Guidelines on the Good Governance of Parastatal Organisations: An ECSAFA Perspective

Guidelines on the Good Governance of Parastatal Organisations

An ECSAFA Perspective

Prepared for the Eastern, Central and Southern African Federation of Accountants (ECSAFA) by the Association of Chartered Certified Accountants (ACCA) with assistance from: the Society of Accountants in Malawi the Centre for Corporate Governance, Kenya and the African Capacity-Building Foundation Financial Management and Accountability Technical Advisory Panel and Network.

About The Eastern, Central And Southern African Federation Of Accountants (ECSAFA) The mission of the organisation is to build and promote the accountancy profession in the Eastern, Central and Southern regions of Africa in order that it is, and is perceived by accountants, businesses, financiers and governments to be, an important factor in the economic development of the region. ECSAFA Membership Angola Botswana Ethiopia Kenya Lesotho Malawi Mauritius Mozambique Namibia South Africa Swaziland Tanzania Uganda Zambia Zimbabwe

ECSAFA, August 2004

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Contents
Preface ...................................................................................... v

Executive Summary................................................................................. ix Chapter 1: Chapter 2: Chapter 3: Chapter 4: Chapter 5: Appendix 1: Introduction ....................................................................1 Standards of Behaviour ...................................................21 Organisational Structures and Processes ...........................33 Internal Control ..............................................................53 External Reporting ..........................................................71 Good Governance: A Checklist for Governing Bodies and Chief Executives.......................................................81 Disclosure .....................................................................89 Further Information.........................................................97

Appendix 2: Appendix 3:

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Preface
Good corporate governance, or just good governance, is essential for all successful organisations. The principles of good governance openness, integrity and accountability are not just optional extras. They are the fundamental foundations on which effective organisations are built. In the public sector, governance is as important, or even more important, than in the private sector. Public services should be just that, services to the public. These Guidelines aim to provide practical guidance on good governance for all types of parastatal organisations across the region and so help to improve their governance processes. Parastatal organisations are taken to include government business enterprises and state corporations and other organisations, including boards, agencies and institutions which are established as semi-autonomous entities with their own governing bodies. In recent years, some state enterprises which operated on a commercial basis have been privatised, but other governing bodies and agencies have been established to provide public-sector services that were previously provided directly by a ministry. Thus this type of organisation continues to be significant. Professional accountants in the member bodies of the Eastern, Central and Southern African Federation of Accountants (ECSAFA) have an interest in the way that parastatal organisations manage their affairs. They expect these organisations to uphold the highest standards of accountability, openness and integrity. For these reasons, ECSAFA is pleased to provide this contribution to the development and maintenance of good governance in parastatal organisations. We commend these Guidelines to all those concerned with good governance of parastatal organisations in Eastern, Central and Southern Africa, especially the members of their governing bodies, their chief executives and other senior managers. In addition, the professional advisers of these entities, especially the audit firms who provide them with external audit and other services, should find these Guidelines useful. We also hope that the Guidelines will facilitate co-operation with others in the public and private sectors to achieve the highest standards of governance. Between 1996 and 1998, an ECSAFA team, funded by a grant from the International Federation of Accountants (IFAC), visited those government officers across the region with responsibility for government accounting services. The aim was to promote higher standards of accountability in the public sector.

The team found that there was mixed understanding of, and little unanimity about, what constitutes proper accountability and governance. As a result, ECSAFA Council encouraged the Public Sector Committee of IFAC to produce guidance on this subject. ECSAFA is grateful to the IFAC for permission to adapt its publication, Governance in the Public Sector: A Governing Body Perspective (August 2001), to the prevailing circumstances in ECSAFA member countries. We are also grateful to the Eastern and Southern African Association of Accountants General (ESAAG) for permission to reproduce its Internal Auditing Standards and to the International Organisation of Supreme Audit Institution (INTOSAI) for permission to reproduce their guidance on public-sector external auditing. This volume also builds on its companion document, Governance in the Public Sector: An ECSAFA Perspective, which was published in 2002 as a guide to governance in government ministries, departments and agencies. It may be useful for national bodies affiliated to ECSAFA to adapt this guide to their particular local environments by including references to their national legislative and regulatory requirements. In some countries there are already national guidelines, for example, those in Kenya prepared by the Centre for Corporate Governance. Where possible such guidelines were used to inform the content of these Guidelines. Attitudes to governance have changed over time and we expect them to evolve further in the future. Thus we expect that these Guidelines will have to be revised and refined to reflect the experience of parastatal governance across the region and the world. We hope that our members will use these Guidelines to assist in the further development of effective governance arrangements in their parastatal organisations. In turn, we hope that this experience can be used to inform future editions of these Guidelines. The standard of governance of parastatal organisations across the ECSAFA region is, of course, variable. The best-governed parastatal organisations will already apply almost all the aspects of good governance practice outlined in these Guidelines, but they may find it useful to benchmark their current practices against such internationals standards. Other parastatal organisations will find the application of the standards outlined in these Guidelines very challenging. These organisations should, however, be able to use these Guidelines to develop an appropriate action plan to introduce these standards over the next few years.

