Creating a stronger central accounting capability
in the MOF

In some republics, such as Serbia and Bosnia, much of the accounting operations of DSUs were handled, at least for some ministries, by a government-wide state agency, the joint services administration (JSA). In these cases, bringing the accounting part of the JSA closer to the core operations of the MOF was one immediate measure to develop accounting in the MOF.8 In other republics, it would be necessary to create a new centralized accounting division (CAD), sometimes recruited from the PB, as well as some of the accounting staff from DSUs themselves (since they also performed some accounting operations). With this centralization came some immediate benefits. Firstly, improved control and supervision over accounting standards and procedures. Secondly, a more focused development of accounting capacity, aimed at raising the standards and professional status of public accountants. Thirdly, timely and detailed reporting on actual expenditures, and arrears, reported according to budget and accounting classification. In this way, the MOF would acquire the information to more adequately control budget execution and its overall cash resources. In retrospect, in the initial phase of reform these improvements often failed to materialize.

Strengthening financial management in government

The establishment of greater accounting capacity was an essential first stage in the development of an integrated financial management system for the government. With information more readily available in a timely and accurate form, governments could move away from their extremely short-term crisis mode of operations to a system where budget execution and cash management decisions could be made ahead of time, more proactively, and with less disruption to government operations. At the same time as strengthening the center, it was also seen necessary to ensure the retention of an adequate financial management function inside each DSU, since ultimately they were responsible for the planning of their budgets as well as the utilization of budget funds appropriated to them in the budget. In the typically cash-constrained early days of reform, this objective often fell by the way side.

Improving government cash management

The establishment of ledger-based accounting for DSUs in the MOF, as opposed to the previous practice of giro account PB-based accounting, was an essential change in approach that enabled the much needed reform of introducing of a treasury single account (TSA). This move would be based on the elimination of DSU accounts, with payments, including transfers to ISUs, being made directly from the main budget account, so moving the control of these accounts from the budget department to the CAD. In the first stage of reform, the bank/giro accounts of ISUs were usually left untouched. Due to their large numbers they posed a severe problem for consolidation in a TSA.

One cannot underestimate the effort involved in establishing a TSA. The SFRY system of government banking arrangements was based on a proliferation of bank accounts all managed through the SDK. As an example, in FY 2000 it was found that there were 14,082 legal entities of general government in the residual FRY,9 of which 12,922 were situated in Serbia and the rest in Montenegro.10 These legal entities had between them 94,943 giro accounts (86,918 belonging to legal entities in Serbia), of which 64,792 were revenue collection accounts (58,269 belonging to legal entities in Serbia). In addition, there were 93 legal entities (73 in Serbia, the rest in Montenegro), classified as unused funds, whose functions were indeterminate. These undetermined funds and other giro accounts had between them 9,742 giro accounts (7,937 for Serbia). Among these giro accounts were court and other deposits (some 9,215, of which 7,477 were in Serbia), which may have been funds held in escrow-pending court decisions.

            This number of giro accounts, and associated banking arrangements, was not dissimilar to the situation in other ex-SFRY republics, which inherited the same system.11 Such proliferation of giro accounts, many with sight deposits in banks other than the central bank, presented a very complex problem for efficient cash management. Just how complex was indicated by the excessive level of idle cash balances usually found in the banking system, which were supported by these giro accounts.

Modifying the system of budget execution

With the accounting function centralized in the MOF, the new central accounts division could also establish centralized computerized operations, such as payroll, to ensure better control and accounting of this important item of spending. Since salaries usually were already disbursed through the banking system, such systems could be established relatively quickly. The aim of the new arrangements was to give the MOF better control over budget execution and, at the same time, enable it to develop modern systems for all stages of expenditure management.

            The new accounting arrangements implied that budget execution flows would also change as the MOF developed its treasury function. A usual first step was to require financial management units in DSUs to channel all payment requests through the CAD, which would code and record them by budget position and by accounts code, conduct preaudit checks, and generate payment orders (POs) on the main budget account. These new arrangements provided the MOF with the opportunity for both a more direct and simplified control over cash utilization, and a more detailed and timely reporting system for budget execution. With all payment orders being made either directly to suppliers, or to ISUs, the MOF could establish a system of payment order coding which could be the basis of a more sophisticated daily report from the PB system. Coding of each payment order would identify the budget position number, the institutional code of the ISU if it was the beneficiary, and the accounting code.

            At this preliminary stage of the treasury system development, the CAD handled all payments made by DSUs, including individual payments to the accounts of ISUs. Financial management units in DSUs would send their payment requests directly to the CAD, which would check if they were within the available budget appropriation, as well as the periodic cash limits set by the treasury. Where a payment request was for a transfer to ISUs, the DSU would submit one payment request, with an attached list of ISUs to receive transfers, indicating the amount for each. The CAD would then process these into individual electronic payment orders. Varying in coverage and timing, most republics in their reform process have tried to adopt some variant of this system of budget execution.

            It was also recognized that the new system could include commitment recording. For example, the DSUs could submit commitment forms to the CAD’s front-end operations, which would check and approve them if they are within budgetary and cash limits, after the budget department had given its approval, if this was required. Such a system was successfully introduced in Slovenia, which by then had constructed a computerized information system that could handle the extra work implied. FYR Macedonia is also introducing this system on a pilot basis. Information on these commitments was thus available, alongside accounting information, to all relevant departments in the MOF, particularly for budget and cash management purposes. As indicated, initially, this was only judged feasible for large contracts. With this commitment recording in place, the process of establishing more reliable cash-flow projections, at least on the expenditure side, could be achieved, and early warning given to DSUs if the revenue situation did not meet expectations. Most other republics, however, decided to delay such a reform until their level of computerization had been more fully developed.

Creating a supporting legal and institutional framework

Building capacity in the MOF, as outlined above, was typically facilitated by its institutional reorganization. One of the most fundamental changes was to create a new treasury department, usually by redeploying sections responsible for budget execution from the budget department, but also generally requiring the recruitment of new skills. The CAD typically formed the core function in the treasury. Another change was to build up a macro fiscal analysis and policy capability within the ministry, to replace the old style central planning methodology typically located in the former state planning agency which mostly disappeared after independence. To empower the MOF in assuming its new role as the government financial manager also required giving it the required legal authority. This was generally done through a new budget system law that redefined the MOF’s responsibilities much more comprehensively in the area of budget procedures, treasury operations, and the control and supervision of public resources. Such laws were modeled on other Organisation for Economic Co-operation and Development (OECD) countries, although in this initial phase of reform with the existing administrative capacity they were often not capable of being implemented fully, or else were amended regularly.

Notes

8 Albeit this was found to be difficult in Serbia initially because the JSA was under the President’s Office.
9 By 2000 only Serbia and Montenegro remained within the Federal Republic of Yugoslavia, which was officially dissolved in 2002 with the creation of a looser association called Serbia and Montenegro.
10 It was recognized that the number of Montenegro entities may be incomplete, given the independence of their payments bureau operations.
11 At the time of independence, it was found that many government institutions also had foreign exchange accounts. Accordingly, it was usually recommended that these foreign exchange deposits be converted as soon as possible into domestic currency and integrated into existing domestic giro accounts.