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(A detailed Background Report on Public Financial Accountability in Panchayat Raj Institutions in Karnataka is available. This has more information and details on the aspects discussed below)
Total expenditures of PRIs in 2001-02 were about Rs. 4800 crores 1. The source of financing for these expenditures was almost fully from the State Government or the Central Government. ZPs and TPs do not have any own revenues; the GPs have limited own revenues (currently about Rs. 65 crores annually). Most funds provided by the State and Central Governments are tied funds i.e., for specific schemes or types of expenditures (e.g., salaries). Limited amounts are provided in the form of untied grants from the State Government. PRIs do not borrow any monies. Transfers from the State Government in 2002-03 to PRIs amounted to about Rs. 4400 crores (about 21% of total state government expenditure) 2. All transfers were in the form of grants to the PRIs. As detailed in Annex 5 State Government Financial Reporting, amounts transferred by the State Government to the PRIs are reflected as expenditures in the State Governments accounts3. Revenues and expenditures of the PRIs per-se are not incorporated or consolidated into the State Governments accounts.
These numbers are indicative based on various sources. There are no reliable numbers on the total expenditures, and the sources of funds. This could include some funds provided by the Central Government, for end-use by PRIs, channeled through the State Government. Expenditures shown in the State Governments accounts are not based on expenditures actually incurred by the PRIs. The State Government accounts as expenditures the amounts that are released to the PRIs (i.e., the amounts that the PRIs are authorized to withdraw). These amounts are not immediately paid out to the PRIs but continued to lie in the PRIs accounts with the State Government Treasury. Amounts not drawn by the end of the fiscal year lapse (i.e., cannot be withdrawn), but are considered as expenditures by the State Government.
payments is used for these payments. Payment verification is further reinforced by requiring prior authorization of payments by upper tier (e.g., TP Bills by the ZP). Detailed line-item budgets are specified; there is a basic system of budgetary controls before payments are made, that works reasonably well. Basic accounting records are maintained all receipts and payments are recorded. Beyond this, systems are weak. 3.5 The quality of accounting and financial reporting is unsatisfactory. Accounts are delayed and there is a huge backlog, ranging from 1 year to 4 years for the upper 2 tiers (ZPs and TPs). Information presented in the accounts is incomplete they omit some transactions. The information presented in the annual financial reports (Annual Accounts) is not easily understandable e.g., Annual Accounts do not present in a single statement all receipts and expenditures -- these are prepared separately for each source of funding; the formats of the Annual Accounts make it further difficult to read and understand these accounts. Reliability of the numbers is also an issue due to non-adherence to standard accounting practices such as reconciliations. Underlying many of the accounting problems are: (i) a complicated funds flow system -- funds flow through multiple layers, instead of flowing directly from the Treasury to the respective PRIs (ZP/TP/GP); (ii) a complex information flow system for TP accounting e.g., compilation of accounts of the TP is done at the ZPs. Further, PRIs do not have all the information required for complete accounting. For example, sometimes utility payments are deducted at source for electricity (a major cost for the PRIs) from the amount of grants due to them, without corresponding information flows. 3.6 Audit performance is also unsatisfactory. Audits of the ZPs and TPs are carried out by the Comptroller and Auditor General of India, and of the GPs by the Karnataka State Accounts Department (KSAD). Follow-up on and responses to audits is unsatisfactory. There is a huge backlog regarding audits of the upper 2 tiers (ZPs and TPs) ranging from 1 to 4 years. Current legislation requires that a single report be prepared for all TPs. This is impractical, and requires amendment, but in any case there are no TP accounts to audit. Audit methodology also needs to be substantially improved. The internal audit system is also weak or non-existent. 3.7 Although budgets are prepared, these need to be substantially improved. PRIs are not aware of their total budgets. Budgets formats are not easily readable. Budgets are basically prepared top-down and without much local-level participation. 3.8 Local-level transparency and State Government monitoring are both limited by the above.
