 is the study of the role of the government in

the economy.
 It assesses the government revenue and
government expenditure of the public
authorities and the adjustment of one or the
other to achieve desirable effects and avoid
undesirable ones.

 The purview of public finance is considered to

be threefold: governmental effects on (1)
efficient allocation of resources, (2)
distribution of income, and (3)
macroeconomic stabilization.
 Financial management: defined as the
planning, organizing, directing, controlling
and prudent management of organization’s
financial resources, including its procurement
and utilization of funds to maximize returns
for its owners (or stakeholders).

 Public financial management, on

the other hand, defined as the system for
generating and controlling public financial
resources for effective and efficient public
service delivery.
 PFM is the process wherein the Govt. unit or
agency

 Employ the means to Obtain and allocate the

resources/money based on implied and articulated
priorities

 Utilize methods and controls to effectively achieve

publically determined ends
 Public finance management
includes: resource mobilization,
prioritization of programmes, the
budgetary process, efficient
management of resources and
exercising controls.

 Rising aspirations of people are

placing more demands on financial
resources.
 It determines the scope and content of
fiscal policies

 It establishes general guidelines to

ensure funds are spent honestly

 It provides organizational structure to

effectively carry out fiscal duties
 Both the sectors finance operations
 Effectively manage the flow of funds
 Seek debt funds
 Large purchases require competitive
bidding
 Have systems of employee pension
plans
 Have unions
 Differences

 End objectives
 Raising of resources
 No payment for services under the govt.
 Quasi public agencies render services on
break even
 NFP agencies with heavy deficits may
become bankrupt
 Specify goals: what is wanted?
(Priorities, policies/Need of the
people/companies/ Industries)

 Quantify benefits (measure the wants)

 Maximize benefits: The primary

objective is to maximize benefits for
any given set of resources
 Planning- defines goals and priorities

 Programming- selects activities to

achieve goals

 Budgeting- develops the work plan and

allocates resources to achieve goals

 Financing- seeks financial resources to

execute the plan
Specifically, the Main Components /
elements of PFM are:

- Financial Planning: revenue and

expenditure analysis is essential for
planning

- Control: measurement & evaluation of

program activities

- Cash Management: minimize opportunity

costs
 Forecasting-
approximation(Estimate) are used
for planning and measuring
variances
 Investments- in securities
 Financial Analysis
 Cost Analysis –includes
expenditures, human resources,
and time
 Governing body:

Determines fiscal policy

Approves the budget
Adopts revenue and
expenditure authorization
measures
Holds the CEO accountable
 Financial Planning
 Budget preparations and
expenditure control
 Develops accounting systems and
procedures
 Reporting for Financial
management-control performance
 Maintenance of asset control
system
 Investment Management
 Financial Liaison
 Staff Training
 Fiscal health analysis
 Suggest ways of expanding
resources
 Negotiate in trade union
contracts
 Financial Condition: The ability of an
organization to meet its financial obligations
(Or ability to finance services on a continuing
basis).
 The organization’s ability to pay its obligations
determines a good/bad FC
 The ability to pay is commonly called solvency
in finance

 The four levels of solvency are: cash solvency,

budgetary solvency, long term solvency, &
service solvency
 Traditional financial statements are
insufficient as a basis for evaluating
the fiscal health of communities.

 Information relating to data such as

reliance on outside revenue
sources, uncontrollable revenues,
per capita income trend, physical-
plant replacement etc is not found
in financial statements
Cash flow problems: generally due
to one or more of these conditions
- Billings are not frequent enough or
occur at the wrong time of the year
in relation to expenditure demands.
- Cash collections are not occurring
fast enough
- Unpaid (receivable) amounts are
increasing
 Causes of budgetary problems:
- problems with budget estimates
-Change in conditions affecting actual revenue
or expenditure levels.
- weak control over revenue, expenditure, or
information system
- increase in expenditure at a faster rate than
revenue
-use of non recurring expense for that of
recurring nature
- decisions taken with lack of cost
effectiveness
- external factors (state or federal mandates,
natural calamities, reduction in
population/industry, weak economy…)
 Causes of long term solvency problems
the same causes of budgetary
problems, Plus,
- deteriorating infrastructure and fixed
assets
-inadequate funding provisions for LTL
-failure to properly account for LTL
- lack of proper planning/budgeting for
multiyear obligations (Compulsion /
responsibility)
 Causes of service level solvency
problems:
chronic budgetary problems result in
cuts to essential services.