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These Guidelines have been prepared for ECSAFA by the Association of Chartered Certified Accountants (ACCA), with assistance from the Society of Accountants in Malawi, the Centre for Corporate Government, Kenya and the African Capacity-Building Foundation Financial Management and Accountability Technical Advisory Panel and Network (TAP-NET). ECSAFA would like to thank them all for their contributions, and particularly ACCA, which also published and circulated these Guidelines. Ndung'u Gathinji Chief Executive, ECSAFA Hughes Building, Kenyatta Avenue, PO Box 42423, Nairobi, Kenya. e-mail: ecsafa@africaonline.co.ke www.ecsafa.org June 2004

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Executive Summary
Corporate governance is the means by which an organisation is directed and controlled. In broad terms, corporate governance refers to the processes by which organisations are directed, controlled and held accountable. Corporate governance encompasses the authority, accountability, stewardship, leadership, direction and control exercised in corporations. Parastatal organisations have been established with financial resources from tax-payers. This means that the main stakeholders in state-owned enterprises are members of the public, whose taxes have been invested in these corporations. The introduction to these Guidelines sets out the case for having good governance, and the need for further improvements to the quality of governance of parastatal organisations in ECSAFA member countries. The term governance is used, rather than corporate governance, purely because the word corporate may be interpreted as a private-sector term; no distinction is made between the two terms. The Introduction explains the governance framework, including the respective roles of Parliament, its public accounts and service committees, the parastatal oversight body, the Ministry of Finance and the relevant line ministry. The three fundamental principles of corporate governance, openness, integrity and accountability, are also introduced. The remaining chapters set out recommendations, derived from these fundamental principles, on standards of behaviour (chapter 2), organisational structures and processes (chapter 3), internal control (chapter 4) and external reporting (chapter 5). STANDARDS OF BEHAVIOUR Openness, integrity and accountability are necessary ingredients of effective governance and should be demanded of all staff working in parastatal organisations. The governing body, chief executive and other senior managers should conduct themselves, in accordance with high standards of behaviour, as role models to others. The governing body and chief executive should also

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determine the values and standards that define their organisations culture and behaviour. Parastatal organisations may be required to adopt government-wide codes of conduct, but if not they should adopt their own formal code of conduct defining the standards of behaviour required. Such a code, or other policy document(s), should cover such issues as conflicts of interest, political influence, gifts, hospitality and entertainment, and dealing with suppliers. All staff are entitled to be treated by their managers and colleagues openly, honestly and with respect. Trade unions are often a useful means of communicating the views of staff and representing their interests. ORGANISATIONAL STRUCTURES AND PROCESSES Parastatal organisations need effective structures to ensure proper accountability, clear communication with stakeholders and clarity about roles and responsibilities. Proper accountability means being accountable for the management of public money and for the performance of the organisation in relation to clearly defined objectives. The appointments to the governing body of a parastatal organisation should be made by the relevant minister on the advice of the parastatal oversight body. This process should ensure that appointments are based on merit, as a result of free and open competition. The chief executive, senior managers and staff should be held to account for the extent to which they have achieved their agreed objectives. Communication with stakeholders (for example, the public, staff, their trade unions, the sponsoring ministry, suppliers, users of services) should be open, honest, transparent, timely and relevant to the stakeholders interests. It should also be adequate and present the information fairly. There should be clearly defined divisions of responsibility at the head of parastatal organisations to ensure a balance of power and authority. These should include the respective roles of the executive and non-executive members of the governing body, the chairman, the chief executive and other senior managers.

