Malaysia’s recent auditor-general’s (AG) report noted that the government lost RM158 million due to losses in public funds, irregular payments and wastages across various ministries and agencies over 2021.
In consideration of the losses no matter what process and systems you put in place; the breadth of services that are provided by the government means that the systems are also relatively complicated to reflect that breadth of the said services. So, the more products you offer, the more complicated the system is to support it, said Public Sector Financial Reporting of The Institute of Chartered Accountants in England and Wales (ICAEW) Manager Henning Diederichs.
In a recent interview with BusinessToday, Diederichs said in ICAEW’s view, the measures or steps that are important to reduce leakages and wastage of public funds include:
Robust Controls and Processes: Implementing strong controls and processes within Public Finance Management (PFM) is crucial. This includes ensuring segregation of duties, where one person is not responsible for too many tasks. This helps prevent errors and reduces the risk of fraud.
Training and Staff Education: Extensive training processes should be in place to ensure that staff members are well-equipped and knowledgeable about their roles and responsibilities. This training is essential to minimise human errors that can contribute to leakages and wastage.
Real-Time Monitoring System: Implementing an automated real-time (RT) system can help flag irregularities and unusual transactions promptly. The system should be capable of detecting irregular payments or duplicate payments to the same supplier within a short period. Such flags can help identify potential issues and prevent further leakages.
Internal Controls and Audits: Establishing an internal control and internal audit function is crucial to maintaining a complete control environment. Random sampling of transactions should be conducted to review and ensure compliance with established processes. These internal audits provide an additional layer of oversight to identify and rectify any potential leakages or wastage.
By implementing these measures and steps, there can be greater transparency, accountability, and control over the use of public funds, ultimately reducing leakages and wastage within various ministries and agencies.
To improve public service delivery within the government’s machinery and ensure the efficient use of public funds, the following measures are seen as imperative for reforming public financial management (PFM) processes and systems:
Comprehensive Asset Management: It is crucial to manage assets effectively to deliver public services. This includes recognising the need for government buildings, schools, hospitals, and other infrastructure necessary for service delivery. Regular maintenance, upgrades, and capital investments should be made to ensure modern functionality and the use of technology that supports efficient service provision.
Adoption of Accrual Accounting and PFM: Implementing accrual accounting and robust PFM systems allows for a comprehensive view of assets and their utilisation in delivering services. Moving away from cash-based accounting and embracing accrual accounting provides better visibility and decision-making regarding resource allocation.
Digitisation of Government Processes: The digitisation of government services has brought significant improvements in service delivery, transparency, and convenience. For instance, the development of apps like the NHS app in the UK has streamlined healthcare services by collecting health-related data and providing push notifications for personalised needs. Embracing digital platforms and technologies can enhance public service delivery.
Focus on Transparency and Trust: Transparency in public finances is crucial to building trust between the government and its citizens. Enhancing transparency involves providing clear and accessible information about public expenditures, revenue sources, and overall financial management. This can be achieved through regular reporting, disclosure of financial data, and open communication channels.
Long-Term Financial Planning: Governments should engage in strategic long-term financial planning to address intergenerational aspects of public finance. This involves considering the implications of borrowing and ensuring that present-day service provision does not burden future generations. Clear communication about financial challenges, potential liabilities, and the need for responsible fiscal management is essential.
Increase Taxation as Necessary: In cases where public debt has increased significantly, governments may need to consider increasing tax rates to address financial challenges and ensure sustainable service delivery. Communicating the need for increased taxation by highlighting the intergenerational aspect and emphasising the shared responsibility of current and future citizens can help garner support for such measures.
By implementing these measures, governments can reform their PFM processes and systems, enhance the efficiency and effectiveness of public service delivery, promote transparent public finances, and improve trust between the government and citizens.
Asked correspondingly, in managing funds or capital, how could the private sector enhance its value?
Diederichs was of the view that in managing funds or capital, the private sector can enhance its value by focusing on sustainability.
However, a challenge arises because sustainability reporting standards are primarily geared towards the bottom line and financial materiality. These standards assess the risk that climate change, particularly CO2 emissions, poses to the bottom line and profitability.
This focus aligns with the private sector’s investor interests. On the other hand, the public sector needs to take a broader view that considers the impact on society as a whole and various stakeholder.
Allocating more funds to climate mitigation measures means less money is available for other essential public services like education, policing, or healthcare. Thus, the public sector faces the challenge of managing finances while addressing the impact of its actions on stakeholders.
Sustainability financial reporting is essential for the future because it provides a comprehensive understanding of an entity’s impact on both financial and non-financial aspects.
This involves adopting a concept called “double materiality,” where sustainability reporting considers the impact on broader stakeholders and society, rather than solely focusing on financial materiality.
