Strengthening Financial Management Systems: Summary | Indian Polity for UPSC CSE PDF Download

Summary of Recommendations of Second ARC on Financial Management

1. Unrealistic Budget Estimates
   • At the end of each year the reasons for the gap between the estimates’ and ‘actuals’ must be ascertained and efforts made to minimize them. These assumptions should also be subject to audit.
   • The method of formulation of the annual budget by getting details from different organizations/units/agencies and fitting them into a pre- determined aggregate amount leads to unrealistic budget estimates.
   • This method should be given up along with the method of budgeting on the basis of ‘analysis of trends’. This should be replaced by top-down method by indicators to each organization/agency.
2. Delay in Implementation of Projects: The norms for formulating the budget should be strictly adhered to in order to avoid making token provisions and spreading resources thinly over a large number of projects/schemes.
3. Skewed Expenditure Pattern – Rush of Expenditure towards the end of the Financial Year: The Modified Cash Management System should be strictly adhered. This System should be extended to all Demands for Grants as soon as possible.
4. Ad hoc Project Announcements: The practice of announcing projects and schemes on an ad-hoc basis in budgets and on important National Days, and during visits of dignitaries’ functionaries to States needs to be stopped. Projects/schemes which are considered absolutely essential may be considered in the annual plans or at the time of mid-term appraisal.
5. Emphasis on Meeting Budgetary Financial Targets rather than on Outputs and Outcomes: The outcome budgeting is a complex process and a number of steps are involved before it can be attempted with any degree of usefulness. A beginning may be made with preparation and training in case of the Flagship Schemes and certain national priorities.
6. Development of Financial Information System: A robust financial information system, on the lines of SIAFI of Brazil, needs to be created in the government in a time bound manner. This system should also make accessible to the public, real time data on government expenditure at all levels.
7. Accrual System of Accounting: A Task Force should be set up to examine the costs and benefits of introducing the accrual system of accounting. This Task Force should also examine its applicability in case of the Appropriation Accounts and Finance Accounts.
8. Internal Audit:
   • An Office of the Chief Internal Auditor (CIA) should be established in select Ministries/departments to carry out the functions related to internal audit.
   • CIAs should be directly responsible to the Secretary of the Department.
   • An Audit Committee should be constituted in each Ministry/Department. The Audit Committee should look after matters related to both internal and external audit including implementation of their recommendations and report annually to the respective departmentally related Standing Committee of Parliament.
9. Integrated Financial Adviser: The role of the Financial Adviser as the Chief Finance Officer of the Ministry who is responsible and accountable to the Secretary of the Ministry/Department should he recognized and the trend of dual accountability should be done away with.
10. Accountability to Parliament: In order to further strengthen the Parliamentary oversight mechanism, as many audit paras as possible need to be examined by Parliamentary Committees.
11. Relationship between Audit and the Government/Government Agencies
    • There is need for better understanding and synergy between the audit and auditees for enhanced public accountability and consequently better audit impact.
    • There should be balanced reporting by the audit. Audit reports should not focus on criticism alone but contain a fair assessment or evaluation, which would mean that good performance, is also acknowledged.
    • There is need for increasing interaction as well as coordination between the executive and the audit, including at senior levels at regular intervals.
12. Timeliness of Audit
    • External audit needs to be more timely in inspecting and reporting so that their reports can be used for timely corrective action. All audits for the year under review should be completed by 30th of September of the following year.
    • IT should be used increasingly and effectively for data collection and analysis.