Effective complaints and whistle-blowing procedures are essential for the good governance of each parastatal organisation. Complaints procedures should ensure that complaints from users and other external stakeholders are adequately monitored, investigated, resolved and appropriately reported. Whistle-blowing procedures should ensure that all significant staff concerns, especially those concerned with the ethical management of the organisation, are adequately dealt with. INTERNAL CONTROL The governing body and chief executive should ensure that their organisation has an effective system of internal control. Internal control is effective to the extent that it provides reasonable assurance that the organisation will achieve its agreed objectives in the following categories: effectiveness and efficiency of operations reliability of financial reporting and compliance with applicable laws and regulations. The governing body and chief executive should ensure that the effectiveness of internal control is periodically assessed and should report on the results of these assessments. Internal control includes, but is not restricted to: budgeting and financial management, staff competencies, internal audit, risk management, audit committees, and anti-corruption arrangements, as well as softer personnel aspects, such as culture, motivation and teamwork. EXTERNAL REPORTING Parastatal organisations should publish an annual report, including financial statements, presenting a balanced and understandable account of the organisation's financial and non-financial position and performance. The report should include a statement about how the organisation has applied relevant codes of governance. The financial and certain other aspects of the report should be subject to an independent external audit. The Auditor-General should

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be responsible directly or indirectly for the quality of this audit. There should be prompt and effective action taken to correct identified negative audit findings.

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1. Introduction
IMPORTANCE OF GOVERNANCE 1.1 Over the last decade or so there has been much debate over the importance of corporate governance. Broadly speaking, corporate governance refers to the processes by which organisations are directed, controlled, and held to account1 and is underpinned by the principles of openness, integrity and accountability. Governance is concerned with structures and processes for decision making, accountability, control and behaviour at the top of organisations. In some countries, corporate may be interpreted as a private-sector term. To avoid any possible confusion, the term governance is used in these Guidelines to describe what is commonly referred to in the private sector as corporate governance. The King Report2 said that corporate governance is essentially about the following aspects of leadership: leadership for efficiency leadership for probity leadership with responsibility and leadership that is both transparent and accountable. The same principles apply to the governance of parastatal organisations.

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Australian National Audit Office (1999). Discussion Paper, Corporate Governance in Commonwealth Authorities and Companies. 2 The King Report on Corporate Governance for South Africa 2002 (King II Report), Institute of Directors in Southern Africa.

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The authors of a 1999 World Bank working paper concluded that there is new empirical evidence that governance matters, in the sense that there is a strong causal relationship from good governance to better development outcomes such as higher per capita incomes, lower infant mortality and higher literacy.3 This type of comment highlights the importance of good governance. In all countries, the public sector plays an important role in society and effective governance of the public sector can encourage the efficient use of resources, strengthen accountability, improve management and service delivery, and thereby contribute to reducing poverty and improving peoples lives. Despite some privatisation, parastatal organisations remain important for public-sector delivery across the ECSAFA region. Many governments consider that the state should retain ownership and control of such strategic areas as regulation, infrastructure, social services, water supply and key industries. Effective governance is essential for maintaining confidence in the parastatal organisations and thus enabling them to meet the governments objectives in such vital areas. CURRENT SITUATION

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Most international aid and assistance is now provided on a conditional basis. Aid agencies and international financial institutions insist on good governance. In addition, it is no longer easy for governments to censor or control inflows of information and freedom of expression and association. Citizens are now informed directly from many sources, for example, television and the Internet. There is also an increasing social awareness by many people, which poses new challenges for governments to be participatory, transparent and accountable in the conduct of their affairs.

Kaufman, D., Kraay, A. and Zoido Lobaton, P. (1999). Governance Matters, Working Paper, The World Bank.