In addition,
- stagnant or shrinking tax base
- lack of revenue growth
- deteriorating infrastructure
-budget inflexibility
- inadequate cost accounting system
 How to measure financial Condition?
 A good financial condition measure
should satisfy at least three criteria
A measure must assess a specified
element of financial condition
( measurement validity)
the elements used should be consistent
& objective ( measurement reliability)
the measure and supporting data should
be affordable to obtain ( measurement
affordability)
 Indicators are quantified changes about
the environmental, organizational, and
financial factors.
 Select indicators that are suitable for
the gov’t and interpret their
significance.
 Financial indicators can provide
snapshots of per capita ratios, revenue
collection efforts, expenditure levels,
results of operations, fund balances, and
cash level
 E.g. of indicators:
Expenditure per capita: Exp./population

Liquidity :Cash/current liability

Employees per capita: No. of

employees/population

Depreciation: Depreciation exp./depreciable assets

Debt service: Debt service/Net op. revenue

 Stronger cash: increase tax/ user charge rates,
changing billing cycles (timing and/or frequency),
improving collection efforts, shifting payment
schedules, improving interest earnings and
borrowing cash

 Better Budgeting: improving budget accuracy,

improving structural balance, monitoring results
throughout the year, controlling costs, improving
internal controls and using cost-benefit analysis
etc
Definition of 'Break-Even Analysis’
An analysis to determine the point at which
revenue received equals the costs associated
with receiving the revenue.

Break-even analysis calculates what is known

as a margin of safety, the amount that
revenues exceed the break-even point.

This is the amount that revenues can fall

while still staying above the break-even
point.
• Variable and fixed costs are two key elements in
determining BEP of a project or program.
• BEP is determined by using; Revenue- VC- FC = 0
Or,
BEP = Fixed cost ÷Contribution margin/unit Contribution
margin= revenue – VC per unit

Break -e\ren poit1t (in units) = Total Fixed Cost

Contribution per unit

Break-even point (in Birr) = Total Fixed Cost

x
Contribution
Sales
Example
Total fixed cost Birr 12,000

Birr 12 per unit

Selling price
Variable Birr 9 per unit
Thus:

Contribt1tion SP-VC
12-9 = 3 Birr/Unit

Fixed cost
B.E. points (in units) = 4 000 unit
Contribution per unit

Total Fixed Cost

Break-even point (in Birr) x Sales
contribution

12,000
x 12 = Birr 48000
3
 Break-even point may be verified as follows

Fixed cost + Variable cost

Total cost =
Birr 12,000 + (4000 x 9)

Birr 48,000

The sales value and total cost at break-even. point are exactly equal
 Defining revenue

Revenue is the amount of money that is

brought into a company by its business
activities.
In the case of government, revenue is the
money received from taxation, fees,
fines, inter-governmental grants or
transfers, securities sales, mineral rights,
and resource rights, plus any sales that
are made.
Functions of govt revenue include:
1. Efficient(Right time…) generation of resources
2. Fairness in the distribution of tax burdens(Logic-
Luxurious Items))
Major Taxes: Income Taxes, taxes on goods and
services, property taxes
Non tax revenues: user fee, user charge, fiscal
monopoly(VAT Import Export duties etc) and utility
revenue
1. Fair(Business not too high or too low) and
equitable distribution(FDI) of tax burdens :
Apply ability to pay.

2. Revenue rate on the base must be responsive

to economic growth.(Demand=Supply)

3.Ensure revenue productivity

4. Easy to comply – Revenue System
5. Revenue collection & cash mgt:
Accelerate collections and make sure that
adequate cash is available on time.
6. Maintaining controls over collections:
Keep up-to-date taxpayer records, make
collection and accounting separate
7. Enforcement of collection: Controlling
delinquency(Uncaring), Discovering non
payers, Auditing Taxpayers
Guidelines
 Fees(Zoo) and charges should cover the cost of
service
 Design policy to limit the use of one time revenue
source.
 Identify unpredictable(Gift/Wealth tax) revenue
sources
 Adopt a policy on revenue diversification(WiFi/Data
usage, land line)
 Institutionalize multiyear projections (Telecom,
electricity)
 Monitor the periodic analysis of revenue sources
 Evaluate the rates and base
 Periodically examine exemptions to assess the loss
 Obtain consensus(agreement) on the revenue
forecast employed to estimate budgetary resources
 Prepare a revenue manual.
Steps
 Establish the base year, identify the collection
 Projection of revenue growth trend and
identification of revenue sources characteristics
 Outline the operating policy that makes the base
for revenue forecast(Eg 2000)
 Validate the assumptions on which revenue
forecast is made (Same trend)
 Select a forecasting method
 Up date the forecasting method

