antigua & barbuda, dominica, grenada, st....

Report No.:

WORLD BANK REPORT LATIN AMERICA AND THE CARIBBEAN REGION FINANCIAL MANAGEMENT AND ACCOUNTABILITY TEAM

COUNTRY FINANCIAL ACCOUNTABILITY ASSESSMENT

ANTIGUA & BARBUDA, DOMINICA, GRENADA, ST. KITTS & NEVIS,

ST. LUCIA, ST. VINCENT & THE GRENADINES

April 30, 2003

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.

OECS Country Financial Accountability Assessment i

ABBREVIATIONS AND ACRONYMS

ABBREVIATION NAME

AG Accountant General AO Accounting Officer ASYCUDA Automated System for Customs Data (UNCTAD software) CARICAD Caribbean Centre for Development Administration CARICOM Caribbean Community and Common Market CAROSAI Caribbean Organization of Supreme Audit Institutions CARTAC Caribbean Regional Technical Assistance Centre CAS Country Assistance Strategy (World Bank document) CDB Caribbean Development Bank CF Consolidated Fund CFAA Country Financial Accountability Assessment CGCED Caribbean Group for Cooperation in Economic DevelopmentCIDA Canadian International Development Agency CIPFA Chartered Institute of Public Finance and Accountancy (UK) CPAR Country Procurement Assessment Report (World Bank) CRF Consolidated Revenue Fund CS-DRMS Debt Recording and Management System (Commonwealth

Secretariat software) CSME CARICOM Single Market and Economy DFID Department for International Development (U.K.) DOA Director of Audit ECCB Eastern Caribbean Central Bank ECEMP Eastern Caribbean Economic Management Program FAA Financial (Administration) Act FINMAN Multi-Country Financial Management Project under ECEMP FIR Fiscal Issues Review FM Financial management FMIS Financial Management Information System FR Financial Regulations FY Financial year IAS International accounting standards ICAC Institute of Chartered Accountants of the Caribbean ICAEC Institute of Chartered Accountants of the Eastern Caribbean IFAC-PSC International Federation of Accountants – Public Sector

Committee IMF-GFS International Monetary Fund – Government Finance StatisticsINTOSAI International Organization of Supreme Audit Institutions IOCR Institutional and Organizational Capacity Review IRD Inland Revenue Department IT Information technology MOE Ministry of Education and Culture MOF Ministry of Finance MOH Ministry of Health MTEF Medium-Term Expenditure Framework

OECS Country Financial Accountability Assessment ii

NGO Non-government organization NIA Nevis Island Assembly OECS Organization of Eastern Caribbean States OPM Office of the Prime Minister PAC Public Accounts Committee PEFA Public Expenditure and Financial Accountability Unit, a

technical unit set up by a group of donors PEM Public expenditure management PER Public Expenditure Review (World Bank document) PFM Public financial management PS Permanent Secretary PSC Public Service Commission PSD Public Service Department PSIP Public Sector Investment Program PSMP Public Sector Modernization Project ROSC Report on Observance of Standards and Codes (IMF, World

Bank) SAI Supreme audit institution SIGFIS Standardized Integrated Government Financial Information

System SIGTAS Standardized Integrated Government Tax Administration

System CRC SOGEMA Canadian management consulting firm implementing

ECEMP SOE State-owned enterprise UWI University of the West Indies VFM Value for money

OECS Country Financial Accountability Assessment iii

TABLE OF CONTENTS EXECUTIVE SUMMARY .....................................................................................................1

I. INTRODUCTION........................................................................................................5

II. LEGAL AND INSTITUTIONAL FRAMEWORK..................................................7 A. THE EXISTING FRAMEWORK AND STATUS OF FINANCIAL LEGISLATION .........................7 B. FINDINGS AND RECOMMENDATIONS .............................................................................12

III. CENTRAL GOVERNMENT BUDGET AND CASH MANAGEMENT ............13 A. BUDGETARY FRAMEWORK AND BUDGET PREPARATION...............................................13 B. BUDGET IMPLEMENTATION...........................................................................................16 C. BUDGET MONITORING ..................................................................................................18 D. BUDGET TRANSPARENCY..............................................................................................19 E. CASH MANAGEMENT ....................................................................................................20 F. FINDINGS AND RECOMMENDATIONS .............................................................................21

IV. CENTRAL GOVERNMENT INTERNAL CONTROLS, ACCOUNTING AND INFORMATION TECHNOLOGY......................................................................................23

A. INTERNAL CONTROLS AND INTERNAL AUDIT................................................................23 B. BASIS OF ACCOUNTING.................................................................................................24 C. AID ACCOUNTING .........................................................................................................25 D. INFORMATION TECHNOLOGY: AUTOMATED ACCOUNTING AND REPORTING SYSTEM...26 E. HUMAN RESOURCES .....................................................................................................27 F. FINDINGS AND RECOMMENDATIONS .............................................................................29

V. CENTRAL GOVERNMENT FINANCIAL REPORTING...................................30

VI. CENTRAL GOVERNMENT AUDITING..............................................................33 A. MANDATE .....................................................................................................................33 B. APPOINTMENT, TENURE AND INDEPENDENCE...............................................................33 C. AUDIT STANDARDS AND PROCEDURES .........................................................................36 D. REPORTING ...................................................................................................................37 E. HUMAN RESOURCES .....................................................................................................38 F. EFFECTIVENESS OF AUDIT ............................................................................................39 G. FINDINGS AND RECOMMENDATIONS .............................................................................40

VII. LEGISLATIVE OVERSIGHT.................................................................................41 A. MANDATE AND ROLE OF PUBLIC ACCOUNTS COMMITTEES ..........................................41 B. ESTABLISHMENT OF PUBLIC ACCOUNTS COMMITTEES .................................................43 C. OPERATIONS OF PUBLIC ACCOUNTS COMMITTEES .......................................................44 D. FINDINGS AND RECOMMENDATIONS .............................................................................45

VIII. OTHER ASPECTS OF PUBLIC SECTOR FINANCIAL MANAGEMENT .46 A. STATE-OWNED ENTERPRISES........................................................................................46 B. LOCAL AUTHORITIES ....................................................................................................47 C. PUBLIC ACCESS TO INFORMATION: ROLE OF THE MEDIA..............................................47 D. FINANCIAL MANAGEMENT IN WORLD BANK PROJECTS................................................48

IX. PRIVATE SECTOR ACCOUNTING AND AUDITING ......................................49

X. FIDUCIARY RISK ASSESSMENT ........................................................................50

OECS Country Financial Accountability Assessment iv

A. THE NEED FOR FIDUCIARY RISK ASSESSMENT................................................................50 B. FRAMEWORK FOR FIDUCIARY RISK ASSESSMENT ..........................................................51 C. RESULTS OF ASSESSMENT .............................................................................................52

XI. CONCLUSION AND NEXT STEPS .......................................................................59

ANNEX 1 ................................................................................................................................60 LIST OF INTERVIEWEES.................................................................................................60

ANNEX 2 ................................................................................................................................66 WORLD BANK PROJECTS IN THE OECS COUNTRIES..............................................66

ANNEX 3 ................................................................................................................................70 INDIVIDUAL COUNTRY REPORT .................................................................................70

OECS Country Financial Accountability Assessment 1

EXECUTIVE SUMMARY The major issue facing most Organization of Eastern Caribbean States (OECS) countries is the transition of their economies from a world of preferences to one of more open competition and from being inward looking to more outward looking. They are all active democracies with independent judiciaries, broad respect for the rule of law and free media. On the other hand, public administration is generally inefficient and inadequately responsive to the needs of the population, particularly the poor. There are concerns about growing levels of corruption in some islands, especially given the increased incidence of drug trafficking through the Caribbean in recent years.1

The objectives of this Country Financial Accountability Assessment (CFAA) are to review key aspects of public financial accountability at the national level in six of the OECS Countries: (i) to identify systemic weaknesses and needs which could be addressed through capacity building initiatives and other measures designed to improve public sector transparency and accountability; and (ii) to inform Bank staff of the institutional context in which they work and provide guidance for the financial management arrangements in Bank lending. It is planned to include recommendations on financial management reform in a wider program for improving public sector performance in the six independent countries of the OECS.

This CFAA overlaps with two other diagnostic exercises of the Bank - the Fiscal Issues Review (FIR)2 and the Institutional and Organizational Capacity Review (IOCR), and complements another exercise, the Country Procurement Assessment Report (CPAR). The FIR is in process, and notes on three countries (Grenada, St. Kitts and Nevis, and St. Lucia) have been drafted at June 2002. The IOCR exercise has been completed, and a final discussion draft has been issued (Report No. 21844 LAC, April 2001). The CPAR has also been completed (January 2001). To avoid duplication of activity, the CFAA team has built on these documents insofar as they included analyses of financial management institutions, processes and issues, and is remaining in close cooperation with the other teams. The results of these studies and the CFAA are expected to be reflected in the Bank’s Country Assistance Strategy (CAS). 1 Issues of institutional and individual accountability are discussed more fully in the Bank’s OECS Institutional and Organizational Capacity Review. 2 The Fiscal Issues Review (FIR) is a diagnostic tool similar to the Bank’s Public Expenditure Reviews (PERs). The PER is a comprehensive report with a mandate to focus on efficiency and efficacy of government resource allocation. The FIR instead has selected topics that each OECS government as well as the Bank team recognized as a priority in the discussion on efficiency and efficacy of resource allocation, and does not intend to cover in a comprehensive manner all the components of a PER. The FIR is expected to be completed for these six countries in mid/late 2003.


This CFAA makes the following comments and recommendations:

General Comments:

The governments studied are in the process of modernizing their financial management systems and the legislation on the reporting and auditing of public funds. The CFAA reviews some of the results of this modernization process and makes recommendations for increasing its impact and success.

The countries’ particular strengths include the presence of well-respected institutions such as the parliamentary form of government, a central bank that has maintained stable exchange rates, and widely understood financial rules and regulations.

There are some clear weaknesses in public sector financial management that apply across all or most countries. In many areas collaboration between the countries, or even regionalization of the activity, could enhance the impact and cost effectiveness of any interventions. The most serious weaknesses are referred to in the specific comments and recommendations below.

Specific Comments:

The legislative framework is in need of updating in most of the countries, and efforts to do so have begun to take place, with support from the CIDA-financed program known as ECEMP. While St. Lucia has moved forward with legislative reforms, the other countries have not passed and implemented new legislation. High priority should be given to completing this process.

Legislative oversight over government financial activity could be greatly improved via the strengthening of Public Accounts Committees (PACs), which in most of these countries are largely inactive. This severely reduces the effectiveness of audit. The main need is to raise appreciation of the importance of the PAC’s role among PAC members, parliamentarians generally and the public, and to understand how PACs can work effectively. To raise the profile of PACs, it is recommended that regional agencies and donors, together with the Commonwealth Parliamentary Association, hold a sub-regional workshop to expose parliamentarians, and other interested parties, to concepts of transparency and accountability and the role of the PAC in raising public standards of financial management. The workshop should include members of PACs from other Caribbean and Commonwealth countries.

Internal control is left to heads of departments (Accounting Officers) who have no internal audit units and very little guidance and support. The planned decentralization of authority and responsibility will depend for its success on strong guidance and support from the ministries of finance. It is recommended that governments clarify central responsibilities for internal controls and internal audit in line ministries, and build initially a central capability for guidance and monitoring. Special training should be provided. Given the shortage of skilled staff, it will not be possible to build effective internal audit units in line agencies until the proposed training program (see below) is implemented.


The extensive use of computers and on-line activities in government budgeting, accounting and reporting has not only added to the transparency of the system, but also facilitated effective monitoring and up-to-date accounting for current transactions. However, the system has in most cases not been rolled out to all line ministries, and ministries having terminals continue to rely on parallel manual procedures performed by staff who do not always possess sufficient technical background to perform their tasks on SIGFIS. Further roll out, training and systems development is needed, and design issues such as the information requirements of users should also be re-considered.

The new systems will soon prevent excess expenditures by automatically rejecting any over-budget requests. However, this will not prevent excessive commitments by line ministries. The financial information systems in use (Standard Integrated Government Financial Information System (SIGFIS), utilizing SmartStream software in four countries, FourGen in St. Kitts and Nevis, and Oracle in Antigua and Barbuda) should have commitment control functionality, for better expenditure control and cash management.

Professionalization of senior accounts and audit staff is needed to ensure that modern concepts and standards of government accounting and audit are brought into the day-to-day work of the public service. There is also a need for training at middle and lower levels, and for particular skills such as internal audit, audit of new computerized information systems, and use of computers in audit management. It is recommended that accounts and audit staff (approximately 600) be included in the scope of a training needs assessment and a sub-regional training program.

The production of audited financial reports at the central government level has generally been timely in Dominica and St. Kitts and Nevis, but in Antigua and Barbuda, Grenada, St. Lucia, and St. Vincent and the Grenadines, there have been significant delays in the submission of such reports to Parliament. The clearing of these arrears would be an important step toward improving the control environment in these countries.

Large amounts of aid are not brought to account in the main public accounts, due to a failure of donors and project directors to report aid receipts and expenditures promptly to the Accountant General. This is distorting comparisons of budgeted and actual revenue and expenditure, comparisons of expenditure with results, and financial statistics. It is recommended that Accountants General meet with representative donors and project directors and consider a common approach to ensuring full and prompt aid accounting.

Oversight of public financial management is generally weak. It appears that actual autonomy of Directors of Audit is in many cases related as much to informal working relationships as to formal institutional arrangements. The independence of Directors of Audit could be improved via changes in: (i) the routing of their reports to Parliament; (ii) the process by which they are appointed; (iii) their autonomy in the use of budgetary allocations; and (iv) the amount of control by Audit Department


management over their personnel and related practices. In addition to these formal changes, existing rules and laws which support audit independence must be strictly adhered to. The audit function is a good candidate for regionalization since this would allow for greater independence and improved utilization of specialized skills.

The operation of the state-owned enterprises (SOEs) is escaping effective scrutiny. More attention to them is needed by the Ministry of Finance, Director of Audit and PAC in each country. Specifically, the MOF should build SOE monitoring capability in-house, or contract out this function; the DOA should maintain a register of private audit firms in good professional standing, and ensure that audits are rotated amongst them; and the Minister of Finance should refer audited accounts of SOEs to the PAC for examination and report.

Opportunities exist for continuing progress in the future. Three key vehicles for reform are the third phase of the CIDA-financed ECEMP project; a possible Bank-financed program on public sector reform; and the continuing technical assistance offered by CARTAC and other donors.


I. INTRODUCTION

1. During the periods November 27th to December 8th, 2000, and April 8th to 26th, 2002, the World Bank carried out field work for a Country Financial Accountability Assessment (CFAA) in six member countries of the Organization of Eastern Caribbean States (OECS): namely Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines.3

2. The CFAA has been undertaken by the Latin America and Caribbean Region’s Financial Management and Accountability Team (LCOAA), with substantial contribution from consultants and the regional public sector team (LCSPS).4 The active collaboration of relevant government and parliamentary officers in each country was sought from the beginning, and the study would not have been possible without the substantial efforts and contributions of these officers. The study was conducted transparently with other donor agencies and units involved in the area (principally CIDA, DFID and CDB), and with sub-regional institutions (ECCB, CARTAC and the OECS Secretariat). The multi-donor PEFA was also consulted. For a full list of interviewees see Annex 1.

3. The Bank periodically conducts CFAAs in all borrower countries. The scope of the CFAA is to review the key aspects of public financial management and accountability at the national level: (i) flow of funds to government entities and Bank projects; (ii) planning, cash management, and budgeting; (iii) accounting and financial reporting; (iv) auditing, and (v) legislative review of public sector activities.

4. This CFAA is prepared in accordance with the draft guidelines issued by the World Bank’s Financial Management Sector Board in March 2002. Since it is the first CFAA for these countries, it addresses the full subject matter of a CFAA. It also addresses aspects of the private accounting and auditing profession, on which no Report on the Observance of Standards and Codes (ROSC) assessment has yet been made. Time limitations prevented more extensive analysis of the accountability of local authorities. 3 The Organization of Eastern Caribbean States has three other members – Anguilla, British Virgin Islands and Montserrat, which are dependent territories of the UK and therefore outside the World Bank’s mandate. Both missions included a visit to Barbados (not a member of the OECS), in part to see the government’s financial management system there, and also to meet other donors. 4 The Bank’s team (‘CFAA team’) consisted of Tony Bennett (Principal Consultant), Uche Mbanefo (Consultant), Carmen Machicado (Operations Analyst) of the regional Public Sector group (LCSPS), Patricia Hoyes (Financial Management Specialist), Gilma Unda (Program Assistant), Oris Guillen (Team Assistant), and Daniel Boyce (Senior Financial Management Specialist and CFAA team leader), Deepa Chakrapani of the Operations Evaluation Department (OED) carried out a simultaneous comparison of donor requirements and joined one CFAA mission. Peer reviewers were Andrew Mackie (Manager, Loan Department), Pascale Kervyn de Lettenhove (Sr. Operations Officer), and Marius Koen (Sr. Financial Management Specialist). Jamil Sopher (Advisor to the Manager, LCOAA) provided substantial comments and guidance.


5. The results of a CFAA are used: (i) to identify systemic weaknesses and needs which could be addressed through capacity building initiatives and other measures designed to improve public sector transparency and accountability; (ii) to inform Bank staff of the institutional context in which they work and provide guidance for the financial management arrangements in Bank lending. It is planned to consider recommendations on financial management reform in a wider program for improving public sector performance in these six countries of the OECS.

6. The CFAA overlaps with two other diagnostic exercises of the Bank - the Fiscal Issues Review (FIR) and the Institutional and Organizational Capacity Review (IOCR), and complements another exercise - the Country Procurement Assessment Report (CPAR). The FIR is in process, and notes on three countries (Grenada, St. Kitts and Nevis and St. Lucia) have been drafted at June 2002. The IOCR exercise has been completed, and a final discussion draft has been issued (Report No. 21844 LAC, April 2001). The CPAR has also been completed (January 2001). To avoid duplication of activity, the CFAA team has built on these documents insofar as they included analyses of financial management institutions, processes and issues, and is remaining in close cooperation with the other teams. The results of these studies and the CFAA are expected to be reflected in the Bank’s Country Assistance Strategy (CAS).

