II.COMPARISONS OF OECD COUNTRY LEGAL FRAMEWORKS FOR BUDGET SYSTEMS

Internal audit is centralised in some countries. In Japan, the Public Finance Act requires line ministries to implement budgets in accordance with guidelines approved by Cabinet and issued by the Ministry of Finance. Decrees elaborate on these general provisions, which include a strong role for the Ministry of Finance. Spain’s General Budgetary Act 47/2003 establishes a General Controller of State Administration for internal oversight of financial management of the State sector as a whole. This powerful body is somewhat paralleled in France, which has a high-level inspectorate (established by decree in France’s case), under the Minister of Finance.

The adoption of dedicated laws for centralised financial control is not common in OECD countries. However, France and the United States are exceptions. In France, a 1922 law established centralised ex ante control over expenditure at the commitment stage. The need to adopt a law, rather than a decree, derives from the fact that government ministers authorise expenditure commitments. Prior to the adoption of this law, ministers were not respecting approved budget limits (see Bouvier et al., p. 410).

The legislature of the United States is particularly active in seeking to assure that the federal budget is implemented as adopted by Congress. In sharp contrast with other OECD countries, it has adopted at least six separate laws relating to financial management in executive agencies (see the United States country case study). The Inspector General Act of 1978 established the Office of Inspector General in the Department of the Treasury. The Inspector General is required to keep both the Secretary and Congress fully informed about the problems and deficiencies relating to the administration of department programmes and operations. The Chief Financial Officers Act 1990 established an Office of Federal Financial Management in the Office of Management and Budget. To support the OMB’s leadership role in improving financial management in agencies, the law requires chief financial officers to be established in all major agencies. The advice and consent of the Senate is needed when the President appoints the Inspector General in the Treasury, the Deputy Director for Management in the OMB and all chief financial officers in agencies. Whereas in most countries, heads of internal audit units report only to agency heads, in the United States, chief financial officers and the Inspector General are required to report to Congress as well as to their agencies.

4.4. Government accounting and fiscal reporting systems

In many OECD countries, the law only provides a few general statements concerning the basis of the accounting system. Nonetheless, a few countries (e.g. Denmark, Japan) have specific public accounting laws. Budget system laws – or special fiscal transparency laws – often elaborate on the timing and content of periodic budget execution reports and annual accounts, which are

II. COMPARISONS OF OECD COUNTRY LEGAL FRAMEWORKS FOR BUDGET SYSTEMS

major accountability documents by which the legislature can reach conclusions concerning budget execution.

4.4.1. The accounting framework

The traditional cash basis for government accounting is usually not explicit in law. However, the Law on Budgetary Principles in Germany requires that “collections and disbursements shall be recorded in accounts. The Minister of Finance may order accounts to be kept on commitments entered into and monies accruing”. Collections and disbursements are both cash concepts.

Although there has been a move towards accrual accounting in a number of OECD countries (Blöndal, 2003), major changes in law to accommodate the new accounting systems have not always been adopted. Some reforming European countries have inserted an article in the budget system law such as “the State accounts shall be kept according to generally accepted accounting principles (GAAP)” (e.g. Finland, Sweden) or “the government accounting norms will not differ from company accounting except to the extent that the State has specific characteristics” (France). In these countries, brief statements in law are accompanied by detailed regulations.

In contrast, the laws in Westminster countries provide some details of accounting arrangements. In the United Kingdom, the Government Resources and Accounts Act 2000 (GRA Act) formally changed the cash basis of government accounting to an accrual basis, with “resource accounts” replacing the “appropriation accounts” that had been in place for 150 years. The act specifies that accounts will be prepared in accordance with directions issued by H.M. Treasury, which shall ensure that resource accounts present a true and fair view and conform to GAAP, subject to such adaptations as are necessary for departmental accounts. For these purposes, the Treasury is guided by an independent Accounting Standards Board.24 The GRA Act also specifies the content of resource accounts: they must include a statement of financial performance, a statement of financial position, and a cash flow statement. A resource accounting manual provides a guide on accounting and management control procedures.

4.4.2. Annual accounts and reports

The necessity to submit annual accounts and/or reports to the legislature is a constitutional requirement in several countries (e.g. Denmark, Germany, Finland, Japan, Norway). In Germany, it is considered important that the legislature, after approval of the audited annual accounts, formally discharges the government from its duty to execute the budget. The Law on Budgetary Principles lays out procedures leading to discharge. The granting of discharge of ministers is also included in the Netherlands Government Accounts Act, 2001.

