1 INTRODUCTION

In every department of government in South Africa, public officials are accountable

for their actions therefore the accountability must be maintained properly within those
departments, financial control is necessary. Financial control is to ensure that there
is no misuse of public funds, in different departments of government. The financial
transactions should be clear and transparent so that the recordings are in right
manner. Managers in departments utilise financial statements and other financial
tools to exercise financial control.

The assignment will analyse the financial control, namely external and internal
control in more detail and describe the effectiveness and significance in Public
Financial Management. Firstly, the assignment will start by defining terms such as
financial control, external control and internal as they will be used throughout the
entire discussion. Lastly, it will conclude by discussing the effectiveness of financial
controls in Public Financial Management, specifically relating to South African
government.

2 DEFINITION OF TERMS

2.1 FINANCIAL CONTROL

Financial control is the process which ensures that financial resources are obtained
at cost considered to be economical and utilised efficiently and effectively for the
attainment of established objectives (Fox and Meyer 1995 :29).

2.2 INTERNAL CONTROL

Internal control is the whole system of control, financial or otherwise, established by

the management to carry on the business of the enterprises in an orderly and
efficient manner, adherence to management’s policies, safeguard the asset and
secure as far as possible the completeness and accuracy of the records (Jones and
Bates 1990: 75).

2.3 EXTERNAL CONTROL

External control are organisational arrangements set out under the framework of
parliamentary or executive control but operate from outside the boundaries of

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government departments, with the aim of ensuring effective and efficient
performance in public sector agencies (Shafritz 1985:281).

2.4 PUBLIC FINANCIAL MANAGEMENT

According to McKinney (1995:1), public financial management is the process

whereby a governmental unit or agency employs the means to obtain and allocate
resources or money, based on articulated priorities, and then utilizes methods and
controls to effectively achieve publicly determined needs.

3 FINANCIAL CONTROL IN PUBLIC FINANCIAL MANAGEMENT IN

GOVERNMENT

Lucey (1996:37) states that control is concerned with the efficient use of resources to
achieve some previously determined objectives contained within a plan. Financial
control is a very significant type of control in the management of government finance.
Financial control it be the sum of the work, which guides, directs and interprets the
budget cycle. It covers the activities of the Executive branch, involving finance and
the ministries. In democratic era, financial control operates internally and externally.

Within the executive arm of government control by the finance ministry is internal
while audit by the Auditor-General (AG) and legislative oversight constitute external
control. Financial control is carries out by the High Court of Auditors, the supreme
body of preventive and management of public revenue and expenditure and is
exercised by counsel-controllers that operate within each entity to manage and use
public money for which budgets were voted or not by the Assembly of Deputies
(Muller 2000:67).

There are formal an

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d informal institutions of financial control over public revenue and expenditure. The
formal institutions of financial include the Executive arm of government, Legislative
and office of the Auditor-General. The informal institutions of financial control
include the media, the organised civil society and donor agencies. The financial
accountability cycle provides that the Executive arm of government collects and
prepares the accounts of government. The formal institution is involved in public
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sector financial control when funds have been expended. In the cycle of financial
accountability established by the Constitution, the budget is a legislative instrument
of financial control. Informal institutions of financial control may promote financial
accountability over public finance and include the mass media and organised civil
society (Teriba and Oji 1973 :315-336).

4 INTERNAL CONTROL IN PUBLIC FINANCIAL MANAGEMENT IN

GOVERNMENT

The internal financial control was organised based on Law no 352 of May 2, 1945 for
the establishment of civic control bodies. As a specialised control body subordinated
to the direction or management accountancy service aimed to legal compliance by
using the means allocated from the budget and its own program and estimates the
execution of work and payment of wages, compliance with financial and budgetary
discipline, the availability, integrity and use of material and money. Internal control
has been organised on the principle of specialisation, its activity being mainly
oriented towards the management control (Berland and Dreventon 2010:31-37).

Internal control not only refer to internal checks and audits but to the entire control
and financial system established by management. It is , however , significant to
remember that internal control does not only refer to internal check and internal audit
, but to the whole system of controls , financial , and otherwise , established by
management to carry out department functions efficiently , ensure adherence to
management policies , safeguard assets , and secure as far as possible the
completeness , accuracy and reliability of the records(Jones and Bates 1990:112).

Internal control is also seen as institutional instrument of monitoring the quality of

improved financial management. It involves internal checks , an internal audit , the
custody of assets and accuracy of records . These are financial resources for
monitoring control on the system . The implementation of internal control in the
public sector is intended to reduce the organisational risks experienced in the
management of financial resources (Visser and Erasmus 2009:277).