From 2023 onwards, sustainability reporting in the public sector should play a more prominent role by incorporating impact analysis and considering multiple forms of capital. This includes financially produced capital, such as GDP, societal capital, which involves the well-being of citizens, and natural capital, which pertains to the environment and natural resources.
The aim is to ensure equal consideration and benefits for all stakeholders and avoid leaving anyone behind.
In terms of accounting for natural resources, there are some challenges. Currently, natural resources do not meet the definition of an asset, leading to issues of measurability and control.
There is a need to debate whether the definition of assets should be updated, especially in the public sector context, to better record these assets. While valuing natural resources based on their ability to absorb CO2, such as forests, is a starting point, it may undervalue their overall benefits.
It is suggested that a price on carbon could provide a monetary value for the CO2 absorption capability of forests. However, it is also important to consider other aspects beyond CO2, such as the broader environmental benefits of forests. Controlling access and managing natural resources, like forests, can be a way forward.
Although there are challenges, putting natural resources on the balance sheet is a crucial step, as what gets measured can then be effectively managed.
Sustainability reporting offers several critical benefits, although it is still in its early stages, particularly in the public sector. One of the main advantages is that it serves as a vehicle to demonstrate the positive actions and initiatives taken by organisations, including governments, to their citizens.
Sustainability reporting, such as ESG (Environmental, Social, and Governance) reporting, allows governments to showcase their efforts in addressing social issues like reducing homelessness and providing social housing.
This helps build transparency and trust with taxpayers by showing how their money is being used to assist those in need, particularly the most vulnerable members of society.
Furthermore, sustainability reporting provides a framework for benchmarking and measuring progress. Governments can develop a national strategy for the environment, setting clear objectives and key performance indicators (KPIs) that guide their sustainability efforts.
This strategic approach enables individual entities within the government to align their actions with the national strategy and contribute to the overall goals. By establishing measurable objectives and KPIs, progress can be effectively tracked and reported.
Governance plays a crucial role in sustainability reporting. Governments need to have the right tone from the top, meaning that leadership and decision-makers must prioritise sustainability and set the direction for action.
Clear governance structures and responsibilities need to be in place, with designated individuals or departments responsible for sustainability reporting and implementing sustainability initiatives.
These governance-related factors contribute to the creation of meaningful and impactful reporting.
It is important to note that reporting is a reflection of actions. Before reporting on sustainability initiatives, organisations must first take concrete actions to address environmental, social, and governance aspects. Reporting should not drive policy but rather be driven by policy decisions and actions.
Diederichs o ensure an effective and comprehensive approach, a national strategy for the environment is necessary. The strategy should be established at the highest level of government, with clear targets for specific years, such as 2030 or 2050.
The transition towards sustainability, particularly in achieving net-zero emissions, should be a just transition that benefits both society and nature. This entails aligning sustainability actions with nature-positive approaches and ensuring a smooth and equitable transition for all stakeholders involved.
In summary, the critical benefits of sustainability reporting include transparency, citizen engagement, benchmarking progress, governance, and accountability. By adopting sustainability reporting practices, governments can showcase their positive contributions, measure their impact, and effectively work towards a sustainable future.
In the United Kingdom presently, there is a mandate for listed companies to follow the Task Force on Climate-related Financial Disclosures (TCFD) requirements, while Small and Medium Enterprises (SMEs) in the UK follow the UK Generally Accepted Accounting Principles (UK GAAP).
The good news is that these TCFD requirements can also be applied in Malaysia. It is expected that in Malaysia, starting from 2425 onwards, listed companies will be required to produce sustainability reports following the TCFD framework.
In the public sector, the Global Reporting Initiative (GRI) sustainability reporting standards are considered highly relevant. These standards take into account multiple stakeholders, including their impact on the financial statements of the entity, as well as the wider impact on society and nature. GRI standards are comprehensive in assessing the effects of climate change and other issues.
Regarding Public Financial Management (PFM) reforms and initiatives, sustainability reforms have not been widely implemented in the UK yet. However, in terms of PFM reforms, asset management and liability management have seen notable progress.
Asset management involves evaluating the split between core and non-core assets. Non-core assets are examined to determine if they can be sold or if they are necessary for the entity’s operations.
On the other hand, core assets are assessed based on their utilisation rate and financing arrangements. The aim is to optimise asset usage and explore opportunities for creating new assets through private partnerships.
Additionally, there have been PFM reforms focused on office consolidation in the government sector. Previously separate departments have been amalgamated, resulting in increased efficiency and collaboration among officers working in the same office.
On the liability side, the government has established a dedicated risk team to enhance risk management practices. This team evaluates contingent liabilities, assessing their likelihood of realisation. Furthermore, the government explores opportunities to charge for the financial guarantees it provides.
This approach ensures that the government’s financial guarantees hold value and can potentially generate revenue.