II.COMPARISONS OF OECD COUNTRY LEGAL FRAMEWORKS FOR BUDGET SYSTEMS

Countries with constitutional requirements for submission of annual accounts generally elaborate in law the content of both the annual accounts and the annual reports on budget execution. The example of Finland is provided (Box II.4). The content of reports and accounts reflects Finland’s adoption of a performance-oriented budget system and an accrual accounting system. Not all countries’ laws require such comprehensive reporting. The legal requirements for

Box II.4. Finland: Legal requirements for annual report and annual accounts

Report on the State annual accounts

The report shall include:

●The State annual accounts, all necessary other information on the management of central government finances and compliance with the State budget, together with information on the most important factors determining effectiveness and operational performance of the State’s operations.

●The report shall also incorporate income statements and balance sheets on State public enterprises and extrabudgetary funds.

●Further provisions concerning compilation of the report on the State annual accounts may be issued by government decree.

State annual accounts

The State annual accounts comprise:

●A statement on budget implementation, specified by section or main division, by chapter and by item. This statement includes the surplus or deficit for the financial year shown in the State annual accounts as well as the cumulative surplus or deficit from previous financial years.

●An income and expenditure statement on revenues and expenditure.

●A balance sheet illustrating the financial position on the final date of the financial year.

●A cash flow statement illustrating cash flows.

●Notes to the accounts needed to provide true and fair information.

True and fair information

The State annual accounts and information on the central government finances and the State’s financial management and operational performance included in the report on the State annual accounts shall provide true and fair information on compliance with the budget, on State revenues and expenditure, on the State’s financial position, and on performance.

Source: Finland, State Budget Act 1988, as amended in 2003, ss. 17-18.

II. COMPARISONS OF OECD COUNTRY LEGAL FRAMEWORKS FOR BUDGET SYSTEMS

annual reports in several countries relate only to the institutional units included in the annual budget law, i.e. exclusive of the activities of extrabudgetary funds and public enterprises. In contrast, the Australian Charter of Budget Honesty Act, 1998, requires the final budget outcome report to contain both the budget sector and the general government sector of the federal (“Commonwealth”) government.25

Only a few OECD countries’ budget system laws require a comparison between revenues and expenditures approved by Parliament and actual outcomes, with an explanation of why deviations occurred. There are no obvious patterns as to why some countries do or do not include such a requirement in the law.26 For countries that have not adopted a performance-oriented approach to budgeting, comparisons are usually made at the consolidated level – not at the level of individual government ministries and/or programmes. For example, the 1959 Organic Budget Law in France required the draft budget execution law to present, in an annex, explanatory notes for why budget appropriations were exceeded and the nature of the profits and losses (of certain budget entities included in the State budget). The emphasis was on presenting an aggregate accounting statement to accompany the required legal contents. These included ratification of in-year modifications to appropriations made by the government within its legal powers; approval of budget appropriations that were overspent for justifiable reasons; and cancellation of unspent budget appropriations that are not being carried over. Although laws in some Westminster countries’ laws (e.g. New Zealand) also require statements of unappropriated (excess) expenditures, emergency expenditure and trust money, emphasis is on the requirement for departments to provide an analysis of financial outcomes.

The production of departmental annual accounts has been a long-standing legal requirement in Westminster countries, in part because responsible ministers and heads of departments are required to defend the annual financial outcomes of “their” budget before Parliament. In these countries, a law requires the availability of both departmental and whole-of-government reports, to assist parliamentary oversight. In contrast, some European countries and Japan have stressed only consolidated accounts of the reporting entity (e.g. the federal or central government, the State). Accordingly, if the law mentions departmental accounts, the emphasis is on ensuring that they are available to the Ministry of Finance for consolidation (see country case studies for Germany and Japan). In France, prior to the adoption of the new Organic Budget Law in 2001, there was no legal obligation for ministries to prepare annual accounts and reports.

The obligation to present non-financial information, especially related to departmental performance, is not elaborated on by the law in some countries (e.g. Denmark, Sweden). In such countries, performance-related information is largely “volunteered” to the legislature with the government determining