4.1 PRINCIPLES OF INTERNAL CONTROL

Internal controls should be based on certain principles ensuring that they add value
to the institution.

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4.1.1 COMPETENT PERSONNEL AND ROTATION OF DUTIES

This includes, first, that employees are adequately trained, supervised, and
managed, and secondly that clerical staff are periodically rotated to broaden their
understanding. This is also useful in uncovering and preventing regularities
(McKinney 1995:89-91).

4.1.2 ASSIGNMENT OF RESPONSIBLITIES

This includes, first, a prerequisite for the efficient execution of assigned duties is
clearly defined responsibilities, secondly, an institution requires a formal
organisational plan assigning responsibility to the various functions with necessary
authority to carry them out. The authority and responsibility for a function should not
be shared as this only results in duplication efforts and may even result in a job
remaining undone (McKinney 1995 :91).

4.1.3 SEGREGATION OF RESPONSIBILITES FOR RELATED DUTIES

This includes, first, planning organisational controls to prevent individuals from

having complete control over a sequence of related transactions. Secondly, dividing
related duties or operational responsibilities between two or more individuals,
minimising error, fraud, collusion, and inefficiency. Thirdly, distributing
responsibilities over several directorates to provide for checks and balances. This
division of duties, if properly carried out, may reduce fictitious transactions, however,
if improperly done could increase the probability of fraud, carelessness and
unreliable record keeping (McKinney 1995 :91-92).

4.1.4 SEPARATION OF OPERATIONS AND ACCOUNTING

This includes, first. separating accounting transactions and their authorization, as

well as custody over assets, and secondly, separating responsibility for maintaining
accounting records and those for engaging in business transactions, also regarding
custody of the institutions ‘s assets (McKinney 1995 :92).

4.1.5 PROPER ACCOUNTING FOR TRANSACTIONS

This includes, first, ensuring the system accurately and appropriately classifies and
records timeously all transactions, and secondly, regularly reconciling general ledger
accounts with sub-sidearm ledger (McKinney 1995:92).

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4.1.6 Proof of security measures

This includes, first, separate bank accounts, provisions for the safekeeping of cash,
encouragement of possible observance and the acceptance of printed receipts from
clerks in some of the various methods that can be applied. Secondly, insurance can
be used to cover the losses caused by fraud due to the shortcomings in the internal
control system. Thirdly, to determine whether internal control procedures are
followed, an independent system review should be carried out periodically
(McKinney 1995:92).

4.2 THE INTERNAL CONTROL PROCESS

The process of evaluating, improving, and reporting on the internal control system
could include six steps (Steyn 1998: 76).

Step 1: Organise

Responsibilities should first be determined and assigned ensuring efficient

evaluation, improvement, and reporting on internal control. Next consideration
should be given to assigning responsibilities for internal reporting, documentation,
personnel supervision, and scheduling of the evaluation process, which includes
vulnerability assessments and internal control reviews (Steyn 1998 :76).

Step 2: Divide the institution into various areas for assessment

The institution should first be divided into components, programmes, and

administrative functions to facilitate evaluation of internal control and execution of
vulnerability assessment (Steyn 1998: 77-78).

Step 3: Conduct vulnerability assessments

Criteria and guidelines must be developed determining programmes susceptible to

waste, loss and unauthorised use or misappropriation. The potential existence of the
lack of compliance of costs and obligations with applicable policies; lack of adequate
safeguard of funds, property and assets; exposure of assets to waste, loss or
unauthorised use should be assessed (Steyn 1998 :78).

Step 4: Develop plans for subsequent action

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Summarise the results of the vulnerability assessment to determine necessary
actions. The aim is to strengthen the system whereby a more cost -effective result
can be achieved. Classify identified programmes and functions according to
vulnerable exposure, thereby ensuring timely achievement of improved outcomes
and enhancement of the system. Corrective action can be taken by scheduling and
implementing internal control reviews; recommending that an audit be initiated and
carrying out staff training programmes etc (Steyn 1998:79-80).

Step 5: Conduct internal control reviews

Defining the event cycle forms the basis of internal control review. A cycle consists of
series of actions to be taken to carry out a specific activity or function. An example is
the administrative function, which can involve payroll issues, supplies and the
handling of correspondence (Steyn 1998 :80).