7. The CFAA team developed questionnaires dealing with specific topics to be addressed in the areas of budgeting, accounting and financial reporting, and auditing. With the assistance of the Ministries of Finance and Planning and Audit Departments in each country, appropriate officials were identified to complete the questionnaires. The team then interviewed individuals to confirm, clarify, and expand on the answers provided in the questionnaires. Factual sections from the draft report were sent to the respective officers for verification and corrections were made from their responses. Given the complexity of reporting on six countries in the same report, the assessment attempted to focus on themes common to all of the countries, while also pointing out exceptions where they were significant. A brief country-specific report is included as Annex 3, with officials in each country receiving their respective annex. However, in Dominica this will be delivered later than the regional document, because the analysis in Dominica will continue into 2003 in conjunction with other reviews of fiscal issues.

8. The Bank team wishes to thank all those institutions and individuals who contributed to this work. In particular, the team thanks the Ministries of Finance and Planning, Audit Departments and Parliaments in the six countries, for their collaboration and assistance.


II. LEGAL AND INSTITUTIONAL FRAMEWORK

A. THE EXISTING FRAMEWORK AND STATUS OF FINANCIAL LEGISLATION

9. The Constitution. All six countries became independent from the UK in the 1970s and early 1980s. They are Westminster-style parliamentary democracies founded on similar written Constitutions. St. Kitts and Nevis is a federation while all the other countries are unitary states. The constitutions include general provisions on financial matters, which are then amplified in Finance (Administration) Acts, Audit Acts and subsidiary legislation. There are also special acts for revenue and statutory bodies.

10. Regional and sub-regional relations.5 All six countries are members of CARICOM, the regional organization which coordinates steps toward a common market of Caribbean states, harmonization of macro-economic policies and eventual monetary integration - the CARICOM Single Market and Economy (CSME). CARICOM represents its members in trade negotiations in global fora. Following a downturn in the economic climate in the 1980s, the prospect of utilizing CARICOM as a channel for pursuit of economic growth and export-led development began to fade. Eastern Caribbean states decided to strengthen the existing institutional framework for mutual cooperation through a parallel set of cooperation and integration institutions specific to themselves. The result was the creation of several sub-regional institutions of which the most important are the Organization of Eastern Caribbean States (OECS) (see Box 1) and the Eastern Caribbean Central Bank (ECCB)(see Box 2).

5 This section draws substantially on the Bank’s Institutional and Organizational Capacity Review and the draft Public Expenditure Review Notes on St. Kitts and Nevis.


Box 1: The Organization of Eastern Caribbean States (OECS)

Following the collapse of the West Indies Federation, the OECS was set up in 1981 by the Treaty of Basseterre. It now has nine members – Anguilla, Antigua and Barbuda, British Virgin Islands, Dominica, Grenada, Montserrat, St. Kitts and Nevis, St. Lucia and St. Vincent and the Grenadines. In the present economic environment, globalization and trade liberalization are posing serious challenges to the economic and social stability of these small island countries. In particular, OECS countries have lost the protected status of their exports of bananas and sugar to the European market and face competition from Central American exporters.

It is the purpose of the Organization to assist its Members to respond to these multi-faceted challenges by identifying scope for joint or coordinated action towards the economic and social advancement of their countries. Meetings of the OECS Authority (see communiqués on www.oecs.org) have identified areas targeted for policy harmonization and functional cooperation and the agreed steps toward their achievement. Progress has been made on functional cooperation in education, health (notably the centralized procurement of drugs), meteorology, civil aviation, agricultural research and marketing, investment and export promotion, tourism marketing, environmental management and legislative harmonization. Overall, however, progress has been slow and halting, largely because of the need for unanimity of decisions, financial weakness of the OECS Secretariat (due to members not paying their agreed contributions), low capacity of national public service agencies to implement collective decisions, and the lack of OECS powers to enforce them. OECS Heads of Government decided in July 2001 to deepen economic integration by creating an economic union. The project is expected to be implemented over a period of two years. With respect to freedom of movement between member states, most of the states have enacted the requisite legislation. A common OECS passport was expected to be adopted on January 1, 2003 and a public awareness and education program is to be launched to raise awareness and understanding among all sectors of the OECS population of the various measures to be implemented. High visibility for the integration process is a key objective. An Association of Caribbean Community Parliamentarians has been set up to widen the political consensus on integration.

The OECS Secretariat, based in St. Lucia, has technical support from DFID for the development of its strategic plan. In addition, the World Bank has provided an Institutional Development Fund grant to strengthen the operational capacity of the Secretariat.

11. The Legislature. Dominica, St. Kitts and Nevis, and St. Vincent and the Grenadines have unicameral legislatures with mainly elected members and some appointed members. Antigua and Barbuda, Grenada, and St. Lucia each have an elected lower House and a Senate with appointed members. In St. Kitts and Nevis, in addition to the Federal Parliament, there is a separate legislature for Nevis - the Nevis Island Administration. Each House is run according to its own Standing Orders.

http://www.oecs.org/


Box 2: The Eastern Caribbean Central Bank and Financial Management Reform

The ECCB was established in 1983 and is based in St. Kitts and Nevis. This is the central bank of all OECS members except the British Virgin Islands. They share a common currency – the Eastern Caribbean dollar, and a common monetary policy that has enabled the ECCB and its predecessor organization to maintain a stable exchange rate of EC$2.70 to US$1 since 1976, and to control the rate of inflation which tracks the rate in the USA.

Its success in achieving monetary stability led the ECCB to broaden the scope of its support to members. It now provides advice on macroeconomic and fiscal policy and implementation of a fiscal reform program, banking services, banking supervision, tax administration, debt recording and monitoring, and economic statistics. The Bank has four objectives: currency stability, financial stability, development of money and capital markets, and the general development of its member countries (Annual Report 2001).

The ECCB is accountable to its member countries through the Board of Governors and Monetary Council, comprising Prime Ministers and Ministers of Finance. It publishes annual and quarterly reports. With regard to the general objective, the ECCB has become increasingly involved as a formal or informal partner in technical assistance projects designed to strengthen economic management at the national level, such as CIDA's Eastern Caribbean Economic Management Program (ECEMP). It has also built a substantial unit for training nationals of member countries in diverse policy areas. The ECCB convenes semi-annual meetings of (a) financial secretaries, (b) comptrollers of inland revenue, (c) comptrollers of customs, (d) accountants general, and (e) budget directors. These committees are useful in their own right, but also serve as effective steering committees when reform projects are under way. They select the country that will pilot each reform, and the countries (usually two) that will be in the second wave of implementation. The latter countries second some of their civil servants to work in the pilot country so that when they return they can lead the reform in their own countries. The ECCB provides backstopping services such as training replacement officers.

The ECCB is accountable to its member countries through annual and quarterly reports and monthly statements. It is audited annually by local affiliates of an international public accounting firm in accordance with ‘generally accepted auditing standards’. Annual reports are published within a few months of the end of the calendar year and are available to the general public. Government auditors generally do not carry out any separate additional audit.

12. The Judiciary. In each country, the judiciary has constitutionally-supported independence. From the Magisterial Courts and High Court, appeals can be made to the OECS Supreme Court (Court of Appeal), then to the Judicial Committee of the Privy Council in the UK.

13. The Executive. With the exception of Dominica, the OECS countries have the British Monarch as the Head of State. She exercises executive authority in each country through a Governor General, who is appointed on the advice of the Prime Minister. Dominica, on the other hand, is a republic with a President elected by Parliament as the Head of State. The Constitution of each country provides that, subject to certain exceptions, the Head of State will exercise his functions and act with the advice of the


Cabinet. Within the Cabinet, power is concentrated in the hands of the leader, the Prime Minister. He is the elected member of the House who commands the support of the majority of the elected members, and is appointed by the Head of State. Thus, the Prime Minister controls the legislature through the support of a majority of the members. If he loses their support by a motion of ‘no confidence’ he has to resign, and the Head of State appoints whoever then has a majority of support.

14. Ministers are appointed by the Head of State on the advice of the Prime Minister. Each Minister exercises ‘general direction and control’ over the department(s) assigned to him or her. Subject to this, each department is ‘under the supervision’ of a Permanent Secretary.

15. Financial Legislation. The definitive guidelines on government financial management are contained in each country’s Finance (Administration) Act (FAA), Audit Act6 and subsidiary legislation such as financial regulations and stores and procurement regulations. They expand and clarify the constitution and contain provisions for the responsibilities of various entities and the accounting officers. The FAA contains provisions for control and management of public finance; the principal officials responsible for managing government finances; definitions of consolidated funds and other public funds; and general procedures for government accounting, authorization of expenditure, payments, bank accounts, investments and deposits, management of the public debt, abandonment of claims and write-offs of public moneys and stores, surcharges, and financial management of state-owned enterprises.

16. All monies received are paid into the Consolidated Fund (CF), unless by law they are payable into some other fund.7 No withdrawal is allowed from the CF except to meet expenditure charged on the CF by law (e.g. an Appropriation Law or Supplementary Appropriation Law) or by the Constitution (e.g. the salaries and allowances of the Head of State, members of the Public Service Commission (PSC), Director of Public Prosecutions and Director of Audit). These officers, as well as the Secretary to the Cabinet, permanent secretaries, heads of departments and their deputies, are appointed and disciplined by the Head of State on the advice of the PSC. The PSC directly appoints all other public officers, disciplines them, grants leave and removes them.

17. Under the FAA, the Minister of Finance is responsible for supervising the finances of the government and ensuring a full account to Parliament. The Minister delegates supervision responsibilities to the Financial Secretary, such as disseminating and enforcing financial management regulations, laws and instructions.

6 Some countries have a separate Audit Act, while for the others, audit provisions are integrated with the FAA Act. 7 A Trust Fund consists of resources held and administered by a government, that were not raised by government for its own purposes. It is created by an Act other than an Appropriation Act, or by a deed of trust or similar agreement. Every Trust Fund must be gazetted, and although it is not part of the Consolidated Fund, it must be administered according to the FAA. In each country, the law has also established a Contingency Fund to be financed by transfers from the Consolidated Fund, but transfers have not generally been made and the Contingency Fund remains empty or very small, e.g. St Lucia has a Contingency Fund of EC$1.7 million (0.2% of estimated expenditure in FY2002).


18. The Accountant General is responsible as both Treasurer and Chief Accountant. The AG’s duties include pre-auditing all payments to ensure that they remain within the amounts appropriated by Parliament; refusing payments that are not in order or do not comply with relevant laws and regulations; acting as custodian of all government securities; implementing internal controls to prevent fraud and embezzlement; and managing the cash flow of the government. As Chief Accountant the AG must account for all revenues and expenditures, prepare monthly and annual financial statements, and present annual statements to the Director of Audit for examination.

19. Permanent Secretaries of Ministries and Heads of Departments are designated in the Act as Accounting Officers (AO), answerable to the Public Accounts Committee of Parliament (PAC) for the efficient management of, and accounting for, the public funds entrusted to them. Each AO is responsible for ensuring that: the funds entrusted to him/her are properly safeguarded, and applied only for purposes intended by Parliament and without waste; all payments and votes are properly authorized; financial records are properly maintained in accordance with financial regulations; and these records are properly stored and presented to the Director of Audit when requested. AOs may recruit accounts staff through the PSC to carry out these functions according to guidelines, regulations, and standards prescribed by the Accountant General. However, the AO remains personally responsible for any expenditure that is improperly incurred.

20. Financial regulations (FR) include detailed provisions for the application of FAA and, in particular, detailed internal control arrangements covering, among others:8

commitment accounting and other checks designed to avoid not only unauthorized expenditures, but also, accidental or deliberate commitments beyond budget approvals;

pre-audit of payment vouchers and instruments to ensure compliance with regulations;

surprise inspections to deter fraud, embezzlement and negligence;

detailed regulations for the maintenance of vote accounts;

security of accounts;

preparation of estimates; and

detailed rules covering every aspect of receipts and payments, and their accounting.

21. For example, a person signing a payment instrument must ensure that:

the service specified has been satisfactorily delivered;

prices charged either accord with approved scales or are fair;

8 For a complete list of legislation, see the respective country annexes.


proper authority has been obtained for the expenditure;

computations and costings have been verified and are arithmetically correct;

the person named in the instrument is entitled to receive payment; and

goods purchased have been correctly received and put to use or taken on charge.

B. FINDINGS AND RECOMMENDATIONS

22. The framework described above is a strong point of these countries’ public financial management systems. Still, there is room for improvement, particularly with regard to bringing legislation up to date so as to be in line with current information systems and less centralized government operations.9 Current efforts to modernize the legal framework are discussed below.

23. ECEMP and the Current Status of Legal Reform. One of the components of the CIDA-sponsored Eastern Caribbean Economic Management Programme (ECEMP)10 was the reform of financial administration legislation. ECEMP hired a Legislation Specialist to prepare a model Financial Administration Act and provided assistance to St. Lucia to facilitate its enactment there. St. Lucia was therefore the first country to pass a revised FAA. Other countries have been making efforts to follow suit, but St. Lucia is so far the only country to have completed the legislative process. The status of each country’s reforms is summarized in the table below:

Table 1: Status of Legislative Reforms (as of April 2002)

Antigua and Barbuda

The Finance and Audit Act of 1982, Development Fund Act of 1976 and Financial Regulations and Stores Rules dating from the 1950s are intended to be replaced by new legislation. New Financial Regulations are circulating, but are already out of date.

Dominica Finance (Administration) and Audit Acts of 1994 (Acts no. 4 and no. 5 of 1994) repealed and replaced the Finance and Audit Act 1965. Financial Regulations were made under the 1965 Act: they are obsolete and urgently need updating. ECEMP model legislation has not been adopted. It is intended to use Anguilla legislation as a model and enact new legislation in FY 2003.

Grenada A draft Public Financial Management bill and a draft Audit bill will replace the Finance and Audit Act 1990 (Cap. 102 of 1990) and the Finance and Audit (Amendment) Act 1998 (Act No. 25 of

9 The Bank’s CPAR, for example, concludes that thresholds for approval of expenditures can be raised without a substantial risk to financial control. 10 ECEMP is discussed in further detail later in this report.


1998). The PFM bill contains revised Financial Rules but they do not support the modernization of the tax systems and the financial management systems. It is expected that ECEMP III will provide assistance for reviewing the application of the rules in a computerized environment.

St. Kitts and Nevis

The Finance Act 1990 is about to be replaced by a Finance (Administration) bill, presently being circulated for comments. Schedules to the bill contain new Financial Regulations and Procurement and Stores Regulations.

St. Lucia The Finance (Administration) Act 1997, Financial Regulations 1997 and Procurement and Stores Regulations 1997 are based on the ECEMP model legislation.

St. Vincent and the Grenadines

The Finance and Audit Act, cap.182 and Regulations made under the Act (now out of print) are to be replaced by a new Finance (Administration) Act, Audit Act and Financial Regulations. Drafts are under discussion.

24. ECEMP III includes two projects to assist in strengthening regulatory frameworks in all six countries. Project PE-11 is intended to review the Finance Act and Regulations, while PE-15 is concerned with reviewing the framework for audit, with Antigua and Barbuda as the pilot country.

25. The legislative and regulatory framework is not only a basis for legal actions against delinquent officers but also a signal of government commitment to modernization of public financial management and to good governance generally. It is recommended that these very basic reforms be put higher on the political and legislative agenda. Further study may be required to determine the best way to update legislation at this point in time.

III. CENTRAL GOVERNMENT BUDGET AND CASH MANAGEMENT

A. BUDGETARY FRAMEWORK AND BUDGET PREPARATION

26. The Ministry of Finance develops and implements the overall economic and fiscal strategy of each country. The MOF establishes the parameters for expenditure planning and monitoring in the public sector and coordinates the preparation of the annual budget and getting it approved by the Cabinet and Parliament. St. Lucia has the most comprehensive planning and preparation process. Planning at the ministry level is also better established than in the other islands and the Government seems to exercise more budgetary discipline. All countries (with the possible exception of St. Vincent and the


Grenadines) prepare a medium-term Strategic Outlook paper as a basis for annual budgeting.

27. The budget cycle starts up to 12 months before the fiscal year. A typical timetable is provided by Dominica, which uses a July-June fiscal year:

Box 3: Typical Budget Timetable

July – September: MOF updates the Medium-Term Economic Strategy Plan, and sets macroeconomic targets for the coming fiscal year and preliminary resource allocation. Line Ministries develop proposals for new initiatives.

November – February: MOF issues the Estimates Call (Budget Circular). Ministries prepare capital and recurrent estimates (mainly incrementally from the previous year’s estimates); MOF reviews and adjusts them as necessary in consultation with Ministries.11

April – May: MOF prepares the Budget Papers. The Legal Department prepares Appropriations Bill. Cabinet reviews the Budget Papers and Appropriation Bill.

June: Budget Address; Passing of Appropriations Bill; Preparation of General Warrants, informing agencies of their annual appropriations.

July: MOF releases an estimated six-month budget spending authority to each Ministry.

July – June: MOF monitors the Ministries’ actual performance against plans. (See section III.B on the in-year use of warrants and III.E on the use of allocations).

28. All countries except Antigua and Barbuda aim to get the budget approved by Parliament before the start of the financial year, and usually succeed. The financial year starts in January in Antigua and Barbuda, Grenada, St. Kitts and Nevis, and St. Vincent and the Grenadines, in April in St. Lucia and July in Dominica. In Antigua and Barbuda the Estimates are prepared by MOF and sent to the Cabinet in December, but it is not until March or April that the budget is presented and passed in Parliament. This delay has a bearing on budget discipline. In Grenada, though the budget preparation process is somewhat compressed, and the budget unit has been affected by reorganizations and high turnover of staff, the budget is still ready for implementation from day one.

