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Financial and Effectiveness (performance) Control in Local Administrations

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Title: Financial and Effectiveness (performance) Control in Local Administrations


1
Financial and Effectiveness (performance) Control
in Local Administrations
  • Modern trends and developments
  • The Spanish system
  • Jose Fernando Chicano
  • Financial Controller
  • Municipality of Tarragona
  • April 2007

2
Summary of presentation
  • Introduction to accepted modern international
    principles, concepts and definitions on internal
    control (COSO)
  • Controls in public sector internal and external
  • The Spanish system of internal control in local
    administration / local public sector. Recent
    trends and developments
  • The Spanish system of external control of local
    public sector national Court of Accounts and
    regional public sector audit bodies (Sindicatura
    de Cuentas)
  • Conclusions

3
Modern international principles, concepts and
definitions on internal control
  • An introduction based on the COSO report

4
International reports and standards on internal
control
  • Different reports have been produced about
    Internal Control in several countries COCO
    (Canada) Sarbanes-Oxley (USA) Cadbury (UK)
    Olivencia Aldama (España)), bur none of them is
    as important and relevant as the COSO report
  • En 1992 COSO published the Internal Control
    Integrated Framework, a report which establishes
    a common definition of Internal Control and
    provides standards to evaluate and improve its
    control systems.
  • INTOSAI incorporates COSOs definition and
    concepts to the Public Sector

5
COSO DEFINITION OF INTERNAL CONTROL
  • Internal control is a process, effected by an
    entitys board of directors, management and other
    personnel, designed to provide reasonable
    assurance regarding the achievement of objectives
    in the following categories
  • Effectiveness and efficiency of operations (O)
  • Reliability of financial reporting (F)
  • Compliance with applicable laws and regulations(C)

6
KEY CONCEPTS
  • Internal control is a process. Its a means to
    and end, not an end in itself.
  • Internal control is effected by people, Its not
    merely policy manuals and forms, but people at
    every level of an organization
  • Internal control can be expected to provide only
    reasonable assurance, not absolute assurance, to
    and entitys management and board
  • Internal control is geared to the achievement of
    objectives in one or more separate but
    overlapping categories

7
Components of control specified in the COSO
framework
  • Internal control consists of five inter-related
    components, these are derivated from the way
    managements runs a business, and are integrated
    with the management process
  • Components
  • Control environment
  • Risk assessment
  • Control activities
  • Information and Comunication
  • Monitoring
  • There is synergy and linkage among these
    components forming an integrate system that
    reacts dynamically to changing conditions

8
Control Environment
  • The control environment sets the tone of the
    organization influencing the control
    consciousness of its people.
  • It is the foundation for all other components
    providing discipline and structure
  • Include
  • Integrity
  • Ethical values and competence of entitys
    personnel
  • Managements philosophy and operating style
  • The way management assigns authority and
    responsibility.
  • The attention and direction provided by the board
    of directors

9
WHAT INTERNAL CONTROL CAN DO
  • Internal control can help an entity achieve its
    performance and profitability targets, and
    prevent loss of resources
  • IC helps ensure reliable financial reporting
  • IC can help ensure the entity complies with the
    law and regulations, avoiding damage to its
    reputation, and other consequences
  • In conclusion, it can help an entity to get where
    it wants to, and avoid pitfalls and surprises
    along the way

10
Some of the key changes that have taken place on
internal control
  • HISTORIC ROLE
  • Policemen
  • Financial Focus
  • Focus on hard controls
  • Focus on tangible assets
  • Compliance based
  • Functional focus
  • Self-sufficient
  • Reactive
  • MODERN ROLE
  • Partners in the organization
  • Business focus
  • Focus on soft controls
  • Focus on intangible assets
  • Risk based
  • Process focus
  • Shares of best practices
  • Proactive

11
The Spanish system of internal control in local
administration / local public sector
  • Recent trends and developments

12
Basic features
  • Internal Control Model Its the same for all
    Public Sectors local sector (law 39/88)
  • Evolution
  • Necessary function, reserved to public servants
    holding a specific habilitation (by law)
  • Mixed model
  • Ex ante Ex post financial control
  • Internal audit
  • Effectiveness/performance audit
  • Key points
  • Managerial Accountability
  • Functional autonomy
  • Dependence on the Head of Administration
  • Contradictory procedures
  • Capacity and necessity of self-regulation

13
Aims and functions
Functions
Aims
INTERNAL CONTROL (Art. 214, 220, 221 TRLHL) Ex
ante Ex post financial control Internal audit
(Effectiveness and Efficiency)
  • Compliance with applicable law and regulations
    (C)
  • Evaluating whether the public resources are
    managed correctly (o)
  • Guarantee the reliability of Financial Reports
    and diffuse it (F)
  • Production of Local General Account.
    Safeguarding the integrity, accuracy and veracity
    of those accounts.

