Lessons on public finance management
An audit professional’s perspective
By Biljana Bogovac
Why do we talk about efficient and effective public financial management?
As a citizen, I appreciate that the Sustainable Development Goals (SDGs) ensure that my family, relatives, friends and fellow citizens experience at least a basic standard of living. But I also know that the targets to build a resilient economy and society put a strain on our limited resources, especially in less developed countries.
This means that the efficiency of public financial management is crucial in order to ensure an equitable spend. This is what policy and fiscal frameworks are for.
But as an audit professional, I also have a behind-the-scenes view of public administration. Many of my clients across South East Europe either work with, depend on or are impacted by the way that public administration functions in respective markets. I’m constantly surprised by the lack of citizen awareness of public finances. Most of my counterparts are not certain where and how taxpayer money is spent, and attribute this to long and costly administrative procedures. And I’ve seen this perspective directly influence business decisions. My clients were factoring these complexities into their cost of investments, and ultimately cost of capital.
Timely, high quality and reasonably priced public services would reduce operational costs for business. In turn, citizens would see cheaper products and services.
This simple goal sounds great in theory. But in practice, it’s very hard to achieve. Why is that the case?
If there’s one thing we can learn from the private sector, it’s the importance of rigor. Financial management best practices from the private sector show that tough monitoring mechanisms and regulations are effective.
What can we learn from the private sector?
The private sector is widely known for its strong financial management. I believe that there are some useful lessons that can be applied from business to the public sector. While also considering the differences between the sectors, we can adapt the tactics to ensure a more transparent and efficient use of resources.
If there’s one thing we can learn from the private sector, it’s the importance of rigor. Financial management best practices from the private sector show that tough monitoring mechanisms and regulations are effective. We can look at the examples of the Public Company Accounting Oversight Board (PCAOB) in the USA, and existing rules in Japan, France and others. Many of these practices assume a set system of internal controls, transparent reporting, and regular and quality audits.
I don’t believe the public sector should be any different. The more we divert from these simple concepts, the harder it gets to simply achieve an effective and efficient public financial management system.
The elements of such a governance framework should include:
- internal control framework,
- internal audit,
- financial reporting,
- accounting,
- and external audit.
This framework focuses on reporting, scrutiny and assurance, which are just part of the requirements for a successful public financial system in any country.
We must also link public financial management to service delivery. Economists, accountants and auditors should not be the only stakeholders involved in the process. But relevant specialists for the social and economic infrastructure in focus must also play a role. These stakeholders provide the local and regional contexts that are relevant for society and broader economic infrastructure. Countries cannot be seen in isolation, and we can’t ignore the socio-economic level of development. In order to have certain aspects embedded in finance policy, there must already be a widespread acceptance of norms, behaviours and values in the society.
Of course, the public sector is unique and should have a tailored public financial management system. While we can take some lessons from the private sector, quality financial management in the public sector requires a certain reform climate. There are different stakeholders, bureaucratic procedures to change existing rules and practices, and often insufficient capabilities and capacity. As a result, the public sector’s timeline to make improvements and produce change is also somewhat different.
Ultimately, when transparent public financial management is achieved at the government level, all citizens and stakeholders immediately benefit.
In CEE, there is a widespread need to improve finance management on all levels of government. At PwC, we are very often called upon to assist governments to either design strategies to achieve this or to help execute an existing strategy. Drawing on our global network, we share good practices with local knowledge and context. This combination of the global and local creates an efficient and effective approach to both implementation and strategy design.
Ultimately, when transparent public financial management is achieved at the government level, all citizens and stakeholders immediately benefit.