French public accounting reform : Key driver of the State modernization plan By N. MORIN Head of “Fonction Comptable de

1. French public accounting reform : Key driver of the State modernization plan By N. MORINHead of “Fonction Comptable de l’État” division DGCP Ministère du budget, des comptes et de la fonction publique

2. Agenda • Legal and institutionnal framework • Revamping central government  accounts • Increasing the reliability of central government accounts through internal control • The certification of central government accounts : first target met, but a continuing process

3. A major accounting reform in order to use accounting to improve the effectiveness and the transparency of state action : a reporting medium a steering tool A three dimensional accounting system (see chart below): budgetary accounting = cash-based accounting general accounting = accrual based accounting cost efficiency accounting New principles for general accounting set by the OLB : a declared ambition to bring central government accounts closer to private sector best practices the rules applicable to central government differ from those available in the private sector only because of the specificity of the State’s actions (article 30) the central government’s accounts must be regular, sincere and give a true and fair view of its net worth and financial position (article 27) the court of auditors is entrusted with a mission of certification of the regularity, of the sincerity and of the reliability of the central government’s accounts (article 58) Legal and institutional framework : what does OLB change?

4. Budget execution in compliance with Parliament authority Budget Accounts (cash-based accounting) The faithful representation of transactions and events and the presentation of true and fair Government: an exhaustive follow up of Assets, Liabilities and Ownership Budget and Financial Accounts (cash-based accounting) LOLF adopted Financial Accounts (accrual accounting) Cost accounting system (Annual Performance Report) Effective government spending: Measure the cost and the performance of French administration and its public policies A three dimensional accounting system

5. A challenging reform … a very tight timetable a two-fold reform : a budgetary reform and an accounting reform conducted at the same time no transitional measures inappropriate IT systems … made possible however thanks to several advantages strong political support a centralized accounting system a network of specialized accountants Knowledge in general accrual accounting an internal control system already in place Mutual control between authorizing officers and accountants Internal audit Legal and institutional framework : handicaps and advantages

6. Authorizing officers are responsible for efficiency, conformity of governmental actions and account for the goals they achieved and the means they employed Accounting officers are required to keep the accounts and to guarantee the integrity of the accounting system “The public accountants in charge of keeping and producing central government’s accounts ensure the consistency of accounting quality principles and especially the accuracy of accounting records and the respect of the procedures“(article 31) Legal and institutional framework : Who does what in French administration ?

7. Agenda • Legal and institutionnal framework • Revamping central government  statements • Increasing the reliability of central government accounts through internal control • The certification of central government accounts : first target met, but a continuing process

8. Revamping central government accounts : establishing new accounting standards • A special independent body in charge of drawing up the new standards : the committee for public accounting standards • made up of experts and academic specialists in both public and private sectors • Taking into account international & private sector standards where appropriate • french general accounting chart and decisions form the French accounting regulation committee • international standards (IFRS) • standards from the IFAC (IPSAS) • but taking into account public sector specificities where necessary • by adapting some standards (eg. Financial statements) • by developing new standards (eg. Tax receivable)

9. Enhancing the central government ’s accounts : initializing the opening balance sheet • A significant operation • reconstituting central government ’s accounts within three years • an operation requiring the involvment of thousands of financial managers (authorizing officers) based throughout the country • A realistic approach • focused on financial and managerial stakes for the 2006 opening balance sheet • state real estate ; • provisions for risks and contingencies ; • charging revenues and charges to the correct fiscal year… • targeting the objective to gradually widen its scope (2006/2009) • intangible assets

10. Enhancing the central government’s accounts : Impact of the reform • Changes introduced by the accounting reform have improved the government’s net worth by + 161 € billion (opening balance sheet) in 2006 due to a large amount of State assets that were not recorded in the previous accounting framework. • Comparison of State assets and liabilities 31.12.2005 and 01.01.2006 (opening balance sheet): (1) Assets : excluding transitory accounts (2) Liabilities : exluding financial debt, other liabilities, transitory accounts

11. Main impact of methodological changes : valuation of fixed assets (roads, military ) and financial assets (government investments) Comparison of assets on State balance sheet 2005 and 2006 + 21 € billion + 154 € billion + 26 € billion

12. Impact of accrual accounting on the State assets, liabilities and net worth • New elements have been integrated into the balance sheet: CGAF CGE 31.12.2005 01.01.2006 € Billion € Billion • Intangible assets026 • Military developments, software • Tangible assets in progress027 • Roads in progress, military equipment in progress • Inventories0 32 • ammunitions, or vaccines,… • Provisions047 • Valuation of State risks