29. In all six countries, dual budgeting prevails. In St. Vincent and the Grenadines, for instance, two divisions of MOF are involved. The Budget Division calls for recurrent expenditures and the Central Planning Division makes calls for capital projects, both ongoing projects and new initiatives.12 Separate meetings are held to discuss each side of the budget. Though the Director of Planning attends meetings on the recurrent side, there 11 The Budget Circular may also request information on assets at year-end, assets for disposal, and expected needs for central procurement of stationery, furniture, equipment and computers (all of which are procured in bulk centrally). 12 Finance and planning functions are usually combined in a single ministry.


is insufficient cohesion, which the integration of capital and recurrent planning would provide. Planning, accounting and monitoring should then focus on each program - its objectives, output indicators, and expenditures, both capital and recurrent. ECEMP III is offering support for this integration, with St. Vincent and the Grenadines as a pilot.

30. Generally, first draft estimates exceed preliminary budget allocations and are negotiated with MOF. In St. Lucia, the Accounting Officer and also the respective Minister are required to take responsibility for their Estimates by signing the transmittal letter to MOF. Only St. Lucia has a medium-term expenditure framework (since FY 2002). Other countries are aiming to convert their Public Sector Investment Programs into medium-term expenditure frameworks (MTEFs).

31. In all countries, there are weaknesses in project management. Public Sector Investment Programs (PSIP) are subject to continued weaknesses in the areas of project definition and formulation, project prioritization, cost-benefit analysis and ex-post evaluations, except in large aided projects where appraisals and evaluations are performed by the donors.

32. All countries have partially restructured their expenditure estimates for program budgeting as follows: (i) by recurrent/capital, (ii) by department (vote), (iii) by program; and (iv) by recurrent activity or capital project. Programs are common to both capital and recurrent: this is a major step towards integrated program management. Recurrent activities are further detailed by standard object codes under the new chart of accounts (salaries, utilities, interest, etc.) which are compatible with the IMF-GFS economic classification. Capital projects should also be detailed by object.

33. The use of information technology in budget preparation is increasing. However, no country yet fully uses the budget module of the Standard Integrated Government Financial Information System (SIGFIS)13 for on-line preparation. In St. Lucia, for instance, agencies are required to provide the information on diskettes containing Excel worksheets, with variance notes for the previous year where applicable; and the basis of the forecast for the next three years. ECEMP III includes a project for developing software to print out the Estimates Book from the SIGFIS database. St. Lucia is the pilot country and has already self-started on this.

34. Progress in developing corporate planning is generally poor, except in St. Lucia. Some countries made a start, but then slipped back. In Grenada, for instance, a tightening fiscal situation made all the plans obsolete and ministries lost interest. Some ministries prepare corporate plans but do not base their estimates on them; some treat corporate planning as a paper exercise; others do not submit corporate plans at all. ECEMP III has a project (PE1) to strengthen budget preparation in all six countries except St. Lucia, with Antigua and Barbuda as the pilot country for reform.

13 SIGFIS is explained in section IV.D below.


35. Progress in performance budgeting is minimal (see Box 4 below), as this depends on well–thought-out corporate plans and performance indicators.14 ECEMP III is providing assistance to all countries (project PE4), with St. Lucia as the pilot.

Box 4: ECEMP-Supported Reforms

The Eastern Caribbean Economic Management Program Phase III (ECEMP III) is funded by CIDA and managed by CRC SOGEMA for the first 4 years through a structure of committees. Management is to be later moved to a regional institution. The program is to be implemented from July 2002 for 6 years (Phase II ran from September 1993 to March 2000). The total approved budget is Canadian $11 million (Phase II was $13.5 mn). The program will be monitored via the ECEMP regional office, to be located in St. Lucia.

Phase III Implementation Objectives (35 projects):

Review and update of legislative and regulatory framework under decentralization;Provide regional training in revenue management, PEM and VFM audit, using UWI distance learning capacity; Establish regional IT unit for OECS governments to outsource their IT support; Strengthen macroeconomic analysis and monitoring capacity; Strengthen tax policy capacity; Carry out feasibility study for establishing debt management capacity; Provide organizational strengthening of MOF, including integration of capital and recurrent budgets (St. Vincent and the Grenadines pilot); Strengthen corporate planning to ensure better linkage with Strategic Outlook and preparation of the Estimates; Implement the budget preparation module of SmartStream and enable printing of Estimates Book; Improve SIGTAS, including property tax and tax legislation, regulations and policies, implement SIGTAS in Antigua and Barbuda, and other revenue management strengthening

Phase II Financial Management Components:

Preparation of a model Financial Administration Act (done, and passed in St. Lucia); Strengthen the budget cycle reforms, introduce a new chart of accounts, implement a new public sector investment system and establish performance budgeting in selected ministries (program structure and chart of accounts introduced, new PSIP). Management teams were established in the Budget Divisions of St. Kitts and Nevis, Dominica, Grenada, and St. Vincent and the Grenadines. Feedback provided by ministry officials indicates that implementation of performance budgeting has been weak; Introduce Standard Integrated Government Financial Information System (SIGFIS); and Training on a new chart of accounts, program budgeting and SIGFIS operation, to Treasury officers and financial personnel in line ministries.

Source: Interviews with CIDA and CRC SOGEMA personnel, and project sheets for Phase III.

B. BUDGET IMPLEMENTATION

36. Once the Appropriation Act is approved and passed, the MOF issues written authority (called General Warrant) to all ministries and departments to incur commitments and request the issue of checks for the implementation of their approved programs and business plans. The system of expenditure control varies slightly from

14 And, ultimately, on the development of accrual accounting and costing of outputs.


country to country. Much use is made of different kinds of warrant. The system in Grenada is shown below as an example:

Table 2: Typical System Of Expenditure Control

Level of Control

Authority to commit expenditures from the Authorized Estimates

Authority to commit unforeseen or excess expenditures

Authority to switch authorized allocations

Perm Secretary Ministry of Finance (on behalf of the Minister)

Appropriation Act Supplementary Appropriation Act (obtained after the event)

On own authority can switch between programs*

Head of ministry or department (as Accounting Officer responsible to Parliament)

General Warrant (excluding reserved items) from MOF

Special Warrant from MOF

On own authority can switch between objects of expenditure within a program**

Program Director Departmental Warrant from Accounting Officer

None None

*The Permanent Secretary (Finance) may allow funds to be transferred between projects and programs, including between capital and recurrent programs. If satisfied that the relevant programs will not be unduly affected, he/she then issues a Finance Virement Warrant or a Special Warrant.

**The Accounting Officer does this on his/her own authority and informs MOF by means of a Virement Warrant.

37. The authority at lower levels is an indicator of the degree of decentralization. Generally, OECS countries allow very little authority to spending agencies to switch (vire) funds from one line item to another, even at object level, so Grenada is relatively liberal in allowing Accounting Officers to vire within the appropriation for a program, only requiring notification after the fact.15 It should be noted that Ministries of Finance may reserve authority to themselves, but freely approve virement applications as needed.

15 But see the proposal in St Lucia to decentralize pre-audit authority, and even check-issuing authority, to Accounting Officers.


On the other hand, Governments have allowed themselves considerable flexibility to switch funds between programs without prior Parliamentary approval. Such changes are included in Supplementary Appropriation bills and authorized after the fact.

38. An Accounting Officer facing insufficient available balance on a line item, can:

request MOF for a virement within the vote (i.e. use savings on one item for an excess on another, without overspending the total appropriation under the head of expenditure);

request MOF for a reallocation from another recurrent vote within the same ministry, or

request MOF for a supplementary authorization, which may be allowed (rarely) by MOF, but must be legitimized by inclusion in a Supplementary Appropriation Act of Parliament.

39. Budgets for new capital projects are generally ‘reserved’: spending can commence only on MOF approval of Tender Board recommendations and a Request to Incur Expenditure. Similarly, MOFs tend to be cautious and keep back a proportion of each appropriation for contingencies, since there is little or no use of the Contingency Fund.

40. During the year, spending departments prepare payrolls and purchase vouchers, which are pre-audited by the Accountant General to check both coding and the availability of funds in the specific programs and line items before central issue of checks. The computerized systems in all countries reject any request for payment that would take total payments over the cumulative allocations to date (see section E below on cash management). When all spending departments are on line, excess expenditures will only be possible by a manual override.

41. However, there is still a problem with commitments. Most countries are implementing a funds control module that will reject registration of a commitment that would take total payments plus outstanding commitments over the cumulative allocations to date. It is recognized, however, that commitments can be made verbally or on paper documents and not registered in the system. An Accounting Officer would be tempted to issue urgently needed purchase orders and delay entering them in the system until further allocations were received. For expenditure control, automated commitment control may need to be supplemented to prevent commitments being made and not registered. Governments should consider how suppliers can reinforce control, e.g. by official notification that purchase orders, etc. will be honored only if they have been registered in the system, so that suppliers will require evidence of registration before they extend credit to the government.

C. BUDGET MONITORING

42. Budgetary performance is monitored in several ways, including a monthly report by the Office of the Budget to the Minister of Finance; quarterly and annual forecasts of


revenue as well as of recurrent and capital expenditure submitted by ministries and departments to the MOF; and quarterly reports by MOF to the Cabinet.

43. In countries where ministries are linked to SIGFIS/SmartStream via the Accountant General's Office, ministries generally do not have the capacity to generate their own reports and statements; instead, they must send financial information to the system by diskette so that such reports can be generated. In some cases, a ministry may prepare its own information for a period using separate software such as Excel and submit this information to the Accountant General. However, the Accountant General usually relies more on the information entered into SIGFIS than on information from ministries. It is up to ministries to reconcile their records with those on the central database.

44. Capital projects are monitored by quarterly reports of financial and physical progress. The quality of reports is generally not good. They are late (or not submitted at all), incomplete and unreliable. In St. Vincent and the Grenadines, for example, the Projects Unit has four staff whose duties include physical inspections of the 130 projects in the PSIP. The Budget Division has a monthly meeting with departments and makes a monthly report to the Minister of Finance. An annual Capital Project Status Report is submitted by the Planning Division to a sub-committee of Parliament chaired by the Minister of Finance.

D. BUDGET TRANSPARENCY

45. Consultation and participation in the budget process improve transparency. In the OECS countries, there is increasing involvement of beneficiaries in the design and monitoring of projects, e.g. in community health, education and agriculture in Antigua and Barbuda. Participation in the budget process at the central level is mainly by particular interests and groups. In St. Kitts and Nevis, for instance, the Government has been moving towards greater consultation with the private sector and civil society in the run-up to the budget. Whole-day meetings are held with representatives of churches, banks, the Association of Industry and Commerce, and every major association (hotels, taxi drivers, etc.). The OECS Authority and Monetary Council announced in 2001 that each government would establish a National Economic Council, with membership from the public sector and social partners. Also recommended at the national level were the establishment of a Cabinet Committee on Economic Policy and a Tripartite Committee.16 The intent appears to be to have more regular meetings to ‘institutionalize’ the consultations. These interactions can lead to the redrawing of the budget, i.e. they are direct inputs to policy-making. This is commendable.

46. The Minister of Finance delivers an annual budget address in Parliament. This provides the basis for Parliamentary debate on the Appropriation bill. After the presentation of the address, Parliament adjourns to allow members time to prepare their contributions to the debate. The debate can include comments and views regarding the 16 See http://www.eccb-centralbank.org/PDF/gov_speech.pdf The Tripartite Committees comprise the government, trade unions, and private sector, and work on four specialized areas: wages, prices, employment, and productivity.


Budget Estimates, which may include alternative budget proposals or other possible changes. According to Parliamentary rules, only a Minister can propose additional expenditure, so disapproval is signaled by ‘cut’ motions. In most countries, the budget address is broadcast live. Copies of the budget are available from Government Printeries.

47. As mentioned above, the budget covers central government fairly comprehensively. It does not include local authorities (which have their own cycles of control), nor statutory bodies such as state-owned enterprises (except that transfers to and from statutory bodies are shown in the Estimates). Nor does it include ‘below the line’ receipts and payments, such as deposits and advances (which are categorized as Trust Funds and included in the public accounts, but not the budget). These are the only extrabudgetary funds.17

E. CASH MANAGEMENT

48. Cash is managed by the Budget Division of MOF by a system of allocations. Within the systems of Parliamentary budget authority and MOF warrant authority to commit funds, MOF has this further instrument of control. All countries monitor revenues and borrowings, and all except for Antigua and Barbuda, and Dominica (see below), make monthly or quarterly allocations of spending authority to each department so as to remain liquid and to reduce debt charges. In fact, far more emphasis is given to achieving fiscal balance than to achieving efficiency and effectiveness, as the successive reductions in spending authority (at the Estimates stage, then contingency reservations, capital project reservations, warrant restrictions and allocation limits) virtually negate the benefits of planning and budgeting.

49. Each ministry is responsible for preparing cash flow projections and presenting them to the MOF for allocations. Once allocations are received, each ministry is required to enter the amount into the accounting system (such as SIGFIS) and track the usage. Ministries that are off line present monthly journal entries to the Accountant General who enters amounts in the system on their behalf.

50. If there are insufficient funds, the departmental head has a choice:

to delay payment into the following month

to request MOF to bring forward its allocation for the next month.

51. Foreign aid finances a high proportion of capital budgets. Where expenditures are made from deposit accounts which are outside the Accountant General's control, she should receive monthly journal vouchers showing the amount spent on each project, which she brings to account as expenditure. The same applies to direct payments by donors to contractors, suppliers and consultants. There is a problem that vouchers are not

17 While extrabudgetary funds are limited, some OECS countries do have problems of extrabudgetary (excess) spending, which serves to weaken the credibility of the budget process, and is partly responsible for significant fiscal imbalances in some countries. This issue is discussed elsewhere in this report, and in the Fiscal Issues Reviews.


sent in good time, which results in the under-recording of expenditure and disbursements by donors are not brought to account as revenue (see section IV.C below).

52. In some countries such as St. Vincent and the Grenadines and Dominica, the budget office has difficulty in managing cash flows on capital projects. The Ministries are expected to provide Annual Work Plans that detail the cash flow requirements on a quarterly basis. Although interim project implementation reports are expected to update the cash flow estimates based on actual progress, the budget department is of the view that this system is weak and not functioning in an optimal manner. Consequently, projects are held up or unplanned cash has to be raised, which increases the government's cost of funds.

53. In Dominica, the Consolidated Fund is made up of five different bank accounts to pay for expenditures and two accounts to receive revenues. The Accountant General, as the chief accounting officer for government funds, manages these accounts with the assistance of 26 staff and the SIGFIS system. However, due to the deteriorating economic situation of Dominica, revenues have not reached projected levels and the Accountant General’s office finds itself holding checks for up to six months due to lack of funds. Cash management is hampered mainly by poor revenue forecasting, but it is exacerbated by multiple bank accounts (which need multiple bank reconciliations). All public money should be held in a single account (with exceptions limited to bank accounts for trust funds, payrolls and imprests).

F. FINDINGS AND RECOMMENDATIONS

54. Our findings and recommendations are as follows:

Delays in the issue of Authorized Budgets (principally in Antigua and Barbuda) weaken budget discipline. Budget timetables should allow adequate time for departments to undertake participative corporate planning within parameters laid down in Budget Circulars, and for the MOF and Cabinet to finalize budgets and get Parliamentary approval before the relevant year starts. Generally this requires about six months, i.e. a country working on a January-December fiscal year should issue its Budget Circular by July 1. This in turn requires that the MOF and other central agencies complete their update of the Strategic Paper and establish all the budget parameters before then.

All six countries have deeply entrenched dual budgeting systems. At one time these were thought to protect the public sector investment program, on the premise that capital expenditure was more productive than recurrent expenditure. This is no longer believed. “The dual budget may well be the single most important culprit in the failure to link planning, policy and budgeting, and poor budgetary outcomes,”18 and it is an important factor in the slow development of MTEFs (see below). St. Vincent and the Grenadines is a pilot in a project supported by ECEMP III to integrate capital

18 World Bank, op.cit., p.53.


and recurrent components of program management. This experience should provide lessons for integrated program management in the other OECS countries.

Budgets should be based on macroeconomic and medium-term expenditure frameworks (MTEFs), i.e. rolling three-year plans showing capital and recurrent revenues and expenditures of ‘general government’ broken down by sector, and distinguishing the cost of existing policies and entitlement programs from the cost of ‘new initiatives’. “The MTEF consists of a top-down resource envelope, a bottom-up estimation of the current and medium-term costs of existing policy and, ultimately, the matching of these costs with available resources”.19 St. Lucia has drawn up its first MTEF (for FY 2002) and this experience should be used to assist other OECS countries in their reform plans.

The on-line preparation of budgets, in which St. Lucia is the leader, should continue to be developed.

Contingent liabilities related to government guarantees of loans to state owned enterprises (or other statutory bodies) should be disclosed in government financial statements, if required according to the criteria set forth in International Accounting Standard 37.20

Corporate planning in the line ministries and departments needs further commitment at senior levels, as this is the only basis for a results-oriented public service.

The financial information systems in use (SIGFIS/SmartStream, St. Kitts and Nevis FourGen and the Antigua and Barbuda Oracle system) should have commitment control functionality, for better expenditure control and cash management. For instance, the funds control module of SIGFIS reports outstanding commitments. If these are matched with work plans, departments will be able to forecast when these commitments will be paid. This will provide the budget office with a more accurate tool to estimate cash requirements. For expenditure control, automated commitment control may need to be supplemented to prevent commitments being made and not registered. Governments should consider how suppliers can reinforce control, e.g. by official notification that purchase orders, etc. will be honored only if they have been registered in the system, so that suppliers will require evidence of registration before they extend credit to the government.

Capital projects are poorly planned and managed. During project formulation and monitoring, line ministries do not always consult with key stakeholders. Periodic discussion meetings or budget review committees (between the line ministries and key stakeholders) will provide better information for project management and cash management.

