Introduction to Public Financial Management

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    • 00:05

      [Introduction to Public Financial Management]

    • 00:09

      DR. ALBERTO ASQUER: This film is an introductionto public financial management. [Dr. Alberto Asquer SOASUniversity of London] I aim to outline some conceptsand issues about the financial managementof the public sector, especially about planning and budgetingrevenues, and auditing.[Planning and Budgeting]Planning and budgeting are fundamental functions

    • 00:32

      DR. ALBERTO ASQUER [continued]: for any government and public sector organization.Planning consists of the location of public moniesto programs such as health, education, welfare, and so on.In many countries, the governmentsplan spending in public programs with so-called medium termexpenditure framework, which includes expenditure planningup to five years in the future.

    • 00:54

      DR. ALBERTO ASQUER [continued]: Every year, moreover, the governmentsformulate the budget, which containsmore detailed financial expenditureplanning in the short term.We know that governments have a lotof discretion in their financial planning decisions.For example, on maintenance of buildings or new capitalinvestment projects.The governments, however, are also

    • 01:15

      DR. ALBERTO ASQUER [continued]: constrained by commitments that have been taken in the past,often by previous governments many years before.For example, some expenditures maybe committed to repay debts that have been made in the past.In addition, we should not forgetthat expenditure decisions mad by the governmentsare typically reviewed and approvedby national parliaments before the budget is implemented.

    • 01:40

      DR. ALBERTO ASQUER [continued]: One of the main issues that arise in the planningand budgeting function is to assesswhether public expenditures are worth doing.We all want to know, as citizens and taxpayers,where public monies were spent.An answer to this question typicallycomes in the form of evaluations of public policiesand programs.Some techniques, such as a cost benefit analysis,

    • 02:02

      DR. ALBERTO ASQUER [continued]: helps estimating additional utilitythat spending on a public programdelivers with respect to the expenditures.The evaluation is based on evidence that is typicallyprovided by performance reviews where data about benefitsand other results are collected, analyzed,and reported to public authorities and to the public.In the evaluation of public programs,

    • 02:24

      DR. ALBERTO ASQUER [continued]: a crucial distinction is made between outputs and outcomes.[outputs]Outputs refer to what the programs deliver in a waythat can be measured by collecting dataabout the quantity and quality of the services.[outputs: measurable, i.e.Data, quantity, quality] For example,we can measure outputs in terms of numberof pupils who pass the final examinationsand the distribution of their marks

    • 02:45

      DR. ALBERTO ASQUER [continued]: over the number of [INAUDIBLE] or hoursof [INAUDIBLE], and of numbers of fires that are extinguished.Outcomes, instead relate to the mostat substantive and long-term affectsof public policies and programs. [outcomes: long-term effects]For example, the outcome of educationis to make individuals able to find good jobs,to take their learning to further levels,and to be engaged in the society in a meaningful way.

    • 03:09

      DR. ALBERTO ASQUER [continued]: Measuring the outcomes of public programsis harder conceptually and the operationallythat measuring the outputs.For example, how can we measure the outcome of school teaching?The results from the final examinationsis not clearly related to the most the substantiveand long-term effects of the educationthat the pupils receive.Having passed exams and having received good marks is not

    • 03:32

      DR. ALBERTO ASQUER [continued]: the same as finding good jobs, furthering the studies,or engaging meaningfully with a society.These effects of good education areapparent only after some years after the completionof the course of study.So when we wanted to evaluate public programsand assess whether public expenditures are worththe undertaking, we needed to think

    • 03:53

      DR. ALBERTO ASQUER [continued]: hard about what we should the measure in order to appreciatethe outcome of public spending.[Revenues] Revenues refer to the acquisition of financialresources by the government and public sector organization's.Revenues originate from different sourcessuch as, for example, taxation, tariffs concessions,

    • 04:17

      DR. ALBERTO ASQUER [continued]: franchises, privatization, and sale of public assets,exploitation of natural resources, and other things,like lotteries for instance.Taxation is the main source of revenue in the public sectorin many counties.Taxation, as we know, originates from the authoritative powerof the state, which can subject the taxpayers to obligations

    • 04:37

      DR. ALBERTO ASQUER [continued]: to pay taxes.There are several sources of taxes, however,such as personal income tax, corporate income tax,taxes from production or excises,taxes on exchanges like VAT and sales tax,and taxes on international trade like custom duties.In developed countries, taxes on personal incomeprovide one main source of tax revenues.

    • 04:59

      DR. ALBERTO ASQUER [continued]: In developing countries, instead, most of tax revenuesderive from taxes on production, exchange,and international trade.These taxes are called indirect taxationbecause the economic actor that is chargedis typically able to shift the burden of taxationto other actors.For example, the producer of a goodtypically charge the clients for the payment

    • 05:20

      DR. ALBERTO ASQUER [continued]: of production taxes.A general [INAUDIBLE] of taxationis they want to understand who really bears the cost of taxes.In general, taxes have distortionary effectson the economy.The introduction of a tax resultsin less quantity of a good or service which is produced.Customers typically pay a price for the goodif it is taxed that is higher than without the taxation.

    • 05:41

      DR. ALBERTO ASQUER [continued]: And producers typically receive less revenuefrom the sale of the good that is taxed.Taxes generate dead weight losses in the economy.That is, the economy creates less valuewhen production, consumption, income are taxed.When the governments plan to introduce new taxes,therefore, they should be careful to anticipate

    • 06:02

      DR. ALBERTO ASQUER [continued]: the effect on the economy.High level of personal income tax, for example,may induce individuals to prefer consuming their spare timerather than earning more income, if a large partof additional income is taken away by taxes.Alternatively, high level personal income taxmay encourage taxpayers to work for cash so as

    • 06:22

      DR. ALBERTO ASQUER [continued]: to lower their reported earnings to tax authorities.Again, high taxes on the income from savings, for instance,encourage individuals to save less for the futureand to enjoy more consumption today.So there are some principles that we shouldorient to taxation generally.But some principles of good taxationhave been formulated since long ago.