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In many member countries in the ECSAFA region there has been a significant re-structuring of the public sector in recent years, especially that part represented by parastatal organisations. Some state-owned enterprises which operated on a commercial basis have been privatised. In contrast, other boards and agencies have been established to provide public-sector services that were previously provided directly by the relevant ministry. These new entities have often been established on a quasi-commercial basis, with a governing body and a chief executive appointed to manage the organisation and to meet a set of pre-determined objectives. These may be set out in a contract or agreement between the governing body or the chief executive and the sponsoring ministry or oversight body. The fees of the members of the governing body and the chief executive (and their continued appointment) may be dependent on the extent to which the organisation achieves its objectives within the available financial constraints. To be successful, these new arrangements require openness, integrity and accountability. This means: The appointment, review and remuneration of the governing body and chief executive should be undertaken openly. The governing body, chief executive, other senior managers and staff of the parastatal organisation should be required to work to the highest levels of integrity. The lines of accountability between the chief executive and the governing body and between the governing body, the sponsoring ministry, the Ministry of Finance and the parastatal oversight body should be clear and transparent.

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Corruption, abuse of power or public office for private gain, and other types of financial irregularity are widely recognised as a serious problem in parastatal organisations and the wider public sector. Financial irregularity, where it exists, results in a waste of resources; in addition, it diverts government resources, the energies of public officials and the press, from the general public interest towards overcoming the activities of those who fail in the duties of public office.

NECESSARY IMPROVEMENT 1.10 Improvements in the management and administration of many parastatal organisations are essential. Such improvements are also necessary to achieve targets for poverty reduction envisaged, for example, by the United Nations millennial development goals. In some cases, governments and their development partners may have tended to devote too much attention to macroeconomic and fiscal issues, to the detriment of effective risk assessment, financial management, monitoring, control and evaluation. In some cases, the rules and systems of financial accountability, record keeping, accounting and reporting, internal control and internal auditing have not been well defined. This is being addressed in many ECSAFA countries, with revised laws on public financial management and audit and refined financial regulations for public-sector organisations. Where suitable rules and systems have been defined, ignorance and/or non-compliance may be the norm rather than the exception. In other cases, there may be an inappropriate emphasis on external or independent auditing of financial statements instead of emphasising effectiveness of internal control systems. Without an integrated accountability framework and measurable performance indicators to determine objectively whether financial records are maintained and managed effectively, financial and other records may be unreliable, incomplete and difficult to use. All these weaknesses create opportunities for fraud, bribery, inefficiency and waste. They may also lead to loss of revenue and impede effective economic and fiscal planning. SCOPE OF THE GUIDE 1.12 A variety of terms are used to describe the head of staff or most senior manager of a parastatal organisation; these include chief executive officer, general manager, director, vice chancellor or principal. These Guidelines uses the term chief executive to describe this person. In the interests of good governance, the governing body and chief executive of each parastatal organisation should ensure that the recommendations for good governance outlined in these Guidelines are applied. The parastatal oversight body, sponsoring ministry or Ministry of Finance may also have to take action to enable such good practice to be implemented. In any circumstances where these recommendations

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cannot be applied directly, the basic principles of governance openness, integrity and accountability should be followed when interpreting and applying locally these Guidelines. 1.14 These Guidelines outline the principles of governance and their application to parastatal organisations in the ECSAFA region. Governance practices should be tailored according to the specific circumstances of individual parastatal organisations and the countries in which they operate. As organisations develop and change over time, it will be necessary for the governing body and chief executive responsible for each organisation, to review and amend the governance practices. In addition, the relevant ministries and other oversight bodies should regularly review the regulatory and accountability environment in which their parastatal organisations operate. INTRODUCTION TO PARASTATAL ORGANISATIONS 1.15 These guidelines are designed to refer to public-sector bodies with their own governing bodies. These may be termed parastatal organisations, boards, or state-owned corporations. They may include governmental organisations (for example, agencies, boards, commissions) and stateowned enterprises (or public entities). The guidelines will also be relevant to other independent organisations owned or controlled by the public sector, such as universities, advisory bodies and other entities that have a degree of independence from ministries or departments. All these entities, unlike private companies, are faced with a number of legal, political and structural complexities that affect the extent to which good governance, as developed by the private sector, can be applied. These complexities may include: the elaborate and overlapping relationships between the chief executive, the governing body, the parastatal oversight body, ministers and ministerial officials, and Parliament the need for parastatal organisations to satisfy a complex, and possibly conflicting, range of political, economic and social objectives