19 World Bank Public Expenditure Management Handbook, 1998, p.46. 20 IAS 37 (para. 2) requires recognition of contingent liabilities when (i) there is an obligation as a result of a past event; (ii) it is probable (more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation; and (c) a reliable estimate can me made of the amount of the obligation.


Governments are making greater efforts to involve social partners in the formulation of budgets. Budgets are fairly comprehensive, and commendably transparent to the public.

Weak cash management practices have had serious consequences in some countries, including the accumulation of significant payment arrears.21 Cash management should be simplified by consolidating all bank accounts, except (i) where separate bank accounts are required by law or trust instruments, (ii) temporary payroll accounts that are cleared after each batch of payroll checks is cashed, and (iii) imprest accounts operated by named officers, which have to be cleared at the end of each year. This will enable multiple cash books to be replaced by a single cash book (or its electronic equivalent), and several bank reconciliations can be replaced by a single reconciliation. It will also contribute to a more efficient allocation of cash resources and allow investment of surplus funds.

IV. CENTRAL GOVERNMENT INTERNAL CONTROLS, ACCOUNTING AND INFORMATION TECHNOLOGY

A. INTERNAL CONTROLS AND INTERNAL AUDIT

55. In most OECS countries there is a low standard of financial control in non-automated operations and even, in some instances, total disregard of Financial Instructions and Stores Rules. This is particularly evident in the area of records management.22 These records are the basis of public accountability. Bad (or non-existent) records management makes the administration unaccountable. Audit is severely delayed by absence of records and supporting documents that are required to verify the correctness of the financial statements.

56. An OECS Best Practices Review of Treasury operations was carried out in 1996 with support from ECEMP. This rated 20 areas23 chosen by OECS Accountants General 21 See also Section IV B below. 22 In Antigua and Barbuda, for instance, the Director of Audit said that records and documents in the Treasury Records Room were in a ‘grossly unsatisfactory condition’. However, the government’s response to the draft CFAA indicated that, as at March 10, 2003, this situation had improved. 23 ECEMP (1998) OECS Treasury Best Practices Workbook. The review covered (i) salaries and pensions, (ii)staff training and development, (iii) bank reconciliation, (iv) purchases and payments authorization, (v) vote books reconciliation, (vi) processing of Consolidated Fund receipts and payments, (vii) consistency of accounts codes with budget, (viii) controls over duplicate payments, (ix) customer service, (x) commitment control, (xi) cash management, (xii) monthly reporting by the Treasury, (xiii) job descriptions and organization charts, (xiv) below-the-line transactions, (xv) travel expenses, (xvi) distribution of Treasury policies and procedures (Financial and Stores Regulations), (xvii) expenditure control, (xviii) support for revenue collection, (xix) Accounting Officer access to Treasury data, (xx) inter-departmental settlements. ECEMP and senior OECS Treasury officials designed a set of 20 questionnaires to assess these Treasury functions on a scale of 1 (needs structural improvement) to 6 (optimum operation). The average of the 20 ratings gave an overall rating for the country. Two senior Treasury staff from another OECS country assessed each Treasury independently. The results of the review have not been made public. St Lucia is using the instrument for self-assessment.


as covering their functions. It is noteworthy that Accountants General considered that their responsibilities ended with the distribution of Financial and Stores Regulations. Their enforcement is left entirely to Permanent Secretaries and Heads of Departments as Accounting Officers for the respective ministries and departments. However, except for revenue departments and the MOF itself, internal audit hardly exists. It is true that Accounting Officers are primarily responsible for internal control in their organizations, but the MOF issues the Financial Instructions on which internal controls should be based and has an inescapable responsibility for seeing that they are complied with. Financial Secretaries should ‘take all proper steps to ensure that any directions and instructions…are brought to the notice of all persons directly affected thereby and are complied with’ (model FAA, section 4). Financial Secretaries should therefore ensure that this function is carried out, either by the Accountant General or by a dedicated Internal Audit Division. In other countries, internal audit is developed by line ministries as an internal management support service under strong central guidance. It is recommended that OECS countries clarify central responsibilities for internal controls and internal audit in line ministries, and build a central capability for guidance and monitoring. Special training should be provided (see section IV.E below). Given the shortage of skilled staff, it will not be possible to build internal audit units in all departments until the main training program is implemented.

B. BASIS OF ACCOUNTING

57. St. Lucia has established a modified cash basis of accounting, while the other governments use the cash basis. The difference in St. Lucia is that invoices are entered as expenditure as they are received, so expenditure includes creditors (which include payment arrears). This is a move toward accrual accounting. Further moves are planned, including the substitution of depreciation for fixed assets expenditures and the accounting for revenue as it becomes due. This is commendable, as accrual accounting reveals the costs of government outputs and this is needed at some stage in the development of performance budgeting and results management generally. This information is used also for decisions on whether to outsource, and decisions on cost recovery from users of government outputs.

58. Some countries that are still on a cash basis, such as Dominica, Grenada and St. Kitts and Nevis, try to include all outstanding invoices in expenditure for the year by speeding up their submission and processing toward the end of the year, even to the extent of printing out checks dated on the last day of the year for all outstanding invoices. The checks are held till processing is complete, then issued to suppliers. This results in (i) accumulations of large payment arrears, when checks can’t be issued immediately due to insufficient cash resources; (ii) an artificial peak of expenditure in the last month; (iii) a big divergence between the cash book balance and the bank balance, adding to the burden of cash reconciliation (which is generally in arrears); and (iv) a security risk in holding checks. On a cash basis, there is always a risk that the following year’s budget will not cover expenditures from the previous year. The preferred solution is to move to a modified cash basis like that in St. Lucia.


C. AID ACCOUNTING

59. All six countries have a problem in bringing foreign aid into the accounts. Donors’ disbursement advices and expenditures from project special accounts are not promptly reported to the Accountant General. The result is that both expenditure and revenue are under-stated in the accounts.24 Generally, aid is included in the budget, but its omission from the corresponding accounts shows up as a shortfall in expenditure and revenue. It is not possible to estimate the amount of shortfall, but some countries admit that it is very serious.25 Many projects in the budget show nil expenditure, even completed schools costing EC$5-6 million.

60. Omissions of aid distort not only the Government accounts but may distort also the national balance of payments accounts and the national income and product accounts.26 What appears to be over-estimation of revenue may be due rather to under-reporting of foreign aid revenue. Direct aid (i.e. aid not passing through government systems) is usually brought to account simultaneously as revenue and expenditure. However the IMF reclassifies loan aid as a financing item, so its omission from the accounts means that expenditure is under-stated and the overall deficit is correspondingly under-stated.

61. It should be an objective of reform to get all such aid expenditure into the budget and accounts, and the corresponding receipts of loans and grants, so as to know the full expenditure in each project, each sector and nationwide, and the full value of aid. Without this full accounting, there can be no comparison of expenditure with progress or results. Nor can actual expenditure be compared with the budget due to different degrees of omission on each side. In general, financial and economic management have an incomplete database and decisions are liable to be based on misleading data at all levels

62. It is recommended that Accountants General meet and work out a common approach to ensuring full and prompt aid accounting.

24 In most countries, project accountants are expected to report monthly project expenditure to the Accountant General by way of a journal voucher, debiting expenditure and crediting revenue. In St. Vincent and the Grenadines, for instance, the Planning Division expects departments to bring these expenditures to account, but departmental accountants (in the Ministry of Health, for example) say that there are no clear procedures and that they do not have the documentation. In Grenada, two entries are made: on receipt of an advance or reimbursement of funds, cash is debited and revenue is credited. On expenditure from a special account, cash is credited and expenditure debited. This is the better method as (1) special accounts are brought within the Accountant General’s accounts, and (2) it ensures that data on loan aid receipts correspond with increases in external debt. 25 In St Vincent-Grenadines, a well-informed guestimate is that half the aid received is being omitted from the accounts. 26 Balance of payments data are commonly compiled from data on imports of goods and services on capital account and official developmental assistance from fiscal sources, so these statistics would be equally affected. The same applies to the national statistical agency, which would use balance of payments data in the estimation of the national income and product. These statistical aspects have not been investigated.


D. INFORMATION TECHNOLOGY: AUTOMATED ACCOUNTING AND REPORTING SYSTEM

63. One of the most important innovations in OECS government financial management in recent years has been the introduction of integrated financial information systems for government budgeting and accounting. These systems have been introduced under the CIDA-financed project, Eastern Caribbean Economic Management Program (ECEMP).

64. ECEMP was implemented in two phases from 1993 until 2000. One of its objectives was the improvement of Financial Planning and Management (FINMAN) in the OECS region. FINMAN had several components, one of which was the implementation of a Standard Integrated Government Financial Information System (SIGFIS). The SIGFIS implementation plan included the following eight modules:

1-General Ledger 5-Payroll

2-Funds Control 6-Human Resources

3-Purchasing 7-Budget Preparation

4-Payables 8-Accounts Receivable

65. The FINMAN project concentrated on selecting software to implement SIGFIS and making the first four modules operational. Based on analysis of the software available at the time, the ECEMP team proposed piloting Geac’s (formerly Dun & Bradstreet's) SmartStream software in St. Lucia and updating the FourGen software already used in St. Kitts and Nevis. After the successful implementation of SmartStream in St. Lucia's Ministry of Finance, the FINMAN project continued implementation of the same software in Dominica, Grenada, and St. Vincent and the Grenadines. Antigua and Barbuda was outside the scope of ECEMP II. Box 4 in section IIIA shows the objectives of ECEMP III, and the main achievements of ECEMP II.

66. With regard to payroll, processing is decentralized, and is either manual or done on stand-alone software packages. Under the ECEMP project, a payroll module exists within SIGFIS but it is only being used on a pilot basis within the Accountant General’s Department in Dominica. St. Vincent and the Grenadines is attempting to implement the module, albeit carefully due to the sensitivity of the information involved.

67. While implementation has been slow, SIGFIS/SmartStream is generally operating satisfactorily, though users complain of difficulties of access, lack of user-friendly report generation, slow speed when several users are on line, lack of server capacity to accept supporting documentation scanned into the system (e.g. in Grenada) and the lack of individual advance accounts. The training provided did not cover the countries evenly: typically the Accountant General's office had extensive training and understanding of the features of the system while other officers, such as staff in the Ministry of Education, were frustrated with procedures that they felt were unclear or duplicated those that they already maintained manually. Training and support is in many cases provided by a


handful of overstretched civil servants, or by expensive consultants, the latter in many cases being ex-government officials who left the public service after receiving software training. No country yet has all its ministries and departments on line (St. Lucia is nearly there).27

68. The resumption of ECEMP will provide limited support for the full roll-out of the system, and the addition of urgently needed modules such as funds control, budget and cashiering. An ECEMP III project (MR-02) will identify IT skills available, assess systems support needs, and develop a business plan for a sub-regional IT unit, from which OECS governments would outsource IT support.

69. The SIGFIS/FourGen system implemented in St. Kitts and Nevis in 1993/94 was further updated during the ECEMP II program. However there are still several ‘dumb’ terminals that are for data entry purposes only and do not provide the user with direct access to live data. The system should be enhanced to provide real time data so that it can prevent the over-commitment of funds.

E. HUMAN RESOURCES

70. Accounting offices are not well staffed. In total the six countries have about 500 accounts staff (see Table 3 below and country CFAAs for further details). This excludes line ministry staff whose position titles do not identify any accounting content, and budget staff. Though the figures are very crude, it can be seen that Antigua and Barbuda, and St. Kitts and Nevis have the fewest accounts staff, relative to total government expenditure, while Dominica and St. Lucia have the most.28

Table 3: OECS Government Accounts and Audit Staff

Country No. of accounts staff

No. of audit staff

Government expenditure budget (US$ millions, 2000)

Expenditure per accounts officer (US$ mn, 2000)

Expendi-ture per audit officer (US$ mn, 2000)

Antigua and Barbuda

51 24 159.1 3.1 6.6

Dominica 126 18 104.4 0.8 5.8 Grenada 54 18 135.5 2.5 7.5 St. Kitts and Nevis

28 15 145.4 5.2 9.7

St. Lucia 161 26 193.0 1.2 7.4 St. Vincent and Grenadines

47 28 105.9 2.3 3.8

Total 467 129 843.3 1.8 6.5 Sources: Country Estimates for 2002, and ECCB Annual Report 2001.

27 The implementation experience has been similar in Barbados, which installed SmartStream on its own accord. 28 The ranking is similar if staff numbers are related to country GNP.


71. Judging from the comments of Directors of Audit, staff are not well qualified or trained for their duties. St. Lucia and Grenada received adverse opinions on their last audited accounts, i.e. that they did not fairly present the state of affairs or government operations for the year. Audit reports complain of negligence, misclassifications, bad record keeping, lack of internal audit, etc. It appears that no country has a professionally qualified accountant in post, though there are holders of degrees and certificates in accounting (mainly private enterprise accounting) and related subjects. One reason for this is the low salary scales for government accountants (US$1,000-1,500 per month) compared with their counterparts in the private sector.

72. Staff are recruited and promoted centrally by Public Service Commissions and their secretariats. Accountants General have some influence on the selection process in some countries, e.g. by sitting on interview panels, but even if recruitment were decentralized, it would make little difference to quality on entry as the labor market is thin and the terms of public sector service are not attractive. Accountants General consider they are lucky to get recruits with GCE mathematics or accounting, indicating basic numeracy.

73. Four types of training are given. (1) Donors provide short one-off courses in support of reforms, such as ECEMP training in SIGFIS. (2) Donors also fund general financial management training, such as diploma and certificate courses run in donor countries. These courses tend to be long and expensive, and of doubtful effectiveness in terms of the impact that returning diploma-holders can make individually. (3) Most OECS governments encourage accounts staff to enroll for training courses of various professional institutes and pay awards if they are successful. These are mainly in private sector accounting and do not provide sufficient understanding of financial management in the government. Then (4) there is on-the-job and ‘vestibule’ training, where (untrained) officers instruct others. In some countries, senior officers provide in-house training for junior and middle level officers. This is commendable but does not go far enough.

74. Given the fiscal impossibility of matching private sector salaries, at least in the short to medium term, a feasible strategy is to provide job-focused in-service training, which can more easily be funded externally. If the training is focused on the acquisition of skills required by staff job descriptions, which at present include only limited aspects of commercial accounting, the drain to the private sector (or abroad) is minimized.

75. A training needs survey should be made and a program designed. This could be undertaken by a training specialist (perhaps through CARICAD) under the joint supervision of the Accountants General and the Ministries of the Public Service in the OECS countries. It should distinguish between the skills required for the performance of current duties in the various budgeting, accounting, reporting and internal audit posts, based on their position descriptions, and training for the levels of accreditation such as accounting technician and full professional level, which should be linked to promotion through the grades. Middle and senior level officers need supervisory skills as well as technical skills. Training should be continuous throughout the career.


76. The actual delivery of training could be regional, using modern distance learning methodology to avoid the high costs of travel and subsistence. The UWI School of Continuing Studies, based in Mona, Jamaica, together with the Distance Education Center, based in Cave Hill, Barbados, has facilities in all the OECS countries for distance learning using centrally prepared course materials, local assistants and teleconferencing facilities.29 This machinery has already been set up and has some years of successful experience. There is scope for a major enlargement of the number of students without substantial extra costs.

F. FINDINGS AND RECOMMENDATIONS

77. Findings and recommendations are as follows:

Internal control is left entirely to Accounting Officers who have no internal audit units and very little guidance and support from the center. It is recommended that governments clarify central responsibilities for internal controls and internal audit in line ministries, and build a central capability for guidance and monitoring. Special training should be provided (see below). Given the shortage of skilled staff, this will be more cost-effective than trying to build internal audit units in all departments.

Financial Regulations generally are models of transparency, clarity, and comprehensiveness but are out of date in some respects, e.g. they need to be updated to legitimize the use of electronic media and combined with the manual for SIGFIS and other systems to form a comprehensive Accounting Manual, which could also be used for training.

Countries should move to a modified cash (plus commitment) basis of accounting, as in St. Lucia, rather than print out large numbers of checks for creditors at the end of each year. Progressively, countries should move to a full accrual basis, which has become the new standard for government accounting; however, at this stage it is far more important for the countries to complete their efforts at automating and improving their expenditure control systems, and to strengthen cash management practices. A move to a modified cash (plus commitment) basis of accounting will facilitate the accomplishment of these objectives.

Large amounts of aid are not brought to account in the main public accounts, due to a failure of donors and project directors to report aid receipts and expenditures promptly to the Accountant General. This is distorting comparisons of budgeted and actual revenue and expenditure, and comparisons of expenditure with results. It is recommended that Accountants General meet with representative donors and project

29 The Center in Dominica, for instance, offers certificate programs in public administration and business administration (2-4 years part time), and a degree in management studies (6 years or more), all of which attract civil servants who are prepared to study in their evenings. Each semester a student takes part in 3-6 teleconferencing sessions of two hours each. This personal contact with tutors maintains student motivation, though drop-out is still high, especially by men. A certificate course of 30 credits typically costs US$1,850. The Government supports civil servants by subsidizing about 60% of their tuition costs. For a brief description of the overall UWI Distance Education Centre (UWIDEC), see www.uwicentre.edu.jm/uwidec/


directors and consider a common approach to ensuring full and prompt aid accounting.

The extensive use of computers and on-line activities in government budgeting and accounting has not only added to the transparency of the system, but also facilitated effective monitoring and up-to-date accounting for current transactions. However, ministries continue to rely on parallel manual procedures performed by staff who do not always possess sufficient technical background to perform their tasks on SIGFIS. In other cases the staff simply do not have access to system terminals. Further training and systems development is needed, along with a re-thinking of the design to take into account user needs. These activities, along with ongoing IT support, should be carried out regionally given the capacity constraints of individual countries and the high cost of employing consultants.