    • 06:43

      DR. ALBERTO ASQUER [continued]: In the Wealth of Nations, Adam Smith, 1776,argued that taxation should followfour principles of fairness, certainty, convenience,and efficiency.Fairness has to do with the normative criteriato make taxes comparable with the conditionsof the taxpayers.Certainty means that the taxpayers

    • 07:05

      DR. ALBERTO ASQUER [continued]: should be informed about why and how taxes arelevied in a transparent manner.Convenience relates to the ease of compliancefor the taxpayers.And efficiency implies that the taxesshould be collected with having considerationfor the administrative cost that the tax system bringson individuals who are held responsible for paying taxes.

    • 07:27

      DR. ALBERTO ASQUER [continued]: These principles of good taxationform a sound basis for orienting taxation still today.In many respects, these principlesare not always followed, however.Sometimes a tax system are not quite fair.For example, when they specially hitcertain categories of taxpayers rather than others,or when they seem to be relativelymild toward other taxpayers.

    • 07:50

      DR. ALBERTO ASQUER [continued]: Sometimes tax systems are not quite the transparent.For example, when taxes are charged on some goodswithout explicit indication of the tax on the bills.Sometimes taxpayers are burdened with administrative tasksthat impose an additional cost on tax compliance.And for example, when taxpayers haveto fill yearly tax returns with a certain amount of effort.

    • 08:14

      DR. ALBERTO ASQUER [continued]: So there are several issues that wehave to consider in the design of the appropriate taxationschemes.[Auditing and Assurance]Auditing is a social practice carried outby accounting or legal professionalson the basis of explicit and codified proceduresthat has increasingly gained an importance in the last decades.

    • 08:36

      DR. ALBERTO ASQUER [continued]: Auditing the public sector used to center on checksthat the laws, rules, regulationson the use of financial resources are followed.Nowadays however, auditing the public sector alsohas a broader meaning.It has to do with ensuring that public monies are usedfor attaining public policy objectivesin an efficient and effective way.So there was originally a concern

    • 08:57

      DR. ALBERTO ASQUER [continued]: with the compliance, which has shiftedover time with a greater concern with the performance.So having a look at the results we get out of public spending.So the role of auditors has changed over time.Nowadays, they are very much concernedwith monitoring whether there is value for money, whichis delivered to taxpayers.

    • 09:18

      DR. ALBERTO ASQUER [continued]: Technically, the work of auditorshas to do with some particular kinds of checks, which theydo in order to detect errors, mistakes,or even deliberate misrepresentationsof financial accounts.Sometimes, in fact, from the sideof managers or accountants, thereis the intention to misrepresent what they did in order

    • 09:40

      DR. ALBERTO ASQUER [continued]: to cover their wrongdoings, or sometimes even their fraud.Of course, from the side of the auditors,there is a lot of concern to employ techniques in orderto make cross checks, to track where money has been spent,in order to detect all forms of wrongdoingsthat individuals may commit.[How do auditors internally audit?]

    • 10:04

      DR. ALBERTO ASQUER [continued]: How do auditors carry out internal audits and control.So if we get into details of the techniques,then we can find a variety of ways that they can employ.For example, auditors may recommendincreasing the security over accounting softwareby setting passwords that are harder to break,or limiting the functions that certain categories of users

    • 10:28

      DR. ALBERTO ASQUER [continued]: can perform.Other techniques have to do with detectingwhether incorrect or illegal actions happen.For example, auditors may cross check documentsto see whether information has been recorded appropriately,or make inspections to company warehousesto see whether the actual stock equals the recorded one.

    • 10:48

      DR. ALBERTO ASQUER [continued]: Further technique's aim to rectify actionsthat are incorrect or illegal.For example, auditors me ask to modify a payroll entry if theybelieve that it is wrong.The work of auditors results in the production of assurancethat is generally understood as the improvementof the quality of information that organizations produce.

    • 11:08

      DR. ALBERTO ASQUER [continued]: Auditors can't guarantee that the organizations that theyaudit are completely immune from errors, mistakesor misrepresentations of their financial condition, partof which may remain unnoticed to some extent.But what they can tell to the stakeholdersof the organization is whether theyjudge that the organization manages financial resources

    • 11:29

      DR. ALBERTO ASQUER [continued]: prudently, and to whether the financial reportsprovide a true and fair view of the organization'sfinancial condition.In the work of the auditors, therefore, thereis some amount of subjectivity whenthey formulate their opinions.So managing financial resources in the public sectoris extremely important still nowadays as ever.

    • 11:50

      DR. ALBERTO ASQUER [continued]: And gaining the competencies, the skills, the capacityto manage financial resources hasto do with acquiring several kinds of competencies.In planning and budgeting, in managing the revenueslike taxation from other sources,and in conducting auditing of public sector organizations.On the top of these, of course, typically what this is required

    • 12:12

      DR. ALBERTO ASQUER [continued]: it is also a sound basis in accounting principlesso that individuals can make sense of financial statementsof public sector organizations.

Introduction to Public Financial Management

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Professor Alberto Asquer provides an overview of public financial management practices. He discusses planning, transparency, and auditing.

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Introduction to Public Financial Management

Professor Alberto Asquer provides an overview of public financial management practices. He discusses planning, transparency, and auditing.

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