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 the diverse nature of stakeholders (including users, staff, suppliers, government, Parliament and the electorate) with their varied and contradictory demands the absence of an annual general meeting at which stakeholders come together to exercise their authority and influence over the organisation the enabling or supporting legislation of parastatal organisations, which sometimes prescribes triangular rather than linear reporting arrangements where the chief executive, for example, is responsible both to the responsible minister(s) and the governing body. 1.17 It is therefore important to provide guidelines that seek to enhance the implementation of good corporate governance principles and practices in parastatal organisations in order to make them more effective and to enable them to contribute to national development and poverty reduction. Recent reforms in the public sector aimed at improving efficiency and effectiveness have greatly increased the need for good corporate governance in parastatal organisations. BALANCING COMMERCIAL OBJECTIVES AND SOCIAL SERVICE OBLIGATIONS 1.18 Many parastatal organisations have both commercial and social objectives. This may produce a conflict which should be addressed and, if possible, resolved clearly and openly. Thus, it is necessary for governing bodies to develop flexible approaches that will help these organisations manage possible conflicts. These conflicts may be reduced or managed by: the commercial and social service objectives of a parastatal organisation being clearly documented and approved by Parliament, the parastatal oversight body, the responsible ministers and the governing body governing bodies consulting and informing their stakeholders on the strategies put in place to balance their organisations commercial and social obligations

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and governing bodies submitting reports to Parliament through the parastatal oversight body on the extent to which they have achieved both their commercial and their social objectives. 1.20 Even if a parastatal organisation has been established to fulfil commercial objectives, there will also be some social objectives which the organisation should be required to meet. These may include: establishment of fair, just and equitable employment policies preservation and protection of the natural environment balancing gender and ethnic interests and concerns protecting and promoting the interests and rights of children and other vulnerable groups and promoting the interests and rights of the host communities.

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Thus the governing body of each parastatal organisation should regularly monitor the extent to which the organisation is meeting its social responsibilities. OVERALL RESPONSIBILITY FOR THE GOVERNANCE FRAMEWORK

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In the overall governance framework, the roles of Parliament, ministries or other oversight bodies and of the parastatal organisations themselves often overlap. Clarity of roles and responsibilities between these oversight bodies is essential. It is normally the responsibility of the parastatal oversight body (with assistance from the relevant line ministry and the Ministry of Finance) to ensure that appropriate governance arrangements are applied in all parastatal organisations. It is necessary to ensure that mechanisms are

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in place to secure adherence to good governance, including the best practice outlined in these Guidelines. Similarly, governing bodies and chief executives of parastatal organisations also have a responsibility to ensure good governance in their own organisations. All these entities should be held accountable to Parliament for the soundness or otherwise of the governance practices of each parastatal organisation. 1.24 In this complex regulatory environment, good governance is synonymous with robust accountability to Parliament for performance. It is complemented by regular and open communication to Parliament (or its committees) by the key participants directly responsible for the performance of the organisation, including the parastatal oversight body, responsible minister(s), the governing body and the chief executive. An appropriate legal framework is necessary to define the roles of governing bodies, and chief executives and the related framework of authorities and responsibilities of each level of corporate governance. In a number of countries establishing an umbrella legislative framework for all parastatal organisations would ensure that the legislation was consistent with current best practice as described in these Guidelines and would provide a common and consistent environment for better governance of all parastatal organisations. The government, through the relevant ministries and any oversight bodies, has a responsibility to Parliament and the electorate to protect, preserve and exercise authority actively over parastatal organisations by ensuring that: the legal framework establishing and determining the operations of the state-owned corporations is clearly defined the role of Parliament in enacting laws of the state-owned corporations is effectively undertaken the authorities of the governing bodies of parastatal organisations are exercised in accordance with the law and Parliaments objectives suitable legislation and regulations are in place to ensure that only competent and reliable persons, who can add value, are appointed to governing bodies

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and the governing body of each parastatal organisation is held to account and is held responsible for the sound governance of the organisation.

