PUBLIC SECTOR GOVERNANCE AND ACCOUNTABILITY SERIES LOCAL PUBLIC FINANCIAL MANAGEMENT Edited by ANWAR SHAH LOCAL PUBLIC FINANCIAL MANAGEMENT Introduction to the Public Sector Governance and Accountability Series Anwar Shah, Series Editor A well-functioning public sector that delivers quality public services consistent with citizen preferences and that fosters private market-led growth while managing fiscal resources prudently is considered critical to the World Bank’s mission of poverty alleviation and the achievement of the Millennium Development Goals This important new series aims to advance those objectives by disseminating conceptual guidance and lessons from practices and by facilitating learning from one another’s experiences on ideas and practices that promote responsive (by matching public services with citizens’ preferences), responsible (through efficiency and equity in service provision without undue fiscal and social risk), and accountable (to citizens for all actions) public governance in developing countries This series represents a response to several independent evaluations in recent years that have argued that development practitioners and policy makers dealing with public sector reforms in developing countries and, indeed, anyone with a concern for effective public governance could benefit from a synthesis of newer perspectives on public sector reforms This series distills current wisdom and presents tools of analysis for improving the efficiency, equity, and efficacy of the public sector Leading public policy experts and practitioners have contributed to this series The first 14 volumes in this series, listed below, are concerned with public sector accountability for prudent fiscal management; efficiency, equity, and integrity in public service provision; safeguards for the protection of the poor, women, minorities, and other disadvantaged groups; ways of strengthening institutional arrangements for voice, choice, and exit; means of ensuring public financial accountability for integrity and results; methods of evaluating public sector programs, fiscal federalism, and local finances; international practices in local governance; and a framework for responsive and accountable governance Fiscal Management Budgeting and Budgetary Institutions Public Services Delivery Local Budgeting Public Expenditure Analysis Local Public Financial Management Local Governance in Industrial Countries Performance Accountability and Combating Corruption Local Governance in Developing Countries Intergovernmental Fiscal Transfers: Principles and Practice Participatory Budgeting Tools for Public Sector Evaluations Macrofederalism and Local Finances Citizen-Centered Governance PUBLIC SECTOR GOVERNANCE AND ACCOUNTABILITY SERIES LOCAL PUBLIC FINANCIAL MANAGEMENT Edited by ANWAR SHAH THE WORLD BANK Washington, D.C ©2007 The International Bank for Reconstruction and Development / The World Bank 1818 H Street, NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: feedback@worldbank.org All rights reserved 10 09 08 07 This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank The findings, interpretations, and conclusions expressed in this volume not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent The World Bank does not guarantee the accuracy of the data included in this work The boundaries, colors, denominations, and other information shown on any map in this work not imply any judgement on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries Rights and Permissions The material in this publication is copyrighted Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law The International Bank for Reconstruction and Development / The World Bank encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Center Inc., 222 Rosewood Drive, Danvers, MA 01923, USA; telephone: 978-750-8400; fax: 978-750-4470; Internet: www.copyright.com All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street, NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: pubrights@worldbank.org ISBN-10: 0-8213-6937-7 ISBN-13: 978-0-8213-6937-1 eISBN-10: 0-8213-6938-5 eISBN-13: 978-0-8213-6938-8 DOI: 10.1596/978-0-8213-6937-1 Library of Congress Cataloging-in-Publication Data Local public financial management / edited by Anwar Shah p cm Includes bibliographical references and index ISBN-13: 978-0-8213-6937-1 ISBN-10: 0-8213-6937-7 ISBN-10: 0-8213-6938-5 (electronic) Local finance Finance, Public I Shah, Anwar HJ9105.L616 2007 