Operating the funds outside IFMIS potentially increases the risk of fraud and corruption
BY MOSES AGESA
Auditor-General Nancy Gathungu has raised fears that the Sh30.53 billion sunk in the county public funds in the last three financial years may have been misappropriated as they operate outside Integrated Financial Management Information System (IFMIS) and therefore lack the required oversight.
The Public Finance Management (PFM) Act provides for the establishment of county public funds with the approval of the County Executive Committee (CEC) and the County Assembly.
But Ms Gathungu, in a document presented to parliament, warns that operating county funds outside IFMIS, which has been instrumental in prudent and transparent use of public resources through increased visibility of financial transactions by the government, potentially increases the risk of fraud and corruption.
“County funds operate outside IFMIS and therefore payments made by these funds may not be properly recorded as the management information system used to record business transactions is mainly manual,” warns Ms Gathungu.
The document shows that the 47 counties have 267 funds with 209 belonging to the county executives and 58 owned by the county assemblies.
The most common funds are the county education fund, bursary fund, county car loan and mortgage scheme fund, county enterprise fund and the social protection fund.
The others are county emergency fund, county assets leasing fund, county cooperative development revolving fund, county business stimulus fund, county persons with disability fund and the county youth and women enterprise development fund.
The document indicates that in the last three financial years, the 209 county executive owned funds have received Sh29.3 billion with the 58 county assembly funds getting Sh1.23 billion.
Other than operating outside IFMIS, Ms Gathungu decried the unregulated creation of the funds by counties, which she says creates administration challenges in oversight as “Auditor-General may not be aware when new funds are created.”
There is also a lack of documented budgeting process for the funds, reduced oversight and accountability and inefficiencies in financial operation.
“Counties are not limited in the number of funds they can set up. They can set up and wind up funds without any limitation in numbers,” says Ms Gathungu adding; “this mat not only creates duplication of the departmental roles but may also increase administration costs without commensurate benefits.”
The document notes that the budgets for the funds are “seldom” presented to county assemblies or independent governance structures for approvals as required by the PFM Act.
Also revealed is that the expenditures incurred by the funds are not captured in quarterly reports to the Controller of Budget (CoB) “as they are treated as part of expenditure for the executive or county assembly.”
She says that the expenditure is reported in gross as transfers to other government entities, which reduces the level of oversight and accountability provided for in the PFM Act.
The constitution and the PFM Act and its regulations require any amount not spent by a public entity at the end of a financial year to be repaid to the County Revenue Fund (CRF).
All revenues received by a county must first be remitted to the CRF.
However, the Auditor-General notes that the county executives have been using county funds to sidestep “this requirement” as cash not spent in a financial year by the county funds are not being repaid to the CRF to allow re-approval by county assemblies and expenditure approval by CoB.
“This allows county funds to have extra finances outside the budgeted amount in a given financial year. This has resulted in audit issues such as lack of an approved budget,” Ms Gathungu says.
Although the funds are created as noble ideas to increase counties’ efficiency and therefore serve citizens better, their unregulated creation and lack of oversight have become avenues for looting and other financial improprieties.
To address this, Ms Gathungu says that it may be necessary to develop a definite county funds budgeting structure that would ensure accountability in their operations to cushion public funds from unnecessary wastages.
“Implementing robust control mechanisms and ensuring compliance with relevant regulation can help address these challenges and enhance efficiency and effectiveness of the county funds,” the document says.
She nonetheless decried that “some funds records are maintained manually.”
This, according to the Auditor-General, has resulted in audit issues such as inaccuracies in the financial statements, non-compliance with the Public Sector Accounting Standards Board (PSASB) requirements, unsupported expenditures and unsupported bank withdrawals.
It also exposes the public funds to difficulties in monitoring performance, thereby hindering the ability to assess their effectiveness in achieving set targets and future planning.
“This creates a lack of transparency in financial transactions. It becomes difficult to monitor and track the inflow and outflow of funds as well as ensure accountability,” Ms Gathungu says.
Operating the county funds outside the main financial system may create difficulties in integrating with other public sector initiatives and programmes.
Whereas county functions are the same, some county executives are not reporting expenditure under some devolved functions and initiatives in the financial reports as these programmes have been transferred to the county funds.
Ms Gathungu cautions that operating the county funds separately from IFMIS has the possibility of leading to inefficiencies in financial operations.
This includes challenges in budgeting, cash management and reporting, which she says, can impact “the overall financial health of the fund.”
“This can lead to duplication in budgeting as activities and programmes will be planned at fund level and again budgeting of the same may be made under the line county department.”
The payments are also done at two levels- transfer from the county executive to the fund and then from the funds to the service providers thereby increasing the operation costs.
Of concern also is the fact that bank accounts for the funds are operated by commercial banks and in some cases the terms are unfavourable hence attracting more costs that are nugatory in terms of bank charges.
Working outside IFMIS also creates potential conflict of interest as staff operating the funds are employees of the concerned county executives or county assemblies and may even be officers in the county departments overseeing the operations of the funds.