Make collections consistent with the projected

revenue
Methods:
1.Expert Opinion Method: Experts in different
fields such as Economics, Accounting, Law etc
will be requested to estimate the revenue
2. Naïve Forecasting: The revenue of the most
recent prior year is expected to be realized next
period
3. Best-Guess: A few experts forecast the revenue
based on their education and experience. They
may use different methods
4. Consensus Forecasting : A group of individuals
and Research firms collectively agrees on
revenue yields
 This consensus forecast includes data from
numerous research firms as Mercom wanted
to present a combined view, which better
predicts the movement of the markets with
multiple insights and market knowledge.
With the world energy markets currently at a
turning point, a lot may change in the next
three months - Mercom predicts that it will
be in a positive direction for solar.
5. Delphi Forecasting: The Delphi
Method is an example of a qualitative
technique where a group of experts
gets together and reaches a consensus
on what will happen in the future. A
questionnaire is sometimes used to
facilitate the process. Two
disadvantages of the Delphi Method
are low reliability with the consensus
and inability to reach a clear
consensus.

6. Time Series Model: It depends

on the recent past for projecting
revenue. It is based on historical
data with equally spaced time
intervals. By graphing historical
data the pattern of a revenue
source will be identified
6.Trend Analysis (Based on Historical Date): The
analyst calculates the rate of change for one
time period to the next or an average rate of
change. This rate will then be applied to the
most recent revenue yield to compute the
revenue for the next year
Change (Δ) = P2-P1
P1 where P1 the base
period, and P2 the following period
Average rate of change =Σ(Pn-P1/P1)
n , where
P1 the base period, Pn indicates each following
period, and ‘n’ total periods in the data set
7.Moving Average: This allows the number
of past periods to be added. For a 3 yr
Moving Average, the collections of three
years (20, 25, 30000) will be added and
the total will be divided by 3. When the
next yr’s figure is available(45000), add
the recent 3 amounts and divide it by 3
 Planning: the process of deciding in advance what
is to be done and how
 It involves determining overall missions,
identifying key result areas, and setting specific
objectives as well as developing policies, programs
and procedures for achieving them. (Kast and
Rosezweig).
 a pre requisite for effective financial management.
 Strategic Planning: the process of identifying
public goals and objectives, and deciding on the
resources to be used to attain them.
 The emphasis in strategic planning is
 From a broad mission statement,
 to statements of more specific goals and
objectives consistent with the organization’s
mission
 to more explicit policies and implementing
decisions
 Strategicplanning will be realized only
through management planning.
 Mgt Planning involves: design projects and
programs to attain goals
 Financial planning process
 Involves three major cycles:
 Planning
cycles, cash management cycle, and
management control cycle

 Planning cycle: involves

 analyzing costs by cost benefit and cost effectiveness
analysis(fixed/variable/controllable/uncontrollable/in
vestment/ etc)
 planning for capital facilities,
 preparing budget
 debt financing and administration
 Cash mgt. cycle involves:
 analyzing revenue and expenditure
 classify revenue sources and expenditure based on
public service assessment ( historical data may be
used)
 forecasting cash flow ( cash budget
preparation/time of availability of cash)
 cash mobilization (accelerating collection,
control of disbursement, avail credit
facilities)
 planning for investments (high return, low
risk, easy convertibility, security selection)
 conducting financial assets analysis ( how new
programs are funded, meeting operating
expenses, adequacy of working capital)
 Mgt control cycle involves:
 use of accounting ( financial accounting, fund
accounting, and cost accounting) for greater
economy, efficiency, and effectiveness
 Expenditure Forecasting; no single accurate
approach for expenditure forecasting
 The normal procedure is projecting the cost of
current service based on population change,
inflation, staff, capital cost, and government
policy.
 the base for future service and provides continuity
 This requires analysis of the major components:
 personnel services ( the highest cost on gov’t.
sector); materials, supplies, and equipment (current
level, price change, pattern of use);
 capital improvements (financed by outright purchase,
by borrowing, or a combination of the two)

