PI-25. INTERNAL CONTROLS ON NONSALARY EXPENDITURE
ABOUT THE INDICATOR
This indicator measures the effectiveness of generalC internal controls for nonsalary expenditures. Specific expenditure controls on public service salaries are considered in PI-23. The present indicator contains the following three dimensions and uses the M2 (AV) method for aggregating dimension scores:
- Dimension 25.1. Segregation of duties
- Dimension 25.2. Effectiveness of expenditure commitment controls
- Dimension 25.3. Compliance with payment rules and procedures
IMPACT ON BUDGETARY OUTCOMES
Internal controls provide assurance that transactions are performed as intended and resources are used only where appropriate authority has been verified. This process ensures that fiscal discipline is maintained at the micro- as well as the macro-level. It also ensures that resources are allocated as intended and properly authorized and that service delivery has access to and uses the resources provided under legal and regulatory authority and are used only for those purposes.
INDICATOR MEASUREMENT GUIDANCE
25:1. This indicator focuses on nonsalary expenditure and covers expenditure commitments and payments for goods and services, casual labor wages, and discretionary staff allowances. It includes a wide range of processes and types of payment across central government including segregation of duties, commitment controls and payment controls. This broad range of processes, with the many types of
expenditure and the number of different people involved, increases the risk of incorrect and/or inconsistent application or circumvention of any procedures and controls that may be in place. This makes it particularly important for assessors to establish whether or not effective controls exist.
25:2. Evidence of the effectiveness of the internal control system could come from discussions with government financial controllers and other senior managers, or from reports prepared by the external and internal audit or the minutes of audit committee meetings (where such committees exist). Minutes of management meetings and regular financial reports prepared for management may also be useful in establishing the extent to which nonsalary expenditure is controlled. Where specific reviews or surveys relating to procurement and accounting systems have been prepared at the request of management, these can provide a useful source of information as well.
25:3. The existence of procedure manuals, instructions, etc. should also be verified wherever possible. Routine and one-off accounting reports – e.g., reports of invoices paid and outstanding, reports of error and rejection rates for financial procedures such as invoice payments, inventory checks, etc. – may also assist in rating this dimension, as may meetings held with managers and staff to demonstrate the level of awareness and understanding of internal control. Organizations in which employees understand what controls are and why they are needed are more likely to have better, more effective systems of internal control in place.
25:4. Repeated policy exceptions or overrides may indicate potential fraudulent activity or a need to reassess current policies and procedures. Any unusual situations identified should be investigated by the appropriate party and should include corrective action if necessary.
PEFA Handbook Volume 1: The PEFA Assessment Process – Planning, Managing and Using PEFA