355.4’215—dc22 2006101269 Contents Foreword Preface xi xiii Acknowledgments Contributors xv xvii Abbreviations and Acronyms Overview xxi Anwar Shah CHAPTER Financial Accounting and Reporting Rowan Jones Traditional Functions of Financial Accounting and Reporting Accounting Bases 13 Expanding Traditional Functions 19 Financial Reporting Standards 29 Summary 30 Notes 31 References and Other Resources 32 v vi Contents Local Government Cash Management M Corinne Larson Collections 34 Funds Concentration 41 Disbursements 45 Banking Relationships 48 Cash Flow Forecasting 50 Investing 55 Conclusion 65 Notes 68 References and Other Resources 33 68 Local Government Procurement and Safeguards 69 against Corruption Clifford P McCue and Eric W Prier Overview of Public Procurement 70 Government Systems and the Potential for Corruption at the Local Level 76 The Procurement Process as a Safeguard against Corruption Ethics and Professionalism 97 Conclusion 101 Notes 103 References and Other Resources 103 Local Debt Management 79 109 Gerald J Miller and W Bartley Hildreth How Do Local Governments Use Debt? 112 When Do Local Governments Use Debt? 116 How Do Local Governments Assess Debt Affordability? 121 What Forms of Debt Do Local Governments Use? 137 How Do Local Governments Issue Debt? 143 How Do Local Governments Manage Existing Debt? 149 Conclusion 151 References and Other Resources 152 Contents vii Local Government Internal Controls to Ensure 157 Efficiency and Integrity Jesse Hughes Corruption and Money Laundering 157 Objectives and Scope of Internal Controls 159 COSO Framework on Risk Management 165 International Federation of Accountants Standards Applicable to the Private and Public Sectors 171 Institute of Internal Auditors Standards Applicable to the Private and Public Sectors 173 International Organization of Supreme Audit Institutions Identification of Organization Need for Internal Controls in the Public Sector 175 INTOSAI Framework 178 Public Internal Financial Control 180 Best Practices in Control and Management Systems for European Union Membership (SIGMA Baselines) 181 Relevance and Feasibility of Internal Controls for Local Governments in Developing Countries 181 Organizing to Implement Internal Controls 187 Notes 190 References and Other Resources 190 Internal Control and Audit at Local Levels 193 Mustafa Baltaci and Serdar Yilmaz The Need for Improving Accountability in Decentralization 195 Contemporary Internal Controls 198 Internal Audit: A Key Module in Control Systems 204 Conclusion 208 Annex 6A.1: Internal Control and Audit in Local Governments across the World 209 Annex 6A.2: Establishing Effective Internal Control in Local Governments 212 Annex 6A.3: Starting from Scratch: Building an Audit Unit in Local Government 216 Annex 6A.4: Basic Elements of Internal Audit 218 viii Contents Annex 6A.5: Importance of Risk Management Notes 222 References and Other Resources 223 221 External Auditing and Performance Evaluation, with 227 Special Emphasis on Detecting Corruption Aad Bac What Makes Auditing in the Government Area Special? The Object of Audit 231 The Scope of the Audit 232 The Users of Audits 247 The Auditor 247 The Auditee 249 The Audit 250 The Auditor’s Reporting 253 References and Other Resources 254 Index 255 BOX 6.1 Three Types of Audit 206 FIGURES 1.1 1.2 1.3 1.4 1.5 1.6 1.7 2.1 2.2 4.1 Year-End Budget Report 12 Operating Statement under Cash Accounting Based on Line Items 14 Statement of Payments under Cash Accounting Detailing Operating and Capital Payments 15 Accrual-Based Statement of Financial Position 22 Accrual-Based Operating Statement 23 Accrual-Based Statement of Changes in Net Assets 24 Cash Flow Statement under the Direct Method 25 Cash Management Cycle 35 Account Structure and Flow of Funds 43 Matrix of Sources of Subnational Government Capital Investment Financing 119 228 ... accountable governance Fiscal Management Budgeting and Budgetary Institutions Public Services Delivery Local Budgeting Public Expenditure Analysis Local Public Financial Management Local Governance in... LOCAL PUBLIC FINANCIAL MANAGEMENT Introduction to the Public Sector Governance and Accountability Series Anwar Shah, Series Editor A well-functioning public sector that delivers quality public. .. of ensuring public financial accountability for integrity and results; methods of evaluating public sector programs, fiscal federalism, and local finances; international practices in local governance;