The principle of "Sound Financial Management"

I. Preface

In 1999, Rigsrevisionen started applying new principles when carrying out financial management examinations on the state. These principles are called sound state financial management and are used as benchmarking. Rigsrevisionen compares financial management in state agencies against these principles. An internal guideline on how to organise an examination in practice has been produced to complement the principles of sound financial management.

The principles of sound financial management have been developed as part of Rigsrevisionen's strategy of carrying out examinations of financial management in all major areas within a ten-year timeframe. Previous financial management examinations have been dissimilar in scope, and the focus has been on various areas of state financial management. Some examinations have focused on the administration of appropriations or the assessment of various procedures, whereas others have included performance audit aspects. The principles of sound financial management have been made in order to ensure that agencies are examined in accordance with consistent principles.

Trends from the most recent developments in public financial management, such as New Public Management, Activity Based Management and Performance Based Management, have been a great source of inspiration. However, this is not meant as Rigsrevisionen’s way of encouraging a certain administrative philosophy or as a way of pressurising agencies towards a more modern kind of financial management. In this past decade, the Danish Ministry of Finance has sought to adapt state financial management in accordance with these new trends, and as such has shown the way for agencies. The principles of Rigsrevisionen ensure that agencies choose the way which is most appropriate for their administrative sphere.

The principles of sound financial management have been discussed with the Ministry of Finance and presented at a seminar for state financial managers within the sphere of the Agency for Financial Management and Administrative Affairs. Usually, Rigsrevisionen does not publish its internal guidelines, but for these particular principles, Rigsrevisionen decided that it would be most appropriate to inform agencies of the principles against which they could be compared.

II. The processes and management tasks of financial management

There are a number of definitions of financial management but Rigsrevisionen has decided to base the principles of sound financial management in accordance with the most frequently used definition in Denmark.

Financial management is defined as follows:

the management processes that the management has initiated with the aim of maximising resources and organising the activities so that the objectives of the organisation are complied with in the best possible manner.

Financial management includes the processes that make it possible for the management of the agency to assess costs, production and performance targets.

Financial management is a part of performance audit. According to “the European implementing guidelines for the INTOSAI auditing standards”:

performance audit may also include a management examination of the individual unit, organisation, activity or the programme which is covered by the audit. Auditors will thus primarily focus on how management carries out strategic and other planning, and how management implements, controls, assesses and follows up on the activities.

In the principles of sound financial management, financial management is divided into seven processes and four steering tasks. The processes deal with the various phases: target setting, planning, budgeting, implementation and management control, presentation of accounts, follow-up and reporting and evaluation. Steering tasks include performance management, activity management, resource management and financial management. The connection between the individual processes and the steering tasks is shown in Figure 1.

Figure 1. Processes and Steering Tasks of Financial Management

Not all processes are equally relevant for all agencies and not all examinations are carried out with the same frequency. For example, the processes of target setting and evaluation do not have to be implemented every year. However, there is an interconnection, and if the result of one process is less satisfactory, it will influence the subsequent processes.

This also applies for the individual steering tasks. Performance management includes management of the production on the basis of outlined objectives or performance targets for an agency. Performance management is consequently aimed more directly at the effect of the implemented activities, rather than the activity itself. Activity management includes organisation of the production, so that the planned number of activities are implemented in accordance with the quality that is decided. Resource management concerns the use of resources and includes procurement, allocation and making use of the individual inputs. Financial management is included in the administration of appropriations and making payments.

Dividing financial management into processes and steering tasks may be quite difficult to apply directly. A manual has therefore been produced for the principles of sound financial management explaining in detail the conditions that may be required of the individual processes. The conditions are not absolute, as the requirements are based on an assessment of the individual agency and its financial management need.

III. Financial Management on various organisational levels

Financial Management is to be organised on various organisational levels, and examinations of financial management are to be planned accordingly. The departments’ management of the whole ministerial area should for example primarily focus on the processes; target setting and evaluation, and on the steering task; performance management. The agencies’ financial management will, however, primarily focus on the other processes and steering tasks. Rigsrevisionen is considering whether the principles can be expanded to cover the steering processes better if the event of there being several organisational levels.

IV. Lessons learned

Since the principles were drawn up in the beginning of 1999, three public programme examinations have been carried out, and two more will be following shortly. The lessons learned from the three initial examinations have shown that by using the principles the possibilities of implementing an examination have improved, and it is ensured that the agencies are assessed on the same basis.

At the present time, the principles include nothing on how reporting of an examination should take place at the political level. Two examinations have been reported by means of a description of the individual steering tasks in the agencies, whereas the third examination based its reporting on a review of the individual problem spheres. Lessons learned have shown that reporting based on a review of the individual problem spheres is preferable. A review of all steering tasks in an agency may give a balanced description of the management, but these reports tend to be too long for the political level. The challenge of future examinations will therefore be to carry out a well-balanced reporting focusing on the problem spheres.

Lessons learned have shown that there is room for potential improvements in the examined agencies, but that it is difficult to assess the financial consequences of the individual initiatives of improvement. Rigsrevisionen will therefore in the near future seek to minimise the scope of the examination, and seek to a greater degree to implement the examination within a well-defined area. Future examinations thus will concentrate on one or two steering tasks instead of all four. But all examinations will be combined with calculations showing the potential financial profit of any recommendations.

In 1999, a financial management examination was carried out of Told·Skat including management of the Ministry of Taxation. The examination was conducted in accordance with the principles of sound financial management, and therefore with a broad review of all steering tasks. However, it has been combined with a traditional efficiency analysis – the Data Envelopment Analysis. In the next edition of EUROSAI, Rigsrevisionen will give a short description of the investigation and its results.