ACCOUNTANCY (Art. 203 a 206 TRLHL y
ICAL) ACCOUNTANT AND BUDGET CONTROL
14
Accountancy Control
Scope
Public Agencies Public enterprises companies
Municipality Autonomous Agencies
Financial Accountancy Monitoring of budget cycle
Accountancy Inspection
Aims
Management
Control
Analysis and communication
15
Internal audit / auditors
  • Autonomy of internal audit
  • Functional independence of internal auditors
  • Technical assistance
  • Legal assessment

16
Proposals President of Spanish Court of Accounts
(Supreme Audit Institution-SAI)
  • To develop the internal control in its full
    meaning
  • ( financial control, and internal audit )
  • To develop a special statutary regime for the
    civil servants with national local habilitation
    similar to internal auditors of State (autonomy).
  • To restrict free recruitment (to guarantee
    independence and imparciality)
  • To modify the law to achieve segregation of
    functions
  • Encourage suport and collaboration of SPAs for
    little municipalities

17
GENERAL OUTLINE OF INTERNAL CONTROL IN SPAINs
LOCAL ADMINISTRATIONS
18
Internal Financial control
Internal control
Internal audit
(Effectivenes Control)
19
INTERNAL FINANCIAL CONTROL
Scope
Municipality Autonomous Agencies
Expenditure
Revenues
20
Revenues
Internal financial control
accountancy
Ex ante internal limited financial control
Ex ante internal financial control
Ex post financial control (Internal Audit)
21
Expenditure
Not submitted to ex ante internal financial
control
Ex ante limited internal financial control
Ex ante internal financial control
Payment with posterior justification
Procedures
Objection
Discrepancy
A Priori
Omission
Ex post internal financial control
Special system of ex post financial control
A Posteriori
Internal Audit
22
Internal Audit
(Effectiveness Control)
Economic Agencies
Grants
Spending units
Public Local Enterprises Companies
Instrumental Entities
Outsourcing
EU co-financed projects
23
Public Local Enterprises Economic Agencies
Regularity Audit
Accountancy
Trusteeship
Inspection accountancy
Compliance audit
Aggregate acounts of LGA
Financial Audit
Loan
24
GRANTS
Not subject to internal audit (C. 2.2 LGS)
Subject to Internal control
Municipalitys bodies
Private audit
Different ways to justification
Non governmental organisations (NGOs)
Special procedures
25
Instrumental Entities
Consortiums
Agrements
Foundations
Other
26
Outsourcing
Participates enterprises
Concerts
Other different way of management
Share risk
Concessions
Public Domain
Publics works
Public services
27
Ex ante financial control
Expenditure
Ex post Financial Control (Internal audit)
Ex ante limited financial control
Financial Control
Ex ante financial control
Revenues
Accountancy
Ex ante limited financial control
Internal control
Economic Agencies
Grants
Spending units
Internal audit
Public Local Enterprises Companies
(Effectiveness Control)
Instrumental Entities
Outsourcing
EU co-financed projects
28
The Spanish system of external control of local
public sector
  • National Court of Accounts and regional public
    sector audit bodies (Sindicatura de Cuentas)

29
CURRENT SYSTEM OF EXTERNAL CONTROL

30
EXTERNAL PUBLIC SECTOR AUDIT INSTITUTIONS IN
SPAIN COURT OF ACCOUNTS Regional Audit Offices
Audit function (Fiscalización)
Functions in "accounting proceedings
Special term for the public sector auditing in
Spanish Fiscalización
31
REGIONAL AUDIT OFFICE (Regions public sector)
Central administration offices in the region (by
delegation of nat. Court of Accounts-SAI)
Regional government and administration
Local administrations
Autonomous agencies
Autonomous Agencies
Public enterprises companies
Public enterprises companies
Regional Audit office reports to the regional
Parliament
32
WHAT ARE REGULARITY AUDITS ? (Regional audit
office)
  • Auditing the financial activities of Regionals
    public sector.
  • Checking on compliance with laws and regulations.
  • Auditing the use or application of
  • Grants and subsidies
  • Loans and monetary assistance granted by
    governmental entities from their budgets
  • Tax exemptions granted by public sector entities
    within Region.
  • Auditing contracts entered into by the Regional
    Government.
  • Auditing the financial position and changes in
    the assets of the Regional Government.
  • Auditing the budget life-cycle.
  • Examining and verifying the "General Account" of
    the Region
  • Producing the "Local Government General Account",
    the aggregate accounts of all local government
    organisations in Region.

33
WHAT IS PERFORMANCE AUDITING? (Regional audit
office)
  • Performance auditing, known sometimes as
    value-for-money auditing or auditing of the three
    Es (economy, efficiency and effectiveness),
    involves
  • Analysing the use of available resources against
    efficiency criteria (economy and efficiency
    audits).
  • Making proposals in order to improve the delivery
    of services by Regions public sector (efficiency
    audits).
  • Assessing to what extent stated objectives, as
    laid down in the various budgetary programmes and
    annual reports, have been met (effectiveness
    audits) and pinpointing the reasons for failure
    to meet objectives.

34
Relationship between external internal control
  • Weaknesses
  • Lack of links between external internal control
  • Lack of references
  • Jurisdictional role (internal control could be
    responsible)
  • Desirable changes
  • Support / assessment
  • Guidelines for Internal Control Standards
  • Definition of performance indicators
  • Coordination
  • Collaboration and distribution of roles
  • To avoid duplications
  • To unify skills procedures

35
Conclusions
  • Heterogeneous public local sector
  • Internal control (financial (ex ante ex post)
    and audit)
  • Tendency towards ex post and audit controls
  • Necessity to improve the professional
    qualification of internal auditors
  • The links between external internal control
    must necessarily be stronger
  • Support of the highest management levels
    crucial!
  • Internal auditors work in isolation
  • Adequate resources
  • Lack of Internal Control Standards and
    Harmonisation for the local sector
  • At the moment. Control systems are in transition

36
THANK YOU FOR YOUR ATTENTION
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