Accounts officers are not well trained, and it is not feasible to recruit accountants on higher salaries (in the short or medium term) nor to contract out accounting and internal audit services. A comprehensive sub-regional in-service training program is recommended, based on a training needs survey of skills and numbers in each government, and using distance learning facilities that already exist in the OECS countries. It is also recommended that a feasibility study be made to explore the possibility of a certificate course in public financial management, based on the legal and institutional framework of the OECS countries, and including practical use of systems such as SIGFIS, SIGTAS and ASYCUDA, for accounts and audit staff from the OECS countries, resulting in a certificate that would be recognized by Public Service Commissions as a promotion bar at a certain stage in their careers.

V. CENTRAL GOVERNMENT FINANCIAL REPORTING

78. In each country the law sets a standard for the timeliness of government financial reporting – all the prescribed annual statements should be handed to the Director of Audit within six months (or just three months in Dominica and St. Lucia) of the end of the year. In fact no country meets the standard, though St. Kitts and Nevis is not far off (see Table 4 below). Three countries (St. Lucia, Grenada, and Antigua and Barbuda) are far in arrears (mainly in respect of financial years before SIGFIS started in 2000) and are making special efforts to get up to date.

79. The FAA requires the government’s annual financial statements to include individual statements of assets and liabilities; balances on advance accounts; balances on deposit accounts; outstanding loans made from the Consolidated Fund; public debt; contingent liabilities; investments and funds on behalf of which they were made; Contingency Fund Account; changes in financial position; and other statements as Parliament may require in each individual country.

80. Most Accountants General provide most of the FAA statements listed above, though the following omissions are noted:


Public debt (St. Vincent and the Grenadines, while Dominica, Grenada, and St. Kitts and Nevis omit significant parts)

Contingent liabilities (St. Kitts and Nevis, Antigua and Barbuda, St. Vincent and Grenadines)

Arrears of revenue (Dominica, St. Kitts and Nevis)

Losses of cash, stores, etc. (Dominica, Grenada, St. Kitts and Nevis)

Changes in financial position (St. Lucia, St. Kitts and Nevis)

Unpaid claims (Grenada, St. Vincent and Grenadines)

Outstanding loans, made by the government (St. Lucia).

81. There is an international standard for general-purpose government financial statements kept on a cash basis (IFAC-PSC ED9, at present in draft). It requires a statement of accounting policies, including the definition of the reporting entity, the point of recognition for receipts and payments, the treatment of reserves and the translation of amounts denominated in foreign currency. Additional disclosures in the notes to the accounts should include:

Lists of physical assets

Commitments

Tax expenditures (estimates of revenue foregone because of preferential provisions of the tax structure)

Forecast information.

82. Except for some partial statements of accounting policies, these are not disclosed by any of the OECS countries.

83. As a general recommendation, Accountants General should be aware of changing international standards and should move in the direction of compliance with them, as well as with domestic laws, as these are the standards of transparency on which governments are now judged.


Table 4: Recent Government Reporting

OECS Country

Fiscal Year ending

Date corrected/ certified accounts were submitted by Accountant General /MOF to DOA

Date of submission by DOA to MOF with certification

Date of transmittal by Minister of Finance /laying on the Table of the House Assembly

Antigua and Barbuda

(i) Dec. 31, 1994

(ii) Dec. 31, 1995

(i) January 2002

(ii) April 2002

(i) February 2002 (i) March 2002*

Dominica June 30, 2000 June 5, 2001 June 13, 2001 July 2, 2001

Grenada (i) Dec.31, 1997

(ii) Dec. 31, 1998

(i) Aug.16, 2001

(ii) March 6, 2002

(i) Nov.15, 2001 (i) Nov.27, 2001

St. Kitts and Nevis

Dec. 31, 2000

June 2001 October 5, 2001 December 2001

St. Lucia (i) Mar. 31, 1996

(ii) Mar. 31, 1997

(i) Around Nov. 1998 (ii) Not completed as of April 2002

(i) August 1999

(i) Nov. 2, 1999*


(i) Dec. 31, 1998

(ii) Dec. 31, 1999

(i) Jan. 2002

(ii) Jan. 2002

(i) Jan. 28, 2002

(ii) Jan.28, 2002

(i) Feb.19, 2002

(ii) Feb.19, 2002

*This refers to Volume II of the audit report, which is based on the financial statements for the year.


VI. CENTRAL GOVERNMENT AUDITING

A. MANDATE

84. Under the Constitution and Audit Act of each of the OECS countries30, Directors of Audit (DOA) have similar mandates. The DOA has to satisfy herself:

that all moneys that have been appropriated by Parliament and disbursed have been applied to the purposes for which they were so appropriated and that the expenditure conforms to the authority that governs it (i.e. a compliance and internal control audit), and

at least once in every year, audit and report on the public accounts of the country (financial statements audit).

85. The two-part nature of this mandate has been used to split the audit report into two volumes where financial statements are being prepared very late, as in Antigua and Barbuda, and St. Lucia at present. In these countries, the DOA performs a compliance audit and reports her findings as volume 1 of her report on the year, pending receipt of the financial statements and the submission of volume 2. This is a pragmatic and useful response to current arrears in those countries, as it provides more current material for legislative review.

86. In all countries, the focus of the DOA is on ex post audit of accounts prepared by the Accountant General and other officials. Pre-audit of expenditures is not required: this avoids a conflict of interest at the ex post audit stage.

87. In each country, the DOA may, at any time, submit a ‘special report’ on any matter considered to be so important or urgent that it should be addressed prior to the preparation of the Annual Report. This mandate is used to submit reports on performance audits. All DOAs consider that their mandates include performance (or comprehensive managerial) audit. However, this requires more resources and more skills than most Audit Departments have, and few such audits have been carried out.

B. APPOINTMENT, TENURE AND INDEPENDENCE

88. Appointment. According to OECS country constitutions, the Director of Audit is appointed by the President, acting in accordance with the advice of the Public Service Commission. Before tendering advice, the Public Service Commission “shall consult the Prime Minister”.

89. This does not fit well with the independence of the audit office from the executive, nor does it reflect the principal role of the DOA as a servant of Parliament. It would be more appropriate for the DOA to be selected after consultation with Parliament.

30 Some Audit Acts are being reviewed and amended, e.g. in St Vincent-Grenadines the old Finance and Audit Act is being redrawn as a Finance Act and a separate Audit Act.


In Trinidad and Tobago, for instance, the Auditor General is appointed after consultation with both the Prime Minister and Leader of the Opposition.

90. Tenure. The DOA is appointed for an indefinite period but must retire at the age of 55 years. This is relatively early. The Trinidad and Tobago Auditor General, for instance, retires at 65. The DOA should be appointed for a fixed term of five to ten years and the term in office should not coincide with the life of a Parliament so as to avoid identifying the DOA with the ruling party.

91. Powers. The DOA has right of access to the books of account and such documents as she thinks relevant. She is not subject to the direction or control of any other person or authority.

92. Removal. The DOA can only be removed from office for inability to perform her functions or for misbehavior on the finding of an independent tribunal. This has generally provided a good level of independence (but see next paragraph).

93. Reporting line. In accordance with the laws of each country, the DOA has to submit to the Minister of Finance certified copies of annual financial statements with her audit report.31 The propriety of submitting the report to an auditee does not appear to have been questioned. The INTOSAI standard is that a state audit body, as the supreme audit institution of the country, should send its reports directly to the Speaker to be tabled in the lower House without delay32. On tabling, they become public documents. Some OECS countries such as Antigua and Barbuda, and St. Kitts and Nevis have added a subsection to their Constitutions that, if the Minister of Finance should fail to table the report promptly, the DOA should forthwith send the report to the Speaker, who then tables it. Such a subsection does not appear in the Constitution of Grenada, where the Minister of Finance failed to table two reports in 1999, resulting in a dispute which precipitated the removal of the DOA and a legal contest that eventually extended to the UK Privy Council. This situation arose in part because of a failure to accept the role of the DOA as a servant of Parliament. It is recommended that all audited accounts be sent directly to the Speaker for tabling at the next sitting of the House.

94. Financial independence. The office of Director of Audit is established and her emoluments are protected by the Constitution. However, the Audit Department’s budget depends on the Ministry of Finance, as though it was a department of the executive, and is subject to the same restrictions as other departments on the use of Parliamentary appropriations. For instance, in Grenada, the Ministry of Finance has not provided any funds for overseas travel since 1999. This prevents the audit of overseas missions, in

31 Antigua and Barbuda: article 97 of the Constitution Order, 1981; Commonwealth of Dominica: Article 72 of the Constitution 1978; Section 17 of the Finance Administration Act 1984 and Section 6 of the Audit Act 1994; Grenada: Article 82 of the Constitution Order 1973, Sections 9 and 10 of the Finance and Audit Act 1964; St Lucia: Article 84 of the Constitution, Section 16 of the Finance Administration Act 1997 and Sections 6 and 7 of the Audit Act 1988; St. Kitts and Nevis: Article 76 of the Constitution order 1983: Section 15 of the Finance Act 1990; and Sections 6, 7 and 11 of the Audit Act 1990; St Vincent and the Grenadines: Section 17 of the Finance Administration Act 1984 and Section 6 of the Audit Act. 32 INTOSAI Lima Declaration, 1977, section 16.


contravention of the DOA’s responsibility. Given the special constitutional position of the DOA and her rather unique role as an independent guardian of public financial accountability, it would be appropriate for the Parliamentary appropriation to be made available as a lump sum vote, to be spent by the DOA as she thinks fit. At some future stage, when PACs are stronger, they should be involved in the determination of Audit Department appropriations.

95. Personnel management. The Director is also formally subject to the Public Service Commission in all personnel matters, such as appointment of staff, pay, promotions, grant of leave, discipline and termination of service. This is incompatible with moves toward the new public management, decentralization of responsibility to heads of departments and undivided accountability. There is little scope for corporate planning and performance management within the agency where so many decisions lie outside the agency’s control.

96. In practice, some DOAs work closely with their PSC and are able to influence their decisions in ways that improve overall management of the audit function. However, other DOAs have no role in recruitment of staff. Their recommendations on promotion are sometimes followed, sometimes not. There is very little awareness in PSCs and their secretariats of the special personnel needs of DOAs. This results in appointments of staff that do not have appropriate experience, particularly in the area of automated accounting systems, and the loss of officers trained in audit. DOAs should seek more involvement in the recruitment and management of their own staff. In Trinidad and Tobago, for instance, the Audit Office has some constitutional protection from arbitrary staff movements, as follows: ‘Before the Public Service Commission makes any appointment to or transfers a member of the staff of the Auditor General .. it shall first consult with the Auditor General’. This should apply in all the OECS countries.

Box 5: Components of SAI Independence33

Supreme Audit Institutions (SAIs) are often responsible for providing the third party review that is an essential aspect of a modern, transparent public sector. To provide a truly independent view, the SAI should have sufficient autonomy to carry out its assigned mission without having to be concerned with political, budgetary, or other pressures. The concept of SAI autonomy has been widely discussed in literature, 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 and approved. The so-called ‘Lima Declaration’ included the following statements:

(i) Although state institutions cannot be absolutely independent because they are part of the state as a whole, the Supreme Audit Institutions shall have the functional and organizational independence required to fulfill their tasks.

(ii) With regard to their professional career, the auditors of Supreme Audit Institutions may not be exposed to influences by the audited entities and may not be dependent on such

33 Taken from the in-progress doctoral dissertation of Daniel Boyce, team leader of this CFAA.


entities.

(iii) If required, Supreme Audit Institutions shall be entitled to apply directly for the necessary financial means to the public body deciding on the national budget.

(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.34

While item (i) makes a general statement, items (ii) – (iv) suggest specific criteria for measuring a particular SAI’s independence: the extent to which SAI employees are accountable to an agency other than the SAI; the extent to which the SAI 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 departments; and (b) the length of the term in office of the SAI head. The latter is borrowed from the literature on central banks, in which the official term in office of the Central Bank President is often considered to be an important measure of independence.

Under the above criteria, as section VI.B shows, OECS Audit Departments have rather limited independence.

97. A further problem, not commonly recognized, is that conflicts of interest can arise where former accounts staff are transferred into audit. As audit staff are not a closed service, they are interchangeable with staff from executive departments. In practice conflict is avoided, as such staff are not assigned the audits of their former departments. The need for this ‘internal’ separation is unavoidable in an open service.

98. The above issues may be illuminated by comparison with international criteria for the evaluation of the independence of supreme audit institutions, such as OECS Audit Departments (see Box 5 above).

99. One route to greater independence would be sub-regionalization of the audit function, as suggested in the IOCR. A central Audit Service, funded by all member-states, would involve the creation of the post of OECS Auditor General and the transfer to this officer of legal responsibilities for reporting on all public accounts. The Auditor General would be responsible for setting and maintaining sub-regional audit standards. All audit reports would be issued in her name, based on audit work done by national audit staffs and supplemented as the Auditor General deemed necessary by her own staff.

C. AUDIT STANDARDS AND PROCEDURES

100. All Audit Departments are members of INTOSAI and the regional CAROSAI and aim to comply with INTOSAI standards.

34 INTOSAI (1977), Lima Declaration, paras. 5.2-7.3.


101. Audit reports are subject to internal reviews (three in St. Lucia) but there is no external peer review of audit standards or practices, such as field standards and reporting standards. There is some discussion of this subject and readiness to be subject to peer review where this is competently done, e.g. under the aegis of CAROSAI. This is recommended, particularly in view of the absence of any independent review of Audit Departments.

102. In the absence of properly functioning accounting systems, audits are transaction- and sample-based, but some systems examination is done on the current year. Observations are sent immediately to relevant Accounting Officers, with copies to the Accountant General, for response and correction. Responses are generally either not received or inadequate. The most serious unsettled memoranda go into the DOA’s annual report, and are the basis for her opinion and certificate.

103. If the DOA detects serious irregularities or misappropriation of public funds she can report the case to the Financial Secretary and Director of Public Prosecutions (in St. Kitts and Nevis), or the Attorney General (in St. Vincent and the Grenadines).35

104. Computers are used only for word processing (collation of memoranda and report preparation). Audit staff, even DOAs, have not been trained to use the SmartStream system, e.g. to get sample transactions. This is an urgently felt need (see E. below).

105. The St. Lucia Audit Office has published a comprehensive and useful Audit Manual covering a variety of subjects, including: the purpose and objectives of the manual; the legislative basis of the DOA’s office; audit standards, process, management, control, execution, criteria, and reporting. The Manual also contains useful appendices including: appropriate extracts from legislation and financial regulations; staff regulations; standards for audit files and working papers; and staff development (a section detailing the training facilities and incentives available to staff and urging staff to take advantage of these facilities, and to accept responsibility for their own training and career development). This is recommended as a model for other countries.

D. REPORTING

106. Audit reports are due not later than three months from the date of receipt of the financial statements from the Accountant General. Though financial statements are usually late, and are frequently sent back for correction, DOAs start their audit during the year, in fact a few months after each month’s transactions, and can usually complete their certification and audit report within a few weeks of receipt of the final corrected statements.

107. Where financial statements are late, it should be possible to report on the status of current internal control and compliance practices of the Government in a ‘Volume 1’ report. The DOA need not limit this to the weaknesses found in that year; it is more 35 The Accounting Officer is required to ask the concerned officer to respond to the charge, then institute an internal inquiry and pass the facts to the Public Service Commission. The officer can be suspended and put on half pay pending determination.


useful to the PAC and MOF to know if those weaknesses are still there, or have worsened and, above all, what the DOA recommends can be done about them, realistically and constructively. Audit reports tend to be narrowly concerned with listing all the transgressions of the executive, major and minor, with no assessment of impact and no prioritization. The only recommendations are to comply with the laws and regulations, with no suggestions as to how this can be done within an appropriate control framework. While the responsibility for corrective action lies solely with the executive (MOF and Accounting Officers), audit reports would be more heeded by hard-pressed public officers if they were more managerially oriented and pointed the way forward.

108. DOAs36 provide an opinion on the accounts, usually as a short form certificate. In St. Vincent and the Grenadines, for instance, the DOA reports as follows: “I conducted my audit in accordance with INTOSAI and generally accepted auditing standards and practices to provide reasonable assurance as to whether the statements are free from material misstatements. Except for my comments in this report, it is my opinion that the statements of accounts for the financial year XXXX properly represent Government’s financial transactions”.

E. HUMAN RESOURCES

109. The six countries have about 129 audit staff (see Table 3 in section IV.E and country CFAAs). It can be seen that St. Kitts and Nevis, Grenada, St. Lucia and Antigua and Barbuda have the fewest audit staff, relative to total government expenditure, while St. Vincent and the Grenadines and Dominica have the most.

110. These numbers of staff are insufficient for DOAs to do even the minimum compliance audit on all ministries, departments and other entities for which they are responsible, let alone increase the number of performance audits. In Antigua and Barbuda, Grenada and St. Lucia, DOAs reckoned that they are able to cover all bodies only once every two years, and some departments may be neglected for longer.37 These three countries and perhaps St. Kitts and Nevis need additional audit personnel to achieve the same coverage as the other countries. Additional numbers would allow more officers to be released for much-needed training (see below). In some Audit Acts, the DOA may submit a Special Report to the Minister of Finance for transmission to Parliament if, in her opinion, the amounts provided for her office are inadequate to enable her to fulfill the responsibilities of her office. This is a dead letter. No such report has been submitted. Less formal requests to MOFs are not addressed.

111. Staff quality determines the effectiveness of audit. There are very few professionally qualified staff (St. Lucia has two), but there is an increasing recognition that professionalization is necessary. In St. Vincent and the Grenadines, for example, a new requirement for certification of managers has gone into effect. Instead of senior staff rising through the ranks without ever obtaining qualifications, the office now aims to

36 Except St. Kitts and Nevis. Their latest report, on the financial year 2000, contains no overall opinion on the accounts. 37 Foreign missions are audited less frequently because of the high cost.


ensure that audit managers in future will have professional certification from a US, UK or Canadian accountancy body.