Step 6: Prepare reports on internal controls

Two types of reports are prepared, the first in which corrective actions are
suggested, is submitted to programme managers, the second goes to heads of
departments and includes a detail description of system weaknesses and ways to
rectify these recommendations in terms of economy and efficiency (Steyn 1998:81).

4.3 COMPONENTS OF INTERNAL CONTROL IN PUBLIC FINACIAL

MANAGEMENT

4.3.1 Control environment

It refers to a set of policies and productions that must be followed in the

implementation of internal controls within an institution. The environment creates a
frame of mind within which an internal control system can function at all levels in the
institution. This entails integrity, ethical values, and competence and direction of the
accounting officer (Makgatho 2013 :43).

4.3.2 Risk assessment

Every entity faces a variety of risks from external and internal sources. Risk is
defined as the possibility that an event will occur and adversely affect the
achievement of objectives. Risk assessment involves a dynamic and iterative
process for identifying and assessing risks to the achievement of objectives. Risk to

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the achievement of these objectives from across the entity are considered relative to
established risk tolerances (Makgatho 2013 :43).

4.3.3 Control activities

An internal control system contains control activities, including policies and

procedures regarding approval, authorisation, verification, reconciliation, review of
operational activities, safeguarding of assets , and segregation of duties (Visser and
Erasmus 2008 :292). They are actions established through policies and procedures
that help ensure that management ‘s directive to mitigate risks to the achievement of
objectives are carried out. They are performed at all levels of the entity, at various
stages within business process, and over the technology environment (Makgatho
2013 :44).

4.3.4 Information and communication

They are the most effective tools to be used to execute all the responsibilities of
internal control. Different sources provide management with information to guide
other components. An ongoing communication provides necessary information and
gives direction of what is to be done. Institution use intrinsic communication to share
information to all employees within their entity while extrinsic communication meets
the expectations meets the expectations of external stakeholders by giving them
information (Makgatho 2013 :44-45).

4.3.5 Monitoring

All issues pertaining to internal control must be evaluated and followed up. There is
must be a continuous monitoring of procedures and systems. It is through the
monitoring process that assessment is made on the quality of a system ‘s
performance. The process of monitoring entails on-going supervision, including other
actions undertaken by personnel in the performance of their duties (Makgatho
2013:45).

5 EXTERNAL CONTROL IN PUBLIC FINANCIAL MANAGEMENT

External control are organisational arrangements operating under the framework of

parliamentary control but are set out from outside the boundaries of local
government sphere. External organisational arrangements include the office of the

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Auditor-General (OAG) and the Inspectorate of government which are mandated
institutions of the legislature, charged with the duty of enhancing accountability and
performance. Thus, public accountability can be examined through a prism of
institutions established to serve as a check on the executive arm of government and
through such agencies established to monitor the efficiency of the public sector (Fox
and Meyer 1995:56).

5.1 Auditor-General

The Auditor-General is an agent of the Legislature. The Auditor-General has the duty
of overseeing the management of public funds and the quality and credibility of
government’s reported financial data. The Auditor-General ensures that the budget is
implemented according to legislative approval. The Auditor-General carries out a
comprehensive audit of all government financial transactions. The Auditor-General
was established to support democracy in South Africa, the Constitution also provides
for the establishment of a few institutions whose functions are control of an external
nature (Visser and Erasmus 2002 :66).

Auditor-General is responsible to obtain assurance about whether the financial

statements as whole are free from material misstatement, whether due to fraud or
error. The Auditor-General of South Africa performs the necessary procedures for
the performance information to provide reasonable assurance in the form of an audit
conclusion. Auditor-General must audit and report on the accounts , financial
statements and financial management of all national , provincial state departments
and administrations , all municipalities and any other institution or accounting entity
required by national or provincial legislation to be audited by the Auditor-General
(Section 188 ,Constitution 1996).

5.2 The Public Protector

Sections 181 and 182 of the Constitution (1996) provide for the Public Protector, who
was also provided for by the Interim Constitution (Act 200 of 1993) and appointed in
terms of the Public Service Act, Proclamation 103 of 1994. Section 182 of the
Constitution 1996 provides that the Public Protector has the power , as regulated by
national legislation to investigate any conduct in state affairs or in public
administration in any sphere of government , that is alleged or suspended to be
improper or to result in any impropriety to report on that conduct and The Public

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Protector has the additional powers and functions prescribed by national legislation
(Visser and Erasmus 2002 : 67).