 Forecasting expenditure using standard costs:

commonly used approach. Procedures:
 Identify the cost item (E.g. personnel)
 Develop standard cost ( the most desired cost to
complete an activity)
 Develop a budget based on the std cost
 Make changes for service reduction, expansion etc
 Budgeting
A road map showing where the organization is going
 The word is derived from the French word ‘bougette’
meaning leather bag
 The most common policy document at all levels of
govt. It:
 records the goals and objectives,
 defines govt’s total service efforts,
 measures performance, impact, and effectiveness
 Budget is a comprehensive plan expressed in
financial terms. It includes estimates of the :
 services, activities and projects to be carried out
 resulting expenditure requirement
 resources usable for the support

 A budget provides the legal base for spending and

accountability. Revenue and expenditure
information is structured to facilitate monitoring,
evaluation, and control of financial resources
 Objectives of budgeting:

 Allocating scarce resources

 Raising revenue
 Stabilizing the economy
 Holding operating agencies accountable
 Controlling expenditures
 Facilitating the transfer of
intergovernmental funds
 Achieving planned goals
 Managing programs
 Budget should be comprehensive

 It include all estimates of revenues and

expenditures.
 Exp. financed by external loans & grants
 Such expenditures should be budgeted in the same

way as other gov’t expenditures . It is advisable to

have one authority (MOF) to deal with loans and
grants.
 Extra-budgetary funds: These are special funds
organized under special arrangement. E.g.
Emergency Fund. These may not be shown in the
budget so as to avoid budget cuts and budget
execution problems.
 Accrual Vs Cash budgeting
Accrual:more comprehensive, easier to
understand, favored by credit rating
agencies, harder to manipulate, comparable
and consistent, includes liability disclosure
(IMF appreciates)
 Gross Terms: Govt activities (including
its business activities), expenditures and
revenues should be shown in the budget
in gross terms
 Annual nature of the budget
A longer period may lead to uncertainty
 Budgeting treatment of Entitlement programs
 Entitlement programs or demand-led programs
depend on various economic and demographic
parameters. Thus, social security payments and
debt servicing are authorized under special
legislation
 Budget Cycle
 Budget call; executive preparation; Budget
adoption ( legislative review, modification and
enactment); budget execution; internal and
external audit.
 Operating Vs. capital budgeting
 Operating Budget is an estimate of expenditures
(salaries, wages, contractual services, materials,
and supplies and other consumables) that must
be balanced against the recommended revenue
program.
 a basis for evaluating competing requirements for
limited financial resources
 facilitates the scheduling of work

 Capital budget : A budget to meet long term

needs for public improvements and the means of
financing these commitments. (often supported
by capital improvement program)
NPV IRR

PREMCHAND 12ME1E0020
“The term capital
budgeting
generally refers to
acquiring inputs
with long term
returns”
 The finance function has to deal with one
of the most important decisions regarding:
 The amount to be invested in fixed
assets.
 The decision is technically in the
form of “Capital Budgeting”
Accounting rate
Of returns
 CB Analysis aims at identifying the projects with
maximum social benefit. The process consists of
the following steps:
 Identification of relevant investment alternatives:
clearly understand various investment choices
 Estimating the cash flow: Consider cash inflows and
outflows
 Selection of criteria to apply to cash flow
 Arrange data and select projects with maximum social
benefits
 CB Criteria
 Simple rate of return ( Average rate of
return)
 ARR= Average net income ÷ Investment