112. There is a problem of high turnover and a lack of audit training. Training budgets are miniscule and all training abroad is subject to the availability of foreign aid. It is recommended that all audit staff be included in the scope of the training needs assessment and sub-regional training program suggested in section IV.E above.

113. Audit staff are urgently in need of computer training. In St. Lucia, for instance, the DOA’s office needs computers and training to handle audits of the Government’s computerized accounting systems (including SIGFIS, SIGTAS and ASYCUDA), and use of computers in audit management and operations. ECEMP III has promised such training. Attachment of a computer/IT specialist with computer auditing experience to the DOA’s office for at least one year would ensure that the training is effective.

F. EFFECTIVENESS OF AUDIT

114. Independence, good staffing and training are relevant, in the long run, only if they have an impact on the effectiveness of the audit process. While this CFAA did not attempt to determine the effectiveness of audit in OECS countries, Box 6 suggests some ways that effectiveness could be measured. In addition, it suggests possible ways that OECS governments can regularly monitor the value added to public sector management by the audit process.

BOX 6: Audit Effectiveness

Measurement of the effectiveness of any public sector body is difficult, and the problem may be particularly acute when it comes to auditing. Some possible indicators of audit effectiveness are the following:38

Extent of critical expenditure and income systems reviewed and tested

Extent of audit plan achieved

Cost savings or increased opportunities identified by audit

Extent of audit recommendations accepted and implemented

Client satisfaction survey results

In the case of internal audit, the extent that it is consulted when systemic changes are made

38 These indicators are taken from “Measuring the Performance of Audit,” published by The Chartered Institute of Public Finance and Accountancy, London, January 1992, page 5.


G. FINDINGS AND RECOMMENDATIONS

115. Our findings and recommendations are as follows:

Directors of Audit have good constitutional independence from the executive, except at the time of appointment. The Director of Audit is a servant of Parliament and Parliament should be consulted in the selection of a new DOA. This may be done as in Trinidad and Tobago, where the Head of State has to consult the Prime Minister and the Leader of the Opposition before making the appointment.

The relatively early age of retirement (55) may interrupt a DOA mid-stream. A DOA should be appointed for a fixed term of five to ten years, not to coincide with the term of any administration.

All audit reports should go directly to the Speaker and not through the hands of any auditee to avoid even the suspicion that the DOA has been pressured to modify the report.

DOAs should have greater financial and personnel management autonomy so that they can make and implement corporate plans with their departments with greater assurance and flexibility.

The audit function is focused mainly on propriety-style audits, which verify adherence to Parliamentary appropriation limits, respect for prescribed rules and regulations, and availability of evidence to support financial transactions. Although the trend towards value-for-money auditing has begun in some countries of the group, the process is at an early stage. DOAs do not generally examine the actual performance of public entities with reference to pre-determined performance measures. However, these performance indicators and targets simply do not exist for most government entities, and without them performance audit depends on assumptions by the audit team.

No audit department is externally reviewed on its methods and standards. External review is becoming common in private audit firms. All audit departments should join in a scheme of external peer review under the aegis of an independent and knowledgeable body such as CAROSAI.

Every audit department should prepare a comprehensive Audit Manual to serve as training material and as a desk guide for all audit staff

The audit departments in St. Kitts and Nevis, Grenada, St. Lucia, and Antigua and Barbuda have far fewer staff, in proportion to their workload, than the other countries, and (with the possible exception of St. Kitts and Nevis) are often unable to complete more than half of the audits that they should carry out in a given year. Additional staff should be appointed to match the workload.

Professionalization of senior audit staff is needed to ensure that modern concepts and standards of government accounting and audit are brought into the day-to-day work


of the department. There is also a need for training at middle and lower levels, and for particular skills such as audit of SIGFIS and other computerized systems, and use of computers in audit management. It is recommended that audit staff (approximately 129) be included in the scope of a sub-regional training program, using distance learning facilities, as for accounts staff (see above).

Audit tends to be seen as an overhead expense made necessary by the Constitution. In contrast, audit should be a value-adding phase in the management cycle. Governments are urged to evaluate the effectiveness of their audit function and to draw lessons from each other on raising its effectiveness.

To address many of the issues identified above, consideration should be given to the establishment of a sub-regional audit service.

VII. LEGISLATIVE OVERSIGHT

116. The circle of accountability is not closed until Parliament, which appropriated resources for particular purposes at the start of the year, receives a satisfactory accounting of how those resources have been used during the year. In this respect, the OECS countries have not closed the circle. It is true that Parliaments actively debate the annual Budget, and ‘Question Time’ is an opportunity for members to obtain information from the government Ministers, but there is almost no ex post Parliamentary oversight of public finance. In other countries having a similar constitutional background, oversight is provided by select Parliamentary committees, principally Public Accounts Committees (PACs).

A. MANDATE AND ROLE OF PUBLIC ACCOUNTS COMMITTEES39

117. All of the countries have some provision – either constitutional or parliamentary – for the establishment of a PAC. The composition of PACs varies. The minimum number of members is usually three to five. In accordance with the Standing Orders of the lower House or similar provisions, the PAC is typically headed by the Leader of the Opposition, a constitutionally recognized position, or some other opposition member. The remaining members tend to reflect the party composition of the lower House, provided this is not overwhelmingly dominated by a single party.

118. The PAC is part of the parliamentary infrastructure that helps ensure that governments account for their management and use of public resources. The PAC relies on the audited financial reports presented by the DOA to carry out its mandate. The PAC and the DOA are separate organizations with separate mandates, but with complementary and interdependent roles. For this reason the Committee is usually a key ally of the DOA, and of public accountability in general. In the OECS countries, the PACs are often 39 Our discussion of PACs focuses on the implications of their activities (or lack thereof) for public financial management. PACs are also discussed, from slightly different perspectives, in the CPAR and IOCR.


specifically required to report to the House any cases where excess or unauthorized expenditure of public funds have been made, the reasons for such expenditure and any measures they consider necessary in order to ensure that public funds are properly spent. The PAC may also perform such other duties as the House may direct. All agency heads, as Accounting Officers, are answerable to Parliament through the PAC for the management and accounting of the public funds entrusted to them.

119. Unfortunately the record of PACs in recent years has shown them to be ineffective in holding the executive accountable for the propriety, efficiency, transparency and effectiveness of public expenditure. As stated in the Bank’s IOCR, this is due to various factors. PACs are seldom formed, or if they are formed, they rarely meet. When they do meet, they are often reviewing outdated information,40 and even when the information is current and substantive, the PAC members often lack the expertise required to analyze financial reports.

120. In some countries, efforts to establish PACs are hampered by the lack of sufficient opposition members. The first-past-the-post electoral system that applies in all six countries commonly results in an overwhelming government majority. A second factor is that Parliaments are small, so the appointment of Ministers and Parliamentary Secretaries, who should not sit on PACs, absorbs almost all the government members, leaving very few backbenchers. The table below shows that this is particularly true in Grenada.

Table 5: Make-up of Parliament Houses*

Country Government Opposition Non-ministerial

Antigua and Barbuda 12 5 6

Dominica 17 12 15

Grenada 14 1 1

St. Kitts and Nevis 10 5 8

St. Lucia 20 8 13


16 5 7

* This refers to the House or Houses from which PAC members may be drawn.

40 See chapter V on late accounts.


121. There are common misconceptions. Though the PAC may be chaired by the Leader of the Opposition, it is not an opposition institution. It is intended to provide a check, not on misguided government policies, but on mismanagement in the administration of policies. For instance, the PAC should not be criticizing the policy decisions of an earlier government, but the way in which the policy was implemented. In this role, it should be immaterial to the PAC which party was in power in the years that they examine as its strictures apply only to the civil service. Similarly, DOAs can assist their PACs directly, rather than through the Speaker.

122. PACs have never reviewed the accounts of statutory bodies, even though they are tabled in the House and a Standing Order of the House requires the PAC to do so,41 because Ministers of Finance have not proposed motions that they be referred to the PAC. This procedural step should be taken, as statutory bodies are users of public funds, questions have been raised about their accountability and they are as subject to parliamentary scrutiny as ministries and departments.

B. ESTABLISHMENT OF PUBLIC ACCOUNTS COMMITTEES

Table 6: Operation and Status of Public Accounts Committees at April 2002

Antigua and Barbuda

A PAC was set up in 1998 with five members, two from the opposition (with the Leader of the Opposition as chairman) and three government party members (including two ministers). At a meeting and a follow-up meeting in 2000, members were unable to agree on a procedural framework to address the lack of clarity in the role and responsibilities of the PAC and because of the lateness of the accounts. No meetings have been held since.42

Dominica The new government appointed a PAC in July 2001 with two opposition members (the former Prime Minister and Minister of Finance) and two government members, and it has met twice. Its initial meeting to define its work program was twice rescheduled due to the difficulty of agreeing a time for all the members to attend. The report on FY 1999 has not been examined.

Grenada Since 1993 there have been insufficient non-government members of the House to establish a PAC of 3 members. Out of 15 members at present, 13 are Ministers. This constitutional problem has been met by amending the Standing Orders to provide for two committees, one of the House and one of the Senate, and having the committees sit together as a ‘Joint Committee’. However, the PAC has not yet been established as the Government has not proposed and passed the necessary motion in the House to do so.

41 e.g. Grenada House of Representatives Standing Orders, 1993, order no. 69: ‘It shall be the duty of the Committee to examine the audited accounts of the State as well as the accounts of corporations, boards and other bodies appointed by Government, and report thereon to the House’. 42 Per the government’s official response to the CFAA, three PAC meetings have been held in 2003.


St. Kitts and Nevis

Out of 15 members of the House, 12 are ministers. A PAC has not functioned since 1972. A PAC was set up in July 1997 with 5 members, but did not have any productive meetings. The new Government set up a PAC in December 2000 with 5 members, 3 from the government party and two from Nevis opposition parties (including the chairman). It has not yet met.

St. Lucia The last PAC meeting in 1998 was aborted by the refusal of the government members to attend. The new Government, elected in December 2001, has not yet set up a PAC, though there are sufficient members to do so.


Meetings were held on March 2000 and February 2001. An election was held in March 2001 that resulted in a change of government. Since then, the PAC has consisted of two opposition party members, one of whom chairs the committee, and three government party members. The chairman, who is Leader of the Opposition and a former Minister of Finance, has not yet called his first meeting.

123. From the above table, it can be seen that four countries (Antigua and Barbuda, Dominica, St. Kitts and Nevis, and St. Vincent and the Grenadines) do at present have PACs, but that none of them has yet had a single productive meeting after periods ranging from nine months to four years. The other two countries (Grenada and St. Lucia) have sufficient numbers of eligible members for PACs, but the Governments have not set them up. The problem, then, is not so much a lack of parliamentarians to constitute the Committees, but rather the lack of importance attached to the institution, both by governments and by opposition leaders (see recommendation below).

124. The PAC would also benefit from the use of local expertise in finance, banking, law, etc. It has been suggested that PACs could be expanded by the appointment of suitable persons from outside parliament.43 The acceptance of non-parliamentarians into the PAC would require an amendment of the Standing Orders of Parliament. But even without such an amendment, PACs have a general power to summon persons to give evidence, so outside witnesses and experts, without being voting members of the PAC, could still give evidence and opinions and thereby strengthen the analysis and findings of the committee.44

C. OPERATIONS OF PUBLIC ACCOUNTS COMMITTEES

125. The success of a PAC depends very much on the character of its chairman. The drive and interest of members is more important than their party affiliation, where it is

43 See for example the Report of the Study Group on Public Accounts Committees, Meeting sponsored by the Commonwealth Parliamentary Association and World Bank Institute, Toronto, May 28-31, 2001. 44 More fundamental alternatives are: (1) a constitutional change to allow additional seats in the House reserved to accredited interests from civil society (as suggested by David Benjamin, Professor of Political Science, St Georges University), or (2) an enlargement of the lower House, as has recently been recommended by a Constitutional Review Commission in Antigua.


accepted that the focus of PAC examination is not on government policies, but on the administration of those policies.

126. The lateness of audited accounts has been a major dampener on the motivation and interest of PAC members. A partial remedy is the greater use of Volume 1 audit reports (see chapter VI), the part that deals with compliance of government agencies with laws and regulations, since these provide a springboard for the Committee to ask searching questions about present procedures and controls.

127. Though the DOA report and PAC represent the main check on poor administration and financial irregularities, they cannot be effective on their own. They need parliamentary and public awareness of their role in making government accountable and transparent. The same need exists in all OECS countries. Members of Parliament and other interested parties should be involved in the Commonwealth Parliamentary Association, which in conjunction with the World Bank Institute has organized a Study Group on Public Accounts Committees, as part of a larger program of collaboration on Parliamentary-Executive Relations and Government Accountability to the Electorate Through Parliament. The purpose of the effort is to explore best practice across the Commonwealth. The Study Group met in Ontario, Canada in June 2001, and follow-up seminars are being organized in countries where there are operations under way, or planned, to enhance public financial accountability.

128. Currently there are countries in the Caribbean which have active and politically effective PACs. The exact way that they work together will and should vary but the principles of financial accountability are the same. The OECS countries should consider drawing on the best practices of their neighbors and model their parliamentary oversight accordingly.

129. A common goal should be to educate the public on the PAC’s role and how it can be an effective instrument for the public to enforce accountability on government authorities and to make financial management in the public sector more efficient. This can be done by using the media to publicize PAC activities and reach out to the public. This goal is consistent with that of the overall role of legislators in a democratic society.

130. The DOA should provide maximum technical support, since Audit Departments and PACs have the same objective of public accountability and each needs the other to make itself effective.

D. FINDINGS AND RECOMMENDATIONS

131. The lack of Public Accounts Committees is one of the clearest and most common weaknesses in public financial accountability in the OECS countries, as it represents a critical missing link in the accountability process. At the same time, the problem should not be considered to be insurmountable, considering that it is being discussed in many circles throughout the world. With this in mind, the CFAA makes the following observations and recommendations:


PACs have not been set up, or have been set up but have not had productive meetings, partly because parliaments are small and the numbers of non-government members have often been tiny, but mainly because of a lack of appreciation of the important role they play

To raise the profile of PACs, it is recommended that development partners and/or regional organizations, together with the Commonwealth Parliamentary Association (which has a local branch), hold a sub-regional workshop to expose parliamentarians, Directors of Audit and Accounting Officers, the media, civic leaders, and other interested parties, to concepts of transparency and accountability and the role of the PAC in raising public standards of financial management. The workshop would benefit from the participation of members of PACs from other Caribbean and Commonwealth countries.

PACs can deal with current issues, even where financial accounts are in arrears, by requiring DOAs to provide them with up to date compliance reports

PACs can be strengthened by greater use of the DOA, MOF and other government resources, by use of experts from outside the government as witnesses to give evidence, and by use of the media to increase public interest and understanding of accountability issues.

VIII. OTHER ASPECTS OF PUBLIC SECTOR FINANCIAL MANAGEMENT

A. STATE-OWNED ENTERPRISES

132. All state-owned enterprises (SOEs) come within the definition of statutory bodies in the OECS countries. The FAA requires them to submit estimates of their recurrent and capital expenditure and the financing for the year to the responsible Minister, who submits them to the Minister of Finance before the start of the company’s fiscal year. Neither the company nor the responsible minister may alter these estimates without the authorization of the Minister of Finance.

133. The enabling Act creating an SOE usually contains provisions for the accounting and auditing of the enterprise. Where it does not in the case of a state-owned company, the provisions of the Companies Act apply. Auditors are appointed and report as provided in the enabling Act. The selection of private audit firms needs to be monitored by the DOA in exercise of her constitutional obligations as auditor of all public funds. The DOA is entitled to receive audited financial statements annually from auditors of SOEs, as well as any other information the DOA deems necessary for the proper discharge of her responsibilities. Some SOEs send copies of their annual financial statements to the DOA, but little further action is taken. As a rule, SOEs apply International Accounting Standards (IAS), and are audited in accordance with


International Standards on Auditing, regardless of whether the SOEs are governed by specific enabling Acts or by the Companies Act.45

134. The MOF in each country attempts to monitor their performance, but lacks the skills required. SOEs and other statutory bodies are audited in accordance with their respective statutes, mainly by private audit firms. These firms should be in good professional standing and totally independent of the bodies they audit and of the Government. In some countries, the appointment of private auditors is subject to approval of the state audit body, which has a broad responsibility for ensuring that all public monies are subject to expert and independent audit. The DOA has constitutional authority to audit statutory bodies, but does not in fact do so. Nor does he see their accounts and reports. The DOA should oversee the appointment of SOE auditors, review their reports, supplement them if necessary and comment on them in the annual report.

135. SOE reports are tabled in Parliament but are seldom referred to PACs, so they are not critically examined. Thus, there is an accountability gap.

136. It is recommended as follows:

Greater attention should be paid to the operation of the SOEs, some of which are very large, by the MOF, the DOA and the PAC. Specifically, the MOF should either build SOE monitoring capability in-house, or contract out this function; the DOA should maintain a register of private audit firms in good professional standing, and ensure that audits are rotated amongst them; and the Minister of Finance should refer audited accounts of SOEs to the PAC for examination and report.

B. LOCAL AUTHORITIES

137. Most of the countries have some basic form of local government that has some spending powers, with the exception of St. Kitts and Nevis, where the Nevis Island Administration is strongly independent, and Antigua and Barbuda, where the Barbuda Council has an established constitutional position. Grenada has six small parish councils and one dependency run by the Council for Carriacou and Petit Martinique. St. Vincent and the Grenadines similarly has six parishes. Most of their functions have been taken over by the central government. Dominica has 38 village councils and a city, urban and town council (one each). Local government accounts are audited by the DOA of each country. In St. Lucia the Government has identified many weaknesses in its town and village councils and has proposed measures to raise their efficiency, transparency and accountability. This sector was not examined in detail, and no recommendations are made.