6 THE IMPORTANCE OF INTERNAL CONTROL IN PUBLIC FINANCIAL

MANAGEMENT

Internal control operates as an integral part of the financial management activities in

the department. As part of this role, it normally reports to the department’s Chief
Financial Officer. The internal control must identify, mitigate and manage control
risks which may hamper achievement of the Department’s objective to effectively,
efficiently and economically manages its financial and related resources. The internal
control manages effective, efficient and transparent financial (internal) control;
manage loss control and manage financial related systems. It also supports the
management of fraud prevention and maintain financial information and knowledge
management. It maintains governance frameworks and facilitate and participate in
committees, forums and oversight bodies. (Daniel 2002 :22-23).

Internal control helped ensure that direction, policies, procedures and practised were
designed and approved by management and put into place and functioning and
desired. Internal control is needed by organisation to provide greater assurance that
it would achieve its operating, financing reporting and compliance objectives. It was
implemented by management and other stakeholders to achieve objectives of the
Institution by complying with the applicable regulation and laws and to ensure
reliable financial reporting. Internal control ensures that set goals and objectives are
met with efficient and economic use of resources, operational and financial
information is reliable and can be used. Internal control manages loss control,
maintain financial information and knowledge management. It also maintains
governance frameworks (Pauw et al., 2009:194).

7 THE EFFECTIVENESS OF INTERNAL CONTROL IN PUBLIC FIANACIAL

MANAGEMENT

Internal control as a financial management discipline which is an integral process

that is affected by a department’s management and personnel and is designed to
address risks and to provide reasonable assurance that in pursuit of the
department’s mission. Internal control must be able to establish and maintain a
degree of independence from other financial management activities. Although part of

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the organisational structure of the office of the Chief Financial Officer, and reporting
to CFO, internal control needs to be able to exercise independent, judgement about
its operations with permit it substantially to determine its own work programme and
express control risk opinions free from direct intervention by line management. An
effective internal control system provides reasonable assurance that policies,
process, tasks and other aspects of an organisation taken together, facilitate its
effective and efficient operation to ensure the quality of internal reporting (Cloete
1998 :241).

Effective internal controls must prevent, detect and correct non-compliance with
legislation and mistakes in the financial and performance reports. It checks and
balances the monthly reports and processes to ensure the credibility of all
management information. The system of internal control employed by the entity to
financial and risk management is effective, efficient and transparent. In line with the
Public Financial Management Act and the recommendations from the King III Report
on Corporate Governance requirements, internal audit provides the Audit Committee
and management with assurance that the internal controls are appropriate and
effective (Hughes 2003 :34).

From the previous reports of the internal auditors, the Audit Report on the annual
financial statements and the management letter of the Auditor -General South Africa
, it was realised that there were no indicated material deficiencies in the system of
internal control (Hughes 2003 :34).

8 THE IMPORTANCE OF EXTERNAL CONTROL IN PUBLIC FINANCIAL

MANAGEMENT

To assess the institution capacity of external control agencies in respect of

promoting accountability. To evaluate the contribution of external agencies towards
the operation of major legislation and regulatory framework relating to accountability
in government. The external control is exercised by the legislators in the financing
process. The Parliament is the one that must be responsible for all financial
transactions incurred by the public executive institutions at the national sphere of
government. The external control check that internal control follows the prescribed
procedures in the management of public finance (Gildenhuys 1993 :45).

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9 THE EFFECTIVENESS OF EXTERNAL CONTROL IN PUBLIC FINANCIAL
MANAGEMENT

The external control is all about the control by institutions from outside the relevant
institution. The external control ensures that finance within the public sector uses the
funds effectively. It requires openness from the internal control system so that
financial transactions are accurate. The external control ensures that the Parliament
at national sphere of government is responsible financial transactions incurred by
public executive institutions. The external control ensures that corporations delivers
offerings correctively. It also ensures that control and accountability in the public
finance is managed effectively and efficiently. Lastly the external control reduces the
organisational risks (Gildenhuys 1993 :45).

10 CONCLUSION

The public finance management in South Africa has gone through fundamental
changes and is still under transition especially after South Africa’s democratization in
1994. Financial control, namely internal and external control were established to
enhance accountability to improve upon efficient and effective service delivery in
government. In central government, there is the Public Accounts Committee of
Parliament charged with the responsibility of monitoring and supervisory financial in
government departments. The Auditor-General is supposed to conduct financial and
value for money audits and report in respect of all public offices including the courts
etc. The external agencies have the mandate of building capacity to better the
internal system of accountability. Internal controls are crucial in ensuring that
effective governance is implemented in the South African Public Service and this
requires effective management leadership.

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