13. Agenda • Legal and institutionnal framework • Revamping the central government accounts • Increasing the reliability of central government accounts through internal control • a framework in line with COSO objectives and key concepts • the keys to a successful implementation • The certification of central government accounts : first target met, but a continuing process

14. General move towards strengthening of internal control A widely accepted response to increased regulatory requirements FINANCIAL STATEMENTS OPERATIONS COMPLIANCE Monitoring Activity 2 Information & communication Activity 1 Unit B Unit A Control activities Risk assessment Control environment SOX FSL(SOX French equivalent) CRBF 97-02(French banks) Confidence, transparency & performance FMA(SEC French equivalent) European directives (Bâle 2, Solvency 2) LOLF • One internal control framework has emerged as predominant : COSO • French central government’s internal control system is inspired by COSO

15. French internal control : a framework in line with COSO objectives and key concepts • Definition : an integrated process carried out by the managers and the staff of an organization and designed in order to manage the organization ’s risks and to provide reasonable assurance that the organization ’s goals and objectives will be pursued through : • effectiveness and efficiency of operations • reliability of financial reporting • safeguarding of assets • avoidance of risk of error or fraud • compliance with applicable laws and regulations

16. French internal control : The COSO five key concepts • 1. Control environment • internal control standards defining shared principles : • common principles, rules and language • a process-oriented approach based on a cartography of 74 accounting processes • IT systems designed to meet the requirements of accrual accounting as well as security and traceability requirements

17. French internal control : The COSO five key concepts • 2. Risk monitoring system • identifying and assessing the risks : • a cartography of the risks identifies and ranks the risks for each process • an action plan defines the relevant measures to cover up uncontrolled risks • Bodies dedicated to risk-management • a steering committee chaired by the general director decides the internal control policy and monitors its implementation

18. French internal control : The COSO five key concepts • 3. Documentation of risks and procedures • Documentation on risks : standard risk-assessment tools : • potential risks of each process are described and measures to manage them are proposed • these risk-assessment tools are designed specifically for the managers so that they can evaluate the reliability of the processes they are responsible for • Online procedure guidelines • tools designed specifically for operative staff in order to enable them to perform their duty securely • IT tools that each staff can connect to from his computer desk

19. French internal control : The COSO five key concepts 4. Control of activities : the public accountant network has implemented a new architecture following a 2-fold logic : Local and national levels to mirror the largely decentralized structure of State services and ensure consistency and homogeneity of the overall system 3 levels of control to produce intermediate reportings and ensure the monitoring on the internal control system • The “Mission de Vérification des Comptes de Gestion (MVCG)”, reporting to FCE, centralizes the reportings and produce a synthesis at national level National level 3rd level control : MVCG Local level (TG) • A special function (CQC) ensures the quality of the 1st level of control 2nd level control : CQC Controls by supervisors 1st level control • Operations undertaken by the accountants Mutual controls self-controls

20. French internal control : The COSO five key concepts • 5. Continuous monitoring by audit • A major component of the internal control system : • the audit must evaluate the effectiveness and the relevance of the internal control system • the auditors make recommandations to improve the whole system and make it more reliable • Implementation of a financial and accounting audit • an audit of the whole process, from the accrual basis to the outcome, which encompasses the authorizing officers ’activities as well as the accoutants ’ activies • joint audits between public accountant general directorate audit body and line ministries’ audit bodies

21. Phases Summary : journey towards a continuous progress The internal control process is implemented in a iterative and continuously improved manner Deliverables General target of accounting quality and performance indicators Risk mapping Risk analysis : identification, assessment and ranking of risks Audit Action plans Action plans Reporting Accounting internal control framework Internal control plan Internal control frameworks Procedure guides

22. Agenda • Legal and institutionnal framework • Revamping central government accounts • Strengthening the reliability of central government  accounts through internal control • a framework in line with COSO objectives and key concepts • the keys to successful implementation • The certification of central government accounts : first target met, but a continuing process

23. The keys to successful implementation • A necessary interdepartmental approach • the accounting function is shared between authorizing officers and accountants • the quality of the accounts depends on the overall quality of processes • the constraints associated with this interdepartmental approach • line ministries unaware of the part they have to play in accounting quality • a general misundertanding of the meaning of internal control • teams very busy implementing the budgetary reform

24. The keys to successful implementation • An approach focused on accounting risks • process analysis covering financial and accounting risks • an option given to line ministries to encompass budget and decision-making risks • an approach based an incentive • the desire to make managers aware of their own responsabilities • the belief that sound and effective implementation cannot take place without genuine support • a pragmatic approach • a system adapted to existing internal control and adjusted to needs