 ARR= (Av Cash flow –Depr) ÷Investment

 If ARR is greater than required rate of

return, the project is accepted

 Pay Back period : Estimated time
required to recover the investment. The
project with short payback period is
selected
 Net Present Value: NPV=(CF x Pr. Value Factor) – I
 Project with positive NPV is accepted. If many
alternatives have positive NPV, the one which the
highest NPV is selected
 Internal rate of return (discounted rate of return)
 CM ensures adequate cash availability
 CM secures yield on the short term investment of cash
 CM focuses on the conversion of A/c R to cash receipts,
the conversion of A/c P to cash payments, the rate at
which cash disbursements clear bank account and what
is done with the cash balances
 CM avoids:
 Liquidity crisis: when an organization has insufficient cash to
meet its obligations
 Inability to accelerate receivable collections and to deposit
 The failure to invest funds:
 The cash to be held must be
determined on the basis of two
costs:
 The opportunity cost of not investing
 The cost of collecting and reviewing
information required to invest,
disinvest, borrow or repay loans.
 The basic CM problem is to balance
these two types of conflicting costs
 The attitude of public managers
holding sufficient cash is changing
due to increasing costs of
borrowing and the expansion of
activities.
 Today they minimize cash
holdings, accelerate cash inflows
& control outflow
 Direct: Divides cash flow into: cash flow from
 Operating activities: includes all revenues, fees, and
contributions, and all cash paid for resources
consumed to provide goods and services.,
 investing activities: involves acquisitions of long-term
assets during a fiscal period.
 Financing activities: reports cash flows resulting from
debt. (All cash transactions affecting the balance sheet
and income statement are placed in the appropriate
categories).
 Indirect method: cash flow is determined from changes
in current assets, current liabilities and other
accounts.
 Cash Budget requires identification of specific
receipts and disbursements as well as relevant
dates.
 Prepared on a weekly, monthly, quarterly, or semi
annual basis
 usually two supporting schedules, namely a schedule
of receipts, and a schedule of disbursement are
prepared
 prior to the cash budget
7. Cash Mobilization
a) Accelerating collections:
 Mail, Processing, and clearing floats
 Cost of float=Amt X Op.costXdays/360
Techniques for accelerating collections: Concentration
Banking, Lockbox services, Preauthorized check
b) Controlling disbursements
 Timing of payments.
 Better control on payments can be made if bank accounts of
various local gov’ts are brought to one central account
 Consider the disbursement float
c) Controlling bank balances
 Avoid accumulating idle cash in banks
 Banks should be ordered to send reports on collections and
payments daily or at regular intervals
 Decide on the extra cash
 Public debt is the result of gov’t borrowing
from private individuals and financial
institutions with the promise of paying back
the money borrowed plus interest
 Purposes of Public Debt
 Managing the national economy
 Making expenditures that exceed revenues over a long
period
 Making exp. that exceed revenues over a short term
period
 Financing specific capital expenditures
 PD process involves all the steps from borrowing money
to payments of debt.
 The process involves the following steps:
Step 1. The decision to borrow money
 identify the purpose
 consider the cost of borrowing