financial reports (Annual Accounts) are prepared in a timely manner, and are made transparent to the local community. The focus should be first on the current periods accounts (as contrasted with backlog); (ii) basic accounting controls such as reconciliations and confirmations are done regularly; (iii) accounting is complete i.e., it covers all receipts and payments; (iv) external audits are done on timely basis; (v) follow-up actions on audits are taken in a regular and timely manner. All the above do not involve any changes to the current system, but would require enforcement and monitoring. Addressing these basic priorities is necessary, but not sufficient. The modernization process outlined below is also essential. 3.11 In addition to the above, the PFMA system needs to be significantly improved to support the governments rural decentralization agenda, specifically to enable better local-level transparency and support local-level decision-making. The major priorities in this direction are: a) The accounting and financial reporting system which constitutes the core central foundations of the PFMA system needs to be substantially improved. The priority should be to get a cash-basis accounting system using satisfactory Accounting Standards to work satisfactorily first. Towards this end: (i) a self-balancing bookkeeping system (doubleentry bookkeeping system) needs to be introduced; (ii) accounting and financial reporting need to be made timely and complete (i.e., reflect all the transactions of the PRIs); (iii) standard accounting practices such as reconciliations, confirmation of balances, matching of main accounts with sub-accounts, need to be done regularly; and (iv) appropriate financial reporting formats should be developed. Mainstream reporting formats (such as a Balance Sheet or Statement of Financial Position, Cash Flow Statement or Receipts and Payments Account) should be used, wherever possible. The objective should be to ensure that the financial statements present the financial performance and position of the PRIs in a simple and readable manner; (v) each PRI should be responsible for compiling and preparing its own accounts and financial statements. Information flows should be revamped to facilitate this. b) Computerization of accounting is a major priority. This is essential for any significant improvements on accounting and financial reporting to be made. Since many of the transactions flow through the State Government Treasury, possibilities of drawing on information from the computerized treasury system could be explored. However, the State Governments treasury system alone will not be sufficient for computerizing accounts of the PRIs. The first priority could be to computerize the ZPs and TPs accounting. Initially, stand-alone systems could be installed in each ZP and TP. Further advances such as networking with Treasuries, could be considered at a later stage. GP accounting could also be selectively computerized wherever feasible. GoK has now launched an accounting computerization initiative covering all three tiers of rural local government. The pilot in 3 ZP jurisdictions is aimed for September, with roll-out by December. c) Auditing: (i) A major priority should be on follow-up action on audit reports, both on individual audit reports, and on systemic issues arising out of audit reports of various PRIs. (ii) There is need for a more systematic financial audit (and certification of financial reports). There is scope for partnership with the professional accounting firms (e.g., Chartered Accountants) in this regard; (iii) An internal audit system, engaging professional accounting firms (e.g., Chartered Accountants) should be introduced. A major focus of such internal audit should be identification of systemic weaknesses and improvement needed.
d) Improving local-level transparency is an important priority. Measures should be taken to improve local-level transparency such as publishing and providing information on budgets, funds released, financial reports, and developmental works, in local community forums, and local offices of the PRIs. e) Improvements to the budgeting system need to be made so that the budgeting process can become more participatory and responsive to local communities needs. The upper two tiers of the rural local government system in Karnataka are largely implementing agencies for state schemes. However, even accepting this perspective, first, PRIs, like Departments, could be given the freedom to budget on the basis of broad Programs rather than narrow schemes. Second, The link document which links the district and state budgets could be computerized, and the coding system at the district level rationalized so that state and district expenditure numbers can be much more easily reconciled e.g., the same Object code system should be used by both the state and local governments. Since much salary expenditure (e.g. for teachers) is currently incurred by the PRIs, funded by transfers from GoK, it is not that easy at the current time to work out how much the state government is spending on salaries including for state employees paid by the PRIs. f) Human resources skills upgradation: There is need to enhance the available human resource through recruitment/posting of better qualified personnel especially in GPs, use of outside qualified consultants, training and on-the-job learning. g) Payment System: Transfer of funds from the State Government to PRIs through the banking system, and making of all PRI payments through the banking system could be considered and progressively introduced. A prerequisite is sound accounting, auditing and internal control systems. Direct payments through the banking system for selected PRIs could be introduced selectively based on each PRIs satisfactory performance on these parameters. h) Changes to Statutes and Rules and Regulations: Some of the above may require changes to the legal framework i.e., the Statutes and/or Rules and Regulations. 3.12 Need for strong leadership, monitoring and follow-up by the State Government. The PRIs own representatives capacity to hold their (PRIs) Executives accountable is still developing. The PRIs are also substantially dependent on the State Government for financing. The State Government therefore needs to play a strong monitoring role, particularly in ensuring that the PRIs conform to the PFMA requirements. The State Government itself needs to establish the necessary capacity and systems to carry out this role, including the necessary database and information flow mechanisms. Appropriate measures, including linking fund transfers from the State Government to adherence to stipulated PFMA requirements, need to be considered and introduced. The State Government (Finance Department and the Panchayat Raj Department) also needs to take a lead role in the PFMA modernization and improvement effort for PRIs.