C. PUBLIC ACCESS TO INFORMATION: ROLE OF THE MEDIA

138. In all countries members of the public can obtain copies of the budget, accounts and audit report. As mentioned above, these are fairly transparent, though with exceptions. Radio stations, television and the press are active in all countries and there 45 This CFAA did not examine the financial statements or audit reports of SOEs.


are few cases of censorship or harassment of the media. Some issues do arise, however, particularly where one political party has been in power for an extended period of time. In Antigua and Barbuda, for example, the opposition complains of facing difficulties in gaining access to the broadcast media; at the same time, however, the recent Medical Benefits Scheme allegations came to public attention, and a Commission of Enquiry is investigating, with continuous coverage by a privately owned radio station.

D. FINANCIAL MANAGEMENT IN WORLD BANK PROJECTS

139. Although it is not the primary purpose of this analysis to review World Bank operations (listed in Annex 2), the following can be said of recent financial management performance in the six countries studied:

The results of audits, reviews by the Bank, and other measures of the strength of project financial management (e.g. disbursement-related problems or identified corruption) indicate that projects in these countries face many of the same issues as encountered in the overall Bank portfolio. The nature of the issues differs primarily in that projects tend to be smaller and less complex.

The Basic Education Projects in St. Lucia, Dominica and Grenada, provided a Best Practice model for sound project financial management. The Bank paid special attention to financial management from the outset of the project, and the ministries involved made vigorous efforts to install and maintain low-cost, effective arrangements throughout the project. Of particular significance was the support that project accountants provided to each other, which included cross-training visits and ongoing communications.

Where problems have existed, they are most often attributed to: (i) lack of depth in terms of personnel, e.g. problems arise when the project size justifies only one project accountant and that person quits the project unit, goes on extended leave, or fails to perform adequately; (ii) lack of proper oversight by the entities involved; (iii) prior to 1998, insufficient attention to financial management issues by the Bank; and (iv) lack of attention to timeliness in submitting audit reports and disbursement applications.

There is not enough evidence to suggest whether a regional or a country-by-country approach is preferable for project financial management. It is probably more important to determine the financial management arrangements on an overall project management approach, rather than attempt to define a particular ‘FM-specific’ arrangement across all projects. The sectoral context may be the most important factor in coming to a decision regarding the organization of project management – e.g. in the case of the OECS Telecommunications project, there was a clear case for a regional approach that could not be made so easily for projects in other sectors in which more typical investments were made via line ministries.

140. Project implementing units (PIUs) (‘ring-fenced’ projects) are still common, but PIUs normally maintain some linkage to the relevant live ministry. These PIUs may be merged where logistically possible, so that one unit manages all donor-funded projects.


The Bank-funded Economic Recovery and Disaster Management Project Implementing Unit, for example, is taking on more than one project in many countries.

IX. PRIVATE SECTOR ACCOUNTING AND AUDITING

141. The market for accounting services in the six countries tends to be dominated by one to three local affiliates of international firms. This is understandable given the small size of the economies involved, but at the same time it presents a risk in terms of the effects on cost and quality of the services provided.

142. Among the OECS countries, the only bodies representing the accountancy profession are the Institute of Chartered Accountants of St. Lucia, the St. Kitts and Nevis Association of Accountants and the Antigua and Barbuda Association of Accountants. Membership is open to members of recognized professional institutes, such as ACCAs (UK), CPAs (US) and CGAs (Canada). Several other accountants have not bothered to join, as they can practice without membership of the local body. Potential membership is probably about double the present numbers.

143. The ECCB and OECS Secretariat are pressing for an Institute of Chartered Accountants of the Eastern Caribbean (ICAEC) to be set up to regulate the practice of accountancy and to raise local standards of accounting and auditing. ECCB has prepared draft enabling legislation to give legal effect to the ICAEC Agreement. The Agreement was approved at a Heads of Government Meeting in November 2000. The establishment of the ICAEC will take effect when five countries ratify the agreement.46

144. The objectives of the ICAEC include: providing facilities for study and examinations, setting up student associations, regulating professional ethics, making representations to governments, etc. making rules for practicing certificates, prescribing accounting standards for its members and disciplining members. It is expected initially to have a standard-setting and monitoring role, and a post-qualification education role. The location of its main office is to be determined by its Council.

145. This represents a significant step in providing a regional focus for accounting professional development in these countries, and is the only way to move forward given the small numbers of professionals in each country.

146. It is recommended as follows:

The effort to establish the ICAEC should be supported by the governments of the countries involved, as a way to improve the financial architecture of each country and

46 At April 2002, out of eight ECCB member states (including Anguilla and Montserrat), six countries had signed (all but Anguilla and St Vincent-Grenadines), and four countries had ratified the agreement (Dominica, Montserrat, St. Kitts and Nevis and St Lucia). One country had passed the enabling legislation (St. Kitts and Nevis, The Institute of Chartered Accountants of the Eastern Caribbean Agreement Act, No. 23 of 2001, passed on October 24, 2001). It was before the House in Antigua-Barbuda.


of the region. Once established, the ICAEC should work closely with other institutes, especially the Institute of Chartered Accountants of the Caribbean (ICAC), to develop and maintain the accounting and auditing profession in the English-speaking Caribbean.47

X. FIDUCIARY RISK ASSESSMENT

A. THE NEED FOR FIDUCIARY RISK ASSESSMENT

147. The previous sections of this CFAA discuss the strengths and weaknesses of public sector financial management, but as such may not provide the reader with a clear picture as to the level of fiduciary assurance that can be derived from existing systems of public sector financial management, expenditure control, and procurement. As such, they do not explicitly incorporate the concept of risk. This section attempts to fill this analytical void by providing a brief but structured analysis of fiduciary risk, based on a model developed by the UK Department for International Development (DFID).

148. There are a number of reasons to assess fiduciary risk in the OECS countries. For example, the OECS is preparing to introduce a sub-regional stock market. Investors’ understanding of a country’s policies and institutions can affect the perception of risk and the cost of capital. Member countries also will see political advantages in aligning their governance practices to regional or international standards and being more transparent so as to position themselves better for membership and influence in regional and international institutions.

149. There is additionally a demand from the public for government transparency and accountability. This is expressed through citizen and political opposition groups and the media, as seen recently in Antigua and Barbuda with regard to the social security funds. The rapid spread of national and international networking has strengthened these groups and amplified their voice.48

150. From the donor perspective, the World Bank and other financing agencies have seen their business change considerably in recent years. The relative increase in adjustment lending, debt relief, and sector programs, in place of traditional investment projects has reduced the relative importance of tracking individual borrower transactions as a source of fiduciary assurance and highlighted the importance of assessing the country’s own PFM system. Meanwhile, the increasing emphasis by donors on working with, and improving, government institutions and systems, also has indicated a need to

47 The Institute of Chartered Accountants of the Caribbean (ICAC), which is based in the Institute of Chartered Accountants of Jamaica, is also interested, though the principal member bodies - those for Jamaica, Barbados and Trinidad - have already achieved legal recognition and a monopoly of sign-off on company audits. 48 At present there is a local chapter of Transparency International in Dominica but not in any of the other OECS countries. Nor is any OECS country included in the TI Corruption Perception Index for 2002.


better understand opportunities for enhancing public sector performance and thus reducing fiduciary risk.49

151. Four OECS countries (Dominica, Grenada, St. Lucia and St. Vincent and the Grenadines) are in receipt of budget support from the EU. Since 1998, most of the allocations under the STABEX scheme have been allowed to be used for budget support, with disbursement based on attainment of agreed macroeconomic and fiscal targets. Also, the IMF has approved a US$4.3 million credit to Dominica with fiscal targets and planned structural reforms in taxation and public expenditure management.50 These budget supports should be secured by a program of financial management improvement to reduce risks of misuse of the resources provided.

B. FRAMEWORK FOR FIDUCIARY RISK ASSESSMENT

152. This fiduciary risk assessment is based on the following definition of fiduciary risk: the expected value of the loss of developmental benefits that may result from gaps between generally accepted financial management standards and actual practices in the subject country.

153. Conceptually, each probability of loss would be subjectively assessed on a scale of 0-1, and multiplied by the estimated amount of the lost benefits. The latter would be calculated as the amount of public funds that may be diverted or misapplied. If it were possible to estimate the probability of losses, the overall risk would be the sum of the products of the probability and amount of each mutually exclusive loss. Since this is not practically possible, the risk arising from non-compliance with each good-practice principle is subjectively assessed on a scale from A (low risk) to E (high risk).

154. This analysis is made according to the DFID and OECD/DAC guidelines51 on managing fiduciary risk when providing direct budget support. These build on the IMF Code of Good Practices on Fiscal Transparency, the IMF/World Bank reviews of 25 HIPC countries, and IFAC/PSC International Public Sector Accounting Standards. In the

49 In recent guidance issued on Country Assistance Strategies (CASs), the World Bank has stated that staff should include “a thorough discussion of the country risks (economic-financial, including domestic and external, political, social and environmental) and risks to the Bank (financial/creditworthiness as well as reputational).” Since January 1999 all CASs are required to include a detailed analysis of governance conditions in general and corruption risks faced by Bank-supported projects in particular. Forthcoming CAS guidelines will make specific reference to the inclusion of fiduciary issues. See “Treatment of Procurement and Financial Management Issues in Country Assistance Strategies: Interim Guidelines to Staff,” jointly issued by the Bank’s Procurement and Financial Management Sector Boards, June 25, 2002. These guidelines support the notion that an assessment of risk should go hand in hand with an assessment of capacity, so that capacity improvements can be focused on areas of highest risk. 50 IMF Press Release No. 02/37, August 28, 2002. 51 DFID (2002) Managing Fiduciary Risk When Providing Direct Budget Support, London, March, and OECD/DAC Task Force on Donor Practices, Sub-Group on Financial Management and Accountability (2002) Development Performance Measures for Public Financial Management, Paris, March.


DFID and OECD/DAC guidelines, developmental benefits are defined (by implication) in terms of pro-poor expenditures.52

155. In total, there are nine ‘Good Practice Principles’ and 18 benchmarks for assessing adherence to them.53 Of the nine principles, six fall within the scope of the CFAA, two within the FIR and one within the CPAR. For each of the six CFAA Principles, the team made an assessment of how far actual practice in the sub-region meets the relevant benchmarks.

156. This analysis was conceived and done after the relevant fieldwork so, in some cases, data are missing and assessments are not fully supported by factual evidence. Nevertheless, it is believed that the overall assessment is reliable. The ratings are an average for the six countries, but information found elsewhere in this report (including country annexes), and in separate country-specific CFAAs such as the one currently being carried out for Dominica, shed further light on particular country situations.

157. On each Principle, a rating has been made on a scale from A (negligible risk) to E (high risk). These ratings represent the level of seriousness and concern with which any prudential shortcoming is viewed by the World Bank, and the corresponding level of benefit expected from reform. They do not necessarily reflect the desired selection or sequencing of reforms, which should take into account the costs of reform and interdependencies as well as the benefits of risk reduction. The costs, in particular the political costs, are for the national executing authorities to gauge.

C. RESULTS OF ASSESSMENT

158. The table below sets out the rating of the sub-region against each Principle. (The first statement represents the Principle, which is followed by applicable benchmarks). Ratings are justified in the notes following the table, together with recommendations for reducing risk and improving low ratings, for consideration by national authorities and other stakeholders.

Good Practice Principle

and Benchmarks for Assessment

Rating

1. A clear set of rules governs the budget process

1.1 A budget law specifying fiscal management responsibilities is in operation

1.2 Accounting policies and account code classifications are published and applied

C

52 This implication is drawn from two of the Good Practice Principles, viz. that the budget supports pro-poor strategies, and that the budget is a reliable guide to actual expenditure. 53 There are slight differences between the DFID Guidelines, OECD/DAC framework and the DFID Mozambique pilot. The OECD/DAC framework adds two more Principles to the DFID list, on budget transparency and revenue laws respectively. In this assessment we have included budget transparency, but not revenue laws as these were outside the scope of the CFAA. A benchmark was added to the expenditure control principle, so as to give explicit weight to the operation of internal controls.


2. The budget is comprehensive 2.1 All general government activities are included in the budget

2.2 Extra-budgetary expenditure is not material

C

3. The budget is aligned with national development strategy

3.1 Budget allocations are broadly consistent with any medium term expenditure plans for the sector or for the overall budget

To be rated in FIR

4. The budget is a reliable guide to actual expenditure 4.1 Budget outturn shows a high level of consistency with the budget

To be rated in FIR

5. Expenditure within the year is controlled 5.1 In-year reporting of actual expenditure

5.2 Internal controls operating to prevent fraud and error

5.3 Systems operating to control virement, commitments and arrears

D

6. Government carries out procurement in line with principles of value for money and transparency

6.1 Appropriate use of competitive tendering rules

6.2 Decision making is recorded and auditable

6.3 Effective action taken to identify and eliminate corruption

Evaluated in CPAR

7. Reporting of expenditure is timely and accurate 7.1 Reconciliation of fiscal and bank records is carried out on a routine basis

7.2 Audited annual accounts are submitted to parliament within the statutory period

D

8. There is effective independent scrutiny of government expenditure 8.1 Government accounts are independently audited

8.2 Government agencies are held to account for mismanagement and criticisms and recommendations by the auditors are followed up.

E

9 The budget process is transparent54 9.1 Information on the fiscal activities of government is available in the public domain

9.2 Information presented in a way that facilitates policy analysis and promotes accountability

B

Average of the six CFAA risk ratings above C/D

Principle 1: A clear set of rules governs the budget process

54 For this analysis, this principle is analyzed only in terms of the central government budget in each country.


159. The current legal framework for each country is specified in Table 1. These laws specify basic fiscal management responsibilities. A new chart of accounts was introduced into each country as part of the computerization of accounting under ECEMP II. However, in all countries except St. Lucia, the laws and regulations are out of date. In Antigua and Barbuda and , the Finance and Audit Act allows the budget to be presented to Parliament up to three months after the start of the fiscal year. In some countries, Financial Regulations and Stores Rules were not adopted by the relevant Acts and their legal status is in doubt. ‘New’ financial regulations have circulated for some years, but they do not allow for the program structure of budgets and accounts, nor the use of electronic media in financial administration. In Antigua and Barbuda, for instance, the Director of Audit says ‘the absence of relevant and modern regulations adversely affects the level of accounting throughout the public service’.55 For further details, see paragraphs 9-25, 28, 54, 77 and the relevant paragraphs of country CFAAs.

160. The risk is twofold: (1) the apparent lack of importance of the legal framework sends a message that irregularities are not considered serious, which raises the probability of loss; and (2) the possible lack of legal recognition of financial regulations raises the probability of delinquent officers escaping prosecution. The amount involved is the whole of general government expenditure, e.g. in Antigua and Barbuda a projected EC$ 532 million (central government alone) in 2002. This constitutes a high risk and the following recommendation is therefore a high priority for all governments except that of St. Lucia:

Complete the legal reforms initiated under ECEMP II. Combine revised financial and stores regulations with the manual for SIGFIS and other systems to form a comprehensive Accounting Manual

Principle 2: The budget is comprehensive

161. If a budget is not comprehensive, there is a risk that receipts and payments outside the budget are not transparently separately budgeted and accounted for. Extrabudgetary funds may be used for doubtful purposes. OECS government budgets, however, are relatively comprehensive. All six countries’ budgets include all central government expenditures, including transfers to local authorities and public enterprises, as in most countries. Local authorities and non-commercial statutory bodies prepare their own budgets. Their expenditures are generally not substantially different from the transfers made to them, so the omissions in central budget coverage are not critical. In Antigua and Barbuda, however, there are substantial arrears of payments due from the Government to the social security bodies,56 which are making substantial expenditures from member contributions. Additionally, some revenues are deposited in commercial banks and used for off-budget operations.57 The cost of tax exemptions is substantial, but not budgeted or

55 DOA Report for FY 1997 (excluding financial statements), para. 21. 56 Funds for social protection include the Antigua and Barbuda Social Security Scheme; the country’s Medical Benefits Scheme; and the educational support fund, which is vested in the Ministry of Education. The government believes that it could make counter-claims against these entities for expenditures made by the government on their behalf. 57 IMF Staff Report for 2001 Article IV Consultation, Antigua and Barbuda, para. 8


accounted for.58 Significant payment arrears exist in Dominica. There is no routine consolidation of general government in any country: the IMF prepares consolidated public sector accounts as part of its Article 4 missions.

162. The law requires all public revenues to be deposited in the Consolidated Fund and/or Development Fund, which are fully disclosed in the budget. Extra-budgetary expenditures financed by donors may be important, but no data are available. Omissions are more serious in the accounts than in the budgets (see Principle 4 below).

163. As in most governments using cash-based systems, budgets do not include ‘below the line’ receipts and payments, such as deposits and advances (which are categorized as Trust Funds and included in the public accounts, but not the budget). In St. Kitts and Nevis these deposits and advances are used as a permanent tool, i.e. advances are never transferred to expenditure, so the budget does not provide a good measure of actual expenditure. With the above exceptions, no significant extra-budgetary funds are known in any of the six countries. Generally then, while the budget provides a good basis for comprehensive and transparent fiscal management, substantial weaknesses do exist.

Principle 3: The budget is aligned with national development strategy (to be discussed in the FIR) Principle 4: The budget is a reliable guide to actual expenditure (to be discussed in the FIR) Principle 5: Expenditure within a year is controlled 164. All the OECS governments prepare monthly reports of expenditure. These are used to monitor adherence to budgets, and for cash management. The new computerized systems59 are enabling Accountants General to produce monthly reports earlier and more accurately.