Step 2. Provide legal advice to the officials responsible

for issuing debt
 It minimizes possible errors
Step 3. Decide the amount to borrow
 Borrow the lowest reasonable amount
 The amount should be the required amount
Step 4: Design a debt issue
 Design features which are attractive for both the
borrower and the lenders
 Design features for minimizing costs
Step 5 & 6 : Marketing Efforts and the development
of debt contracts
 Ads for issuing bonds
 Debt contracts should be accompanied by a Prospectus
Step 7: Exchange of ownership of debt contracts for
money
 A debt issuer signs a contract with the underwriter,
transferring ownership
Step 8: Administration of debt
 The administration includes handling the debt
proceeds, maintaining records, fulfilling debt contract
requirements, handling call options
 Short Term
 Bills, Notes, Bank Loans, A/c Payable,
Unpaid bills and claims, Cash discounts
 Intermediate Debt
 The period is usually 1-5 years
 Long Term Debt: is appropriate where (for) the
project will not require replacement for many
years (E.g.city hall, heath facility)
 The project can be financed by service charges to pay
off the debt commitments
 Needs are urgent for public health or other emergency
reasons
 Intergovernmental revenues may
be available on a continuous basis
to guarantee the security of the
debt
 (For)Financing projects in areas of
rapid expansion where the demand
on resources are comparatively
large and unforeseen
 It is the most common long term debt
 It is a Prom. Note ensuring that the
lender will receive periodic payments
of interest and at maturity repayment
of the original sum invested.
 Face value is the amount that the
issuer pays on maturity
 Coupon rate is the interest rate
 General Obligation Bonds: are backed by “full
faith, credit and taxing power” of the issuing
authority. Govt can levy taxes to meet debt
service requirements
 Special Tax or Spe. Assessment Bonds: are
payable only from the proceeds from a special
tax levied from the beneficiaries (Highway
bonds)
 Revenue Bonds : are issued to finance a
revenue-producing enterprise such as the
construction of a toll road or bridge
 Stepped Coupon Bonds: use a serial maturity
schedule, with coupon rates that start at lower
levels and progressively increase to higher levels
 Zero-Coupon Bonds: are not eligible for any interest,
but sold at a deep discount.
 Capital Appreciation Bonds: are compound interest
bonds
 Tender Option Bonds: allows the investor to submit for
redemption before maturity.
 Flexible Interest Bonds: The yield changes over the life
based on some interest index issued by reliable
authorities
 Detachable Warrant Bonds: the holder can buy more
securities at the same price and rate of return
 Inflation Protection Bonds: The Principal will be
adjusted for inflation without changing the interest.
 External debt is defined as “the
amount of disbursed and
outstanding contractual liabilities
of residents of a country to
nonresidents to repay the
principal with or without
interest, or to pay interest with
or without principal.”
Analyzing PD
PD Outstanding= total debt level a govt carries at
a specific time.
Debt service = annual payment of principal and
interest.
Debt capacity =the level of debt a govt can
afford
Possible measures of debt capacity
1. Debt outstanding a s a percentage of taxable
property values = Debt outstanding / taxable
property values. (Or) Debt outstanding /
personal income
2. Debt outstanding per capita = Debt outstanding /
Population
3. Debt service as a percentage of revenue = Debt
service / revenue
 and (2) are called debt outstanding
ratios and (3) is called debt service
ratio
 Additional debt capacity is available if
the current debt level of government
does not exceed its benchmark debt
ratio.
 IC consists of the policies and procedures that are
used to protect an organization’s asset from
improper use, maintain accurate information, and
ensure that laws and regulations are adhered to.
The broad objectives of IC are:
 Assurance for safeguarding the assets
 Accounting information is accurate and staff members
comply with rules, regulations and procedures.
 Promotion of efficient operations
1. The Control System Environment
 How the organization is structured,
objectives are established, risks assessed,
and communication and monitoring system
operate
 The control environment indicates the degree
of control consciousness
2. Risk Assessment
 Risk includes changes in economic factors
that affect tax intake and donations, and
employee violation of policies and procedures
3. Control Procedures
 It is the combination of policies and
procedures.
 Hire competent personnel,
 Rotation of personnel
 Fraud related functions should be divided
into two (e.g. Purchasing& Receiving)
4. Monitoring and Independent reviews
Periodic reviews of IC systems
should be undertaken to see the
effectiveness
5. Bonding Key Employees
Assets should be insured
Employees handling cash and
negotiable assets have to be
bonded
1. Competent personnel and rotation of duties
 Employees should be trained
 Rotate clerical personnel
 Encourage annual vacation
2. Assignment of responsibility
 Clearly defined responsibility
 Avoid overlapping of responsibility
3. Segregation of responsibility for related duties
 Avoid one individual to have complete control
4. Separation of operations and accounting
 Authorizing transactions, accounting transactions and
custody of assets should be separated
5. Proper accounting for transactions
6. Proofs of security measures
 Various techniques include separate bank accounts, and
encouragement of possible observance, and acceptance of
printed receipts from clerks; Insurance against losses
7. Separation of Record Keeping from Custody of Assets
 It reduces theft
8. Adequate safeguarding of assets
 IC system should ensure that assets are physically protected
from fire, theft etc
 There should be an inventory of assets
 Differences in the count of assets should be investigated