Reliable consolidated data for all the ULBs is not available. Numbers provided are highly indicative.
accounts (i.e., financial reporting), and backlog in maintaining accounts and financial reporting; c) Unsatisfactory audit arrangements and follow-up to audits: Major issues include lack of an independent auditor for City Corporations (CCs), lack of certification of financial statements, unsatisfactory audit techniques, backlogs in audits of CCs; and lack of follow-up to audits. d) Weak public oversight system, and weak state government monitoring and enforcement of the PFMA requirements.
framework both in the statutes and in practice. This is in line with the overall concept of decentralization that calls for accountability to the local citizens and their representatives. The Council needs to have a more clearly defined role in approving budgets, holding the executive of the ULBs accountable for financial and operational performance, and in oversight over PFMA aspects such as accounts, finances, and audits. Providing more information and training to the Councilors on PFMA aspects, is also an important priority. b) Increased transparency disclosure of information to and facilitating access to information by the ULBs constituents (citizens), on financial and performance aspects of the ULBs is an important priority. Making information available to the public on aspects such as ward works planning, budget, performance, accounts, audits, statistics, major achievements, including through web sites and citizen forums would help improve citizen understanding and help build demand for ULB performance. c) The budgeting system needs to be substantially improved so that the budget is linked to the ULBs objectives, is more realistic, and becomes a better monitoring and control tool. There is also need for more public involvement in the budgeting process. d) The accounting and financial reporting system which constitutes the core central foundations of the public financial accountability system needs to be substantially modernized. A self-balancing bookkeeping system (double-entry bookkeeping system) needs to be introduced, along with computerization. Similarly the cash-basis of accounting should be progressively changed to an accrual-basis or appropriate variations (such as the Fund Based Accounting System FBAS). The financial reporting system needs to evolve towards more mainstream reporting practices such as balance sheet, cash flow statement, and income and expenditure account. Accounting and financial reporting Standards need to be developed and codified and adhered to by ULBs. Accounting and financial reporting need to be become more timely and complete (i.e., reflect all the transactions of the ULB); currently there are huge backlogs and these are incomplete. Standard accounting practices such as reconciliations, confirmation of balances, matching of main accounts with sub-accounts, need to be done regularly. These are major weaknesses in the current system that also compromise the overall control environment. Given the scale of effort involved on the accounting and financial reporting modernization agenda, prioritization and sequencing is important e.g., initially improving reliability by moving to a double-entry bookkeeping system, and ensuring that all transactions are captured and reported, modernizing accounting manuals and rules, and improving financial reporting under the cash basis in the first instance. The major priorities are the 6 CCs, although the other ULBs are also important. e) The external audit system needs to be substantially modernized . Independent and qualified auditors need to be appointed to audit the ULB accounts. Audit standards and methodology need to be modernized, to expand from the current emphasis on transaction auditing (of compliance with procedures), to include certification of financial statements, and audit of internal controls systems. Audit capacity of the Karnataka State Accounts Department, (KSAD), the auditor of most of the ULBs, is a major issue. Involvement of professional auditors (Chartered Accountants) to carry out financial audits and audits of the larger ULBs, and to partner with the KSAD, needs to be actively considered and implemented. External audits also need to be timely. There is need to ensure that satisfactory follow-up action on audit reports are taken on timely basis.
f) Internal controls systems currently focus on strong transaction controls. More modern internal control systems focusing on managerial accountability, reporting on financial and performance aspects, information and transparency also need to be progressively emphasized. Appropriate internal audit systems need to be introduced. g) Human resources skills upgradation: There is need to enhance the available human resource through recruitment of better qualified personnel, use of outside qualified consultants, training and on-the-job learning. h) Payment System: Transfer of funds from the State Government to ULBs through the banking system, and making of all ULB payments through the banking system could be progressively considered (in place of the current system in which payments made out of funds provided by the State Government are made through the State Treasury system, and payments made out of self-generated resources are made through the banking system). A prerequisite is sound accounting, auditing and internal control systems. Direct payments through the banking system could be introduced selectively in some ULBs based on each ULBs satisfactory performance on these parameters. i) Changes to Statutes and Rules and Regulations: Some of the above may require changes to the legal framework i.e., the Statutes and/or Rules and Regulations. As indicated earlier, the PFMA framework in the two statutes also need to be rationalized and made consistent.
3.20 There is need for strong leadership, monitoring and follow-up by the State Government. The ULBs own representatives capacity to hold their (ULBs) Executive accountable is still developing. The ULBs are also substantially dependent on the State Government for financing. The State Government therefore needs to play a strong monitoring role, particularly in ensuring that the ULBs conform to the PFMA requirements of the statute. The State Government itself needs to establish the necessary capacity and systems to carry out this role, including the necessary database and information flow mechanisms. Appropriate measures, including linking fund transfers from the State Government to adherence to stipulated PFMA requirements, need to be considered and introduced. The State Government also needs to take a lead role in helping the development of standards, and in the modernization effort.
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