25. Agenda • Legal and institutionnal framework • Revamping central government accounts • Increasing the reliability of central government accounts through internal control • a framework in line with COSO objectives and key concepts • the keys to a successful implementation • The certification of central government accounts : first target met, but a continuing process

26. The certification of central government accounts : an achieved target • The Court of auditors recognizes the acknowledgesconsiderable efforts made to prepare for the implementation of central government accounting reform • However, central government accounts contain some anomalies and consequently the Court gave a qualified opinion on 2006 accounts • France ranks among the few State whose accounts have been certified : • only two States’ accounts have received an unqualified opinion : Canada and New-Zealand • four States’ accounts have received a qualified opinion : Australia, Great-Britain, the EU, France

27. The certification of central government’s accounts : an achieved target • The 13 qualifications of the Court of auditors may be classified in four categories : • general observations : • limits of the existing IT systems, as far as the audit trail is concerned • inadequacies of internal control and/or internal audit within some line ministries • ambiguities of the accounting standards : the public accounting standards committee has been summoned to clarify the standards • disagreements between the certification authority and the ministry of the budget, public accounts and civil service • specific items that can only be adressed within a multi year action plan : • military assets, roads • intangible assets

28. Conclusion- The benefits of internal control • Enhanced accounting quality • Both decision makers and accountants are more accountable • Risk management is required by the certification body • The certification body relies on the quality of the internal control system to adjust the nature and scope of its tests • The internal control related tasks is the core topic in exchanges with the certification body • A cultural change in line Ministers reflects the increased awareness of the stakes linked to internal control • An improved monitoring thanks to better control of risks • Originally perceived as a constraint, internal control is increasingly considered as an opportunity to improve the performance of public action

29. Conclusion- Next steps The reform is now well advanced. It will continue to be implemented as a multi-year plan : • The approach of internal control strengthening has had a very positive impact on the State’s financial statements. Efforts will continue in coming years : • Finalization of the action plans at Ministerial level • Regular updating and monitoring of the framework to integrate the internal control approach fully as a perennial process • The State has also pledged in the medium term to modernize its information systems, including the roll-out of an ERP (Chorus project). • The State has undertaken a survey of the 1st LOLF closing statement in order to further improve the closing statement process and streamline the production of financial statements. • The State has committed itself to providing to Parliament with enriched, reliable and transparent accounting information, which in turn will help the Parliament to assess the possible manoeuverability as for as budgetary & fiscal medium term policy is concerned.

30. Legal Framework (LOLF) Institutional Framework Reform Implementation Public  Expenditure Management: Conformity Performance Transparency Accountability Public Accounts: Faithful Lawful True and fair view A budgeting reform: New budget framework public management performance-oriented A new accounting framework Reform process: prerequisites and important issues A new public financial management framework: -a strong internal controlsystem -a systemic approach A New IT architecture An accounting reform: from a cash-based accounting to an accrual-based accounting system New organisational arrangements of financial management system: -authorizing officers, accountants roles and responsibilities -central government accounting Unit -reinforcement of financial internal auditing -Specific monitoring Boards Goals achieved: -an improved vision of State assets and liabilities -a more comprehensive financial reporting Control and Auditing reform: -accountants linsure public accounts quality and compliance -certification of State accounts by the Court of Accounts SAI opinion on State accounts for 2006: a qualified opinion Cost accounting system: public policies efficiency’ assessment Relations with SAI: continuous dialogue  Future challenges Change conduct Overview of the Government Accounting Reform process

31. Authorizing Officers Accounting Officers Organise and put in place: - Organisational structures - Delegations - Internal management and control procedures in accordance line with laws and regulation Manage: budget appropriations and are committed to their goals and accountable for their management actions via results indicators Authorize expenditures; approve contracts and place orders; certify that goods have been received and that services have been provided as specified; authorize payment Responsible for keeping accounting commitments, budgetary accounting and cost accounting systems Are accountable and report to the Minister and Parliament in an annual performance report. Handle and collect receipt orders passed on to them by the authorizing officers Pay expenditures Carry out cash transfers, that is movements of funds that are neither receipts nor payments; Keep financial records that describe these operations In charge of inventory records in cooperation with authorizing officer staff Lay down the accounting rules on methods and the chart of accounts Are required to keep the accounts and prepare the annual accounts for the Parliament Are responsible for maintaining the quality of ministerial accounts Internal audit capabilities: Based on ministerial unit audit or ministerial Inspectorate General Internal audit capabilities: based on Treasury offices internal audit unit Key Players roles and responsibilities