Public Financial Management and Internal Control: The Importance of Managerial Capability for Successful Reform in Developing and Transition Economies by Noel Hepworth

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 Changing from Financial Control 
to Financial Management in the Public 
Sector: An Introduction to the Changes 
That Will Be Required
 This chapter describes the key aspects of public financial management and 
internal control reform, viewed through a managerial lens. It describes how, 
without a thorough appreciation of the linkage with management, this reform 
will at best fail to meet the intended objectives and at worst could add to 
administrative bureaucracy and hence costs. These are recurrent themes 
throughout this guide. This chapter introduces some of the terms and facets 
of the reform that will be explored in more depth in later chapters. Overall, 
this should be regarded as a major reform and it will take several years to 
achieve. It affects the quality of policy making, the relationships between poli-
ticians and the civil (or local government) service officials, the operational 
managerial arrangements and the approach to internal control and budgetary 
and accounting information. To undertake the reform is not a simple task: it 
has wide-reaching effects including the arrangements for delegation, account-
ability and transparency. The requirements of the reform may be in conflict 
with traditional customs and practices and these may affect whether or not 
the reform can be effectively implemented.
 1.1  The Aim of and Audience for This Guide
 This guide is about the development and then the practical application of the 
public financial management and internal control (PFM/IC) reform. It aims to 
help countries seeking to adopt PFM/IC to undertake this successfully and to 
avoid common pitfalls experienced by many countries which have tried to adopt 

PFM/IC, but ended up ultimately with only superficial reforms. The critical 
pitfall that this guide seeks to highlight and help countries avoid is the common 
assumption that focusing solely on the technical procedures and bureaucratic 
processes of introducing PFM/IC will achieve the substantive benefits of the 
reform. It will not! The technical aspects of the PFM/IC reform are important 
but to achieve a robust reform, managerial changes will almost certainly be 
required. Changes to governance arrangements and transparency are also likely 
to be needed. The nature of the necessary reforms may conflict with traditional 
custom and practice with the risk that such reforms may be difficult to embed.
 Unfortunately, this failure to recognise the impact upon management and 
traditional custom and practice has been a typical feature of financial manage-
ment reform activities, both of PFM/IC and other PFM reforms, such as 
programme budgeting and accrual accounting, leading to some being 
described as ‘fake’ reforms. A key message of this guide is that countries 
should do their utmost to avoid this failure. To do that, countries should rec-
ognise that introducing PFM/IC requires a major managerial reform and it 
should be treated as such by senior politicians and senior appointed officials. 
This guide demonstrates the complexities of the reform.
 Before PFM/IC is introduced, countries will have in place some form of 
public financial administration and internal control (PFA/IC). The principal 
difference between the two systems is that PFA/IC has a focus on the control 
of financial inputs, whereas the more advanced PFM/IC has a focus not only 
on control of financial inputs but also upon the efficient and effective delivery 
of the outputs of public services. This applies equally to revenue collection 
arrangements, including taxation. This change of focus is central to improv-
ing public sector productivity. With PFM/IC the operational management 
of a public organisation has considerably more discretion over the detail of 
spending (and revenue collection arrangements), that is, the mix of inputs 
and levels of spending in order to achieve objectives (outputs) and to do so 
efficiently and effectively, than it would with PFA/IC. Discretion is also 
needed when circumstances require that economies have to be made so that 
minimum damage occurs to existing services and activities. PFM/IC

Public Financial Management and Internal Control: The Importance of Managerial Capability for Successful Reform in Developing and Transition Economies by Noel Hepworth