165. All governments except St. Lucia use a cash-based accounting system which records receipts and payments in the double entry books and commitments in supplementary records (vote books). St. Lucia uses a ‘modified cash’ basis that records receipt of invoices as they are received, as well as commitments and payments. In all countries, manual vote books are not properly maintained. The computerized systems being introduced include registration of commitments and of receipt of goods/services, as well as payments, so that outstanding commitments and arrears (overdue creditors) can be better controlled. However, the systems are not fully rolled out to all spending agencies and users, and there are problems of access, report generation, server capacity and control of individual advances. Additionally, agencies can make commitments without entry into the system thus evading system controls. See paras. 40/1, 54, 57/8, 63/9 and 77. It is therefore recommended:

58 Import tax waivers were estimated at 12.5% of GDP of Antigua and Barbuda in 2000, ibid, table 3. 59 SmartStream in Dominica, Grenada, St Lucia and St Vincent-Grenadines, FourGen in St. Kitts and Nevis, and Oracle in Antigua and Barbuda.


Complete systems development and training; install funds control modules; prevent unregistered commitments; re-think systems design taking better account of user needs

166. Expenditure control is based on internal controls (clearly laid down in Financial Regulations and Stores Regulations) in the respective agencies. These are the responsibility of agency heads in their capacity as Accounting Officers answerable to Parliament. However, accounts staff have no structured training in the systems and procedures they operate, supervisory officers do not supervise, there are no dedicated internal audit units serving line agency heads, Ministries of Finance do not monitor compliance with internal controls or provide systems support, routine reconciliations are months in arrears, records management hardly exists and Directors of Audit report repeatedly that internal controls are widely ignored or evaded. In Antigua and Barbuda, the DOA has been particularly critical. There is a high risk of fraud and error (see paras. 55/6 and 70/77). High priority recommendations are as follows:

Clarify central responsibilities for internal controls and internal audit in line ministries, and build a central capability for guidance and monitoring. Provide special training

Establish a comprehensive sub-regional in-service training program, based on a training needs survey of skills and numbers in each government, and using distance learning facilities

Principle 6: Government carries out procurement in line with principles of value for money and transparency (Procurement is discussed in the CPAR) Principle 7: Reporting of expenditure is timely and accurate 167. Annual statements are the principal channel of accountability of government to the citizens. Accountability delayed is accountability eroded. In no OECS country does the Accountant General submit the annual financial statements to the Director of Audit within the statutory period (3 or 6 months from the end of the year), though St. Kitts and Nevis is close. Three countries (St. Lucia, Grenada, and Antigua and Barbuda) are far in arrears, dating back to before 2000 when the SIGFIS systems were introduced. These countries are making special efforts to get up to date.

168. Bank reconciliations are grossly in arrears in St. Lucia and St. Vincent and the Grenadines. There is a risk that reconciliations will reveal fraudulent payments. It is expected that the full roll-out of the computerized systems would enable all countries to complete their reconciliations and report their expenditure on time.

169. No OECS country meets international reporting standards (IFAC/PSC-ED9) on the content of financial statements. The most frequent omissions are public debt (or significant parts of it) and losses of cash and stores. Expenditure reports are there but it cannot be said that they are accurate. Directors of Audit return obviously incomplete or


inaccurate statements to the Accountant General for correction during the statutory period for completion, but their audit reports list many unauthorized expenditures.

170. The cash accounting basis does not bring non-cash assets and all liabilities into the accounts; it gives an incomplete picture. There is a risk that non-cash assets are reduced or liabilities increased without authorization or transparency. For further details, see paragraphs 57/8 and 77 and the relevant paragraphs of country CFAAs.

171. Recommendations of medium-level priority are as follows:

Move to a modified cash (plus commitment) basis of accounting, as in St. Lucia. Progressively, countries should move to a full accrual basis and compliance with international standards

Countries in arrears with their annual statements should aim to clear the arrears within a reasonable period or contract to have this done by an outside firm

Principle 8: There is effective independent scrutiny of government expenditure 172. In each country, the Director of Audit has a wide mandate and powers to audit all public accounts. Though DOAs are constitutionally independent of the executive, their appointment is on the recommendation of the Prime Minister and their reports pass through the Prime Minister’s Office on their way to Parliament (and in Grenada were blocked). State-owned enterprises are audited by private firms selected by the responsible ministers, without independent review of their suitability. Thus DOA independence is seriously limited.

173. The effectiveness of audit scrutiny is also limited as Directors of Audit do not have independent use of their appropriated funds and personnel: a ministry of finance and public service commission treat the audit office as just another department. They are not regarded as ‘supreme audit institutions’. Nor are they backed up by strong parliaments. Public Accounts Committees do not exist in Grenada and St. Lucia. They do exist in Antigua and Barbuda, Dominica, St. Kitts and Nevis, and St. Vincent and the Grenadines, but are not holding productive meetings. Thus there are fundamental weaknesses in the institutional checks on executive power. For further details, see paras. 88/99, 109/113, 116 and 118/137 and the relevant paragraphs of country CFAAs.

174. Without effective independent scrutiny of government expenditure, treasuries are vulnerable to unscrupulous acts committed by government officials and their supporters. The highest priority should be given to re-establishing effective and independent audit and parliamentary review as follows:

Public audit, like the Supreme Court, should be organized as a sub-regional function, with an OECS Auditor General to exercise independent and expert review of work done by national audit staffs, and to issue annual reports to national parliaments


The Director of Audit is a servant of Parliament and Parliament should be consulted in the selection of a new DOA. Appointments should be for a fixed term of five to ten years

Audit reports should go directly to the Speaker for tabling as soon as the House is sitting. The role of the executive branch, as auditee, should be to provide feedback within a reasonable (e.g. 2 week) time frame of its receipt of the draft report

DOAs should have greater financial and personnel management autonomy and be subject to regular external peer review

Audit staff should be included in the scope of a sub-regional training program, as for accounts staff

Parliamentarians and other interested parties should be exposed to concepts of transparency and accountability and the role of the PAC. Innovative approaches should be considered to ensure that PACs have sufficient membership and resources to function effectively.

There should be greater use of the DOA, MOF and other government resources, use of experts from outside the government as witnesses to give evidence, and use of the media to increase public interest and understanding; PACs should request DOAs to provide them with up-to-date compliance (Part 1) reports

DOAs should maintain a register of private audit firms in good professional standing, and ensure that SOE audits are rotated amongst them; Ministers of Finance should refer audited accounts of SOEs to the PAC for examination and report

The issue of fiscal transparency could be explored further in a Fiscal Report on Observance of Standards and Codes (Fiscal ROSC), which the IMF has prepared in over 50 countries.

Principle 9: The budget process is transparent60 175. Information on public sector operations is available to the public at various stages of the budget cycle. There is increasing interaction with NGOs during budget preparation, especially in St. Kitts and Nevis, and St. Vincent and the Grenadines, and the annual budget speech in Parliament is broadcast in some countries. The media and members of the public have access to the published budget, accounts and audit reports. Though the latter have in the past been long delayed, arrears are being reduced. There is no public access to in-year expenditure reports.

60 While a rating of “B” has been given in the table, the fiscal issues review will provide further information and analysis on this topic.


176. The new accounting classification and program structure, introduced in all countries as part of the computerization exercise, facilitate policy analysis and accountability.

XI. CONCLUSION AND NEXT STEPS

177. This report was prepared by consolidating individual country findings, which were obtained by review of source documents, interviews with country officials, and discussions with others involved in financial management processes or the reforms of them. The CFAA provides a road map as to where countries can build on strengths, what reforms are taking place, and where weaknesses seem to exist.

178. Problem areas are bulleted at the end of each chapter. The risks involved are explicitly identified and rated in chapter X above, with a series of recommendations made on how they can be reduced. There are major differences in risks with regard to particular fiduciary principles. Budgets are by and large transparent and comprehensive, but financial reporting and audit need substantial upgrading in most countries.

179. Some of the shortcomings identified are significant enough to warrant concern as to the sufficiency of the overall functioning and controls within some of the countries studied. They should be addressed promptly, either via existing government capacity building programs, new donor-funded efforts, or other measures as recommended throughout this CFAA. The pattern of implementation of reform adopted by ECEMP in association with the ECCB (see Box 2) has been relatively successful, and its continuation and enhancement is recommended. But ECEMP’s reforms should be enhanced by, and coordinated with, other government-led and donor-supported programs.

180. The next step is for national and sub-regional authorities to review these findings and for all stakeholders, including the donors, to reach a consensus on a program of financial management reform – what precisely is to be done, by whom, how, when, and how it will be funded. This stage of the reform process should be led by the national authorities and should involve a sharing of experiences across countries.


ANNEX 1

LIST OF INTERVIEWEES

NAME POSITION ENTITY

BARBADOS

Flusker, Alan

Humes, Dorla

Director, Economics and Programming Department Deputy Director, Economics and Programming Department

CDB

Baker, Bill

Thompson, Nicole

Senior Governance Advisor

Asst. Program Manager

DFID

Bradshaw, Nigel

Stevenson, Jim

dos Santos, Paolo

Murad, Howard

Program Coordinator

PEM Adviser

Tax Adviser

Statistics Adviser

CARTAC

Anderson, Bill Country Manager CIDA

Simpson, Louisette

Voyer, Dominick

ECEMP III Field Director

Vice President, Business Development

CRC SOGEMA

ANTIGUA AND BARBUDA

Harris, Whitfield Director of Budgets* * later appointed Financial Secretary (Ag.)

Ministry of Finance

Spencer, Hon. Baldwin Chairman Public Accounts Committee

Parker, Calvin Deputy Financial Secretary Ministry of Finance

Peters, Eustace Accountant General Ministry of Finance

Browne, Veronica Deputy Director Audit Department


Harris, Bridget Speaker House of Representatives

DOMINICA

Bannis, Joseph Permanent Secretary of Finance Ministry of Finance

Sylvester, Ambrose Financial Secretary Ministry of Finance

Pascal, Francisca Accountant General Treasury Department

Elwin, Ralph Director of Audit Audit Department

Knight, (Mrs) Alix Boyd Speaker House of Assembly

James, Hon. Edison Chairman Public Accounts Committee

Bruno, Nicholas Budget Controller Ministry of Finance

Astaphan, Michael President Dominica Assoc. of Industry & Commerce (DAIC)

Fadelle, Michael Acting Manager National Development Corporation

Bellot, Edith Resident Tutor UWI Department of Continuing Studies

GRENADA

Antoine, Timothy Permanent Secretary of Finance Ministry of Finance

Antoine, Patricia Accountant General Ministry of Finance

Haynes, Marvin Sr. Economist Dept. of Economic Affairs, Ministry or Finance

Joseph, Anslem Director of Audit/Sr. Economist Ministry of Finance

Dathorne, Collin Manager Coopers & Lybrand

Andrews, J. Lennox Deputy Principal Secretary Ministry of Finance

Roberts, Garvin Deputy Accountant General Treasury

Baptiste, Hon. Michael Chairman Public Accounts Committee


Alexis, Dr Francis Constitutional lawyer

Romain, Jerome Journalist Voice of Grenada

Benjamin, Dr Dave Professor of Political Science St Georges University

Strachan, Sir Curtis Speaker House of Representatives

Moore, Joanna Project Accountant ERDM Project

ST. KITTS AND NEVIS

Lawrence, Wendell Permanent Secretary of Finance Ministry of Finance

Edwards, Calvin Budget Director Ministry of Finance

Von Camper, Idetha Accountant General Ministry of Finance

Edwards, Albert

Galloway, Wesley

Director of Audit

Audit Manager

Audit Department

Phipps, Wendy Executive Director Chamber of Industry and Commerce

Gardner, Omax Partner Pannell Kerr Forster/Arthur Andersen

Thompson, Donald Manager, Internal Audit Unit National Bank Group of Companies

Wattley, Douglas Permanent Secretary of Communications

Ministry of Communications

James, Kenneth

Harris, Janet

Bain, Laurel

Shortte, Ingrid

Fontanelle, Francis

Nichols, Garth

Elliott, Lydia

Deputy Acting Director

Adviser to the Governor

Adviser

Director of Research

Legal Adviser

Eastern Caribbean Central Bank


Millington, Joan Deputy Director, Human Resources

Gumbs, Hon. Walford V. Speaker National Assembly

Nisbett, Hon Patrice Chairman Public Accounts Committee

ST. LUCIA

La Corbiniere, Bernard Permanent Secretary of Finance & Economic

Ministry of Finance

King-Joseph, Allison Director of Planning Ministry of Planning , Development, Environment and Housing

Anthony, Isaac Accountant General Ministry of Finance & Economic Affairs

Hyacinth, Arlette Director of Audit Audit Department

Leo, Calix Director of Research Ministry of Finance

Dalser, Phillip Deputy Director of Research Ministry of Finance

Atkinson, Anthony Manager Price Waterhouse Coopers

Poyotte, Victor CIDA

Mathurin, Cheryl Project Accountant –Disaster Management Project

Ministry of Planning

Monrose, Marie Deputy Accountant General Ministry of Treasury

Daria, Poyotte Project Accountant Poverty Reduction Fund Project

Trevor, Cyril Accountant MOF

Baptiste, Catherine Accountant Ministry of Planning

Solomon, Sharmain Department of Audit Ministry of Planning, Development, Environment and Housing

James, Averil Department of Audit Ministry of Planning, Development, Environment and Housing


Deterville, Lenus Department of Audit Ministry of Planning, Development, Environment and Housing

Mitchell, Doreen Department of Audit Ministry of Planning, Development, Environment and Housing

Wilson, Hon. Maurice

Alexander, Senator Rhikkie

Chairman

Member

Public Accounts Committee

Laurent, Lawrence Ombudsman Office of the Ombudsman

Louis, Mark Director Public Sector Reform Unit

Abool, Bijay Consultant Ministry of Finance and Economic Affairs

ST. VINCENT AND THE GRENADINES

Roman and Marcel Project Officers Department of Planning

Jackson, Edmund Budget Director Ministry of Finance, Planning and Development

Saunders, Cecily Director of Audit Audit Department

Wickman, Yvette Acting Accountant General Department of Treasury

Edwards, Maurice Director General Ministry of Finance and Planning and Development

Solomon, Isaac Budget Director Ministry of Finance and Planning and Development

Browne, Laura Anthony Director of Planning Ministry of Finance and Planning and Development

Fitzpatrick, Ingrid Accountant General Treasury

Eustace, Hon. Arnhim Chairman Public Accounts Committee

Alexander, Hon. Hendricks

Speaker House of Assembly


Herbert, Nicole

Clerk to the House

Bonadie, Yvonne

Williams, Selma

Assistant Secretary (Finance Officer)

Executive Officer

Ministry of Health

WASHINGTON, DC

Smithers, Nicola Adviser Public Expenditure and Financial Accountability Unit


ANNEX 2

WORLD BANK PROJECTS IN THE OECS COUNTRIES Status at 30 June 2002

Country/Project Source of Finance

Loan Amount

US$mn

Amount Disbursed US$mn

Date Effective

Closing Date

Audit Report

ANTIGUA AND BARBUDA

OECS Waste Mgt Trust Fund

1.3 1.263 11-Nov-1996

28-Feb-2002

Last report unqualified

DOMINICA

OECS Waste Mgt IDA

IBRD

TF

0.6

0.6

0.8

0.423

NIL

0.675

11-Nov-1996

28-Feb-2002


Basic Education IDA

IBRD

3.1

3.1

6.0 28-Oct-1996

31-Dec-2001


OECS Telecommunications

IDA

IBRD

0.6

0.6

Nil

0.3

8-Oct-1998

30-Sep-2002


Disaster Management

IDA

IBRD

2.5

2.5

3.54 9-Jun-1999

31-Dec-2002


Emergency Recovery

IDA

IBRD

2.24

0.96

Nil Not yet

GRENADA


Basic Education IDA

IBRD

3.8

3.8

3.8

3.7

13-Jun-1996

31-Dec-2001


OECS Waste Management

TF 1.3 1.3 11-Nov-1996

28-Feb-2002


OECS Telecom Reform

IDA

IBRD

0.6

0.6

0.3

nil

8-Oct-1998

30-Sep-2002


Disaster Management

IDA

IBRD

5.01

5.06

2.98

5.06

7-Feb-2001

15-May-2004


Emergency Recovery

IDA

IBRD

2.66

1.1

Not yet

HIV/AIDS Initiative IDA

IBRD

Not yet signed

GEF Biodiversity MSP

GEF grant

OECS Education APL

Initial stage

ST.KITTS-NEVIS


TF

IBRD

1.2

2.13

1.2

1.584

11-Nov-1996

28-Feb-2002


OECS Telecom Reform

IBRD 1.2 0.3 8-Oct-1998

30-Sep-2002


Disaster Management

IBRD 8.5 4.6 22-Apr-1999

31-Jul-2003


Emergency Recovery

IBRD 4.4 Not yet

OECS Education APL

IBRD Not yet signed


APL signed

ST. LUCIA


TF

IDA

IBRD

1.1

2.3

2.28

0.933

0.75

nil

11-Nov-1996

31-Oct-2002


Conservation/

Ecotourism

TF 0.114 0.061 16-Aug-2001

30-Jun-2002

No audit yet

OECS Telecom Reform

IDA

IBRD

0.6

0.6

0.3

0.3

8-Oct-1998

30-Sep-2002


Disaster Management

IDA

IBRD

3.0

3.0

1.8

nil

13-Aug-1999

30-Jun-2003


Poverty Reduction Fund

IDA

IBRD

1.5

1.5

0.8

nil

23-Sep-1999

31-Dec-2002


OECS Education APL

IDA

IBRD

Not yet signed

Emergency Recovery Program

IDA

IBRD

4.41

1.9

Not yet effective

Water Sector Reform

IDA

IBRD

1.3

1.3

Nil

nil

Recently effective

ST. VINCENT AND THE GRENADINES


TF

IDA

IBRD

1.1

1.8

1.81

1.077

1.763

0.15

11-Feb-1997

28-Feb-2002

Last reports unqualified


OECS Telecom Reform

IDA

IBRD

0.6

0.6

0.3

nil

8-Oct-1998

30-Sep-2002


Emergency Recovery

IDA

IBRD

2.2

1.1

Not yet effective

Disaster Management

IDA

IBRD

2.9

3.0

Not yet effective


ANNEX 3

INDIVIDUAL COUNTRY REPORT

antigua & barbuda, dominica, grenada, st....

Documents