUDGET 9. BUDGET TABLED IN PARLIAMENT 10. STANDING FINANCE COMMITTEE EXAMINES THE BUDGET 11. BUDGET DEBATE 12. PARLIAMENT APPROVES APPROPRIATION BILL 13. MINISTRY FO FINANCE ISSUES WARRANTS 14. ACCOUNTANT GENERAL RELEASES FUNDS 15. DEPARTMENTS RECEIVE FUND AND RECORD EXPENDITURE 16. AUDITOR GENERAL AUDIT RECORDS AND PRESENTS AUDIT TO PARLIAMENT 17. PARLIAMENT REVIEWS RECORDS THROUGH PAC Jamaica Country Financial Accountability Assessment 38 ANNEX 4 INTEGRATED FINANCIAL MANAGEMENT SYSTEM U- L , t I- - - ------------ -~ ~ ~ ~ ~ ~ ~~~~~~ p 13~/ U. U- du ei~ P 4J~~~~~~~~~~~~~~~~~ . ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 9