9. Technology and Internal Controls

 Technology can reduce information processing errors
 Stepsinvolved in IC process are:
1. Organize
 Decide responsibilities
2. Divide the institution into
various areas of assessment ( into
programs and administrative
functions)
 Conduct vulnerability assessment
 Develop guidelines and criteria to determine
programs that are susceptible to waste, loss,
unauthorized use, misappropriation etc (Lack of
compliance of costs, lack of adequate safeguard of
funds, lack of properly recorded revenues and
expense)
 Develop Plans for subsequent action
 After identifying the vulnerable programs,
corrective actions have to taken by: (l) Auditing, (2)
Improving monitoring, (3) staff training, (4) issuing
clear instructions, (5) Modifying existing procedures.
 Conduct Internal control reviews
 IC environment (attitude of management,
organizational structure, personnel, policies, budgeting,
and reporting) should be analyzed
 Evaluate the IC system and make sure that the fund,
and assets are protected
 Prepare reports on internal controls
A report should indicate the areas that require
correction, weaknesses of the system, ways to correct,
and recommendations in terms of economy and
efficiency
 Broad Categories:
1. Organizational Control - org. structure, segregation
of duties,
supervision, management
2. Procedural Control - Physical (for the custody of
assets), Authorization, Accounting
 Specific Categories:
1. Management Control : should include:
- Clear statement of objectives
- HRM, Quality standards, method of
allocating resources, management
information, comparing results with
the plan, taking corrective steps
Specific Categories…
2. Accounting Control:
- Assures that transactions are executed with
authorization, and are recorded to maintain
accountability for assets
3. Administrative Control:
- Focuses on operations and comprises
procedures that assist mgt to achieve the goal.
(Submission of reports is a control)
1. Accomplishment of established goals and objectives
2. Reliable Information
 IC system should be able to provide management with
reliable information
3. Safeguarding Assets
 IC system should use various techniques such as password,
fences, joint responsibility etc to protect assets
4. Promote Efficiency
 Duplication of efforts and wastage should be avoided
5. Ensure Compliance
 Ensure that the staff comply with the policies and
procedures of the orgn.
6. Cause Identification
 IC should identify problem and cause
 Fraud involves trickery, cheating, and intentional
deception that causes an individual to give up some
lawful rights or ownership of property.
 Fraud is in essence, an intentional illegal and wrongful
act employed explicitly for obtaining money or benefit
from public programs.
 Waste most often is comprised of unintentional acts
that result in inefficient practices or the misapplication
of resources, causing increased public costs or reduced
benefits to potential recipients.
 Abuse involves the violation of rules, procedures, and
regulation impairing the effective and efficient
implementation of a gov’t program
 To minimize FWA(Fraud, Waste and Abuse), the IC
should provide information.
The IC should assure that:
 assets are used for gov’t purpose
 employees comply with procedures
 public and NFP information is accurate
 A regular internal audit program should be
included to monitor and evaluate the system and
to provide the mgt. with feedback.
 Internal audit serves to deter fraud, error, waste,
and abuse in gov’t
 As feedback is important to minimize FWA, the IC
system should be audited periodically
 An effective system of IC is the solution for
reducing FWA in govt.
 It facilitates the generation of reliable data that
are disclosed in reports to minimize FWA and
protect assets
 However, the IC system should be well-designed
with all the necessary components.
 Risk is defined as an organization’s exposure that
creates the potential for loss.
 Risk Management is the process of identifying and
controlling risks of all kinds – accidents, fire, theft,
liability suits etc.
 An initial step in the Risk Mgt is the development
of policies.
 Define responsibilities of Risk Manager
 How the risk mgt activities are to be coordinated
 policy for insuring
 prioritized risk mgt program goals
 Scan the environmental risk sources
that create hazards. This involves
An exam of items such as liquid assets,
capital assets, documents, records etc
Regular inspection of premises
Use of risk discovery questionnaires to
identify possible losses
Use insurance brokers to analyze
exposure to risk
 It assesses the potential impact of risk
on the organization, qualitatively and
quantitatively
 A review of the past loss experience
and the frequency and severity is
needed
 Data on each identified risk
(frequency, type of incident, and
amount of claims) should be organized
 This is an analysis of the relevant alternatives to
reduce the risk
 A decision must be made to determine if the risk
can be eliminated entirely, reduced, be absorbed
partially by the govt organization or be transferred
to insurers
 Risk reduction in govt is complicated due to
fragmentation of risk mgt among different depts
 It provides a shield against risk
 It is typically not available to govt, as
they are required to provide essential
services such as police and fire depts
 The ideal avoidance should prevent risk
 This requires a clear understanding of
the risk factors that create liability
 Three ways of risk transfer:
The transfer of activities to another
organization
Legal assignment of financial losses to
another organization
Joining a pool (It is a shared insurance
approach)
 Large units will have a separate risk manager
and in small units, the FM
 Clearly written policies and procedure
 Observe closely the risk magt process
 Maintain a risk mgt information system
 Risk manager should act as a communication
channel for the whole orgn