Figure 1.1: Accountability of a parastatal organisation to Parliament

OVERSIGHT FUNCTION OF PARLIAMENT 1.27 Parliament has the right and responsibility to hold government and its subsidiary entities (including all parastatal organisations) to account for the effective management of their financial affairs, the proper and efficient use of resources entrusted to them and the result achieved. Parliament should exercise control over the expenditure of all public monies. Thus both the planned or expected income and expenditure of parastatal organisations should be included within the governments annual budget statements. In addition, the annual investment plans and borrowing requirements of parastatal organisations should be noted in the budget. Borrowing undertaken by parastatal organisations and any financial guarantees which the government provides should be subject to the same level of parliamentary scrutiny and authorisation as general government borrowing and other financial commitments. Parliament should review the annual reports of parastatal organisations and evaluate the extent to which they have efficiently achieved their objectives (usually through a service committee). Parliament should also review the financial management and control exercised by parastatal organisations through the use of a parliamentary accounts committee and reports received from the Auditor-General or the other external auditors of parastatal organisations. Parliament should approve all government appointments to the governing bodies of parastatal organisations. Each year, Parliament should also approve the levels of honoraria, sitting allowances and all other fees and allowances to be paid to members of governing bodies of parastatal organisations. Parliament should retain both residual powers to ensure the enactment of appropriate regulations and the ultimate supervisory functions over all parastatal organisations. All questions relating to individual parastatal organisations should be referred to the relevant parliamentary committee and should not be dealt with by Parliament as a whole or by individual members. Contact with the governing bodies, members of the governing body or managers of parastatal organisations by members of Parliament should be limited to meetings of parliamentary committees or questions to ministers.

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Service committees 1.32 Parliaments will usually have a series of service committees, which may have the responsibility to assist Parliament with the monitoring and accountability of a particular ministry and its related parastatal organisations. The responsibilities of such a committee with regard to each parastatal organisation should include: reviewing its long-term, medium-term and short-term plans considering and recommending to Parliament the suitability of its annual budget reviewing and recommending to Parliament the appropriateness of its investment plans and borrowing requirements considering the reports of relevant oversight bodies monitoring the extent to which plans and investments are implemented and reviewing the annual report. Public Accounts Committee 1.33 In many countries, a Public Accounts Committee fulfils the responsibility of reviewing, on behalf of Parliament, the external auditors reports for each parastatal organisation. In the interest of transparency, the hearings of such a committee should usually be in public. The work of the Public Accounts Committee should include: (1) (2) receiving the reports of the Auditor-General (or other auditor) undertaking hearings, including questioning of the chief executive, other relevant officers and the auditor

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(3)

reporting, including recommendations, to the oversight body, the governing body or the chief executive of the particular parastatal organisation receipt of the response of the oversight body and/or of the governing body and chief executive on the action to be taken in response to the Committees report subsequent reports from the external auditor on the extent to which agreed recommendations have been implemented.

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(5)

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In many countries parastatal organisations have payment arrears with each other and with other public-sector organisations. A comprehensive analysis of this arrears situation should be undertaken. The analysis should then form the basis of a plan to eliminate, as far as possible, the stock of arrears and loans between public-sector organisations within an agreed timescale. Such an exercise would greatly clarify the financial position of many parastatal organisations. THE ROLE OF THE PARASTATAL OVERSIGHT BODY

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Parastatal organisations may be responsible to the relevant ministry. In other countries there may be a central body which is responsible for the oversight of all parastatal organisations, for example in Malawi this is the Department of Statutory Corporations, in South Africa the Department of Public Enterprises and in Kenya the State Corporations Advisory Committee. Whatever the particular arrangements, it is important that the parastatal organisation, its governing body and chief executive have clear lines of accountability, preferably to a single oversight body. The role of a parastatal oversight body should be to monitor the activities of each parastatal organisation on behalf of Parliament, to report significant issues to Parliament or its committees and to ensure that action agreed as a result of parliamentary reports is implemented within the agreed timescale. Specific responsibilities of the oversight body should include: formulating general guidelines on the good governance of parastatal organisations

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 establishing and co-ordinating clear, non-conflicting objectives for each parastatal organisation ensuring that there is proper and open selection, induction and development of members of governing bodies of parastatal organisations agreeing the medium-term corporate plan for each parastatal organisation monitoring the activities of each parastatal organisation and appraising the extent to which it achieves its objectives ensuring that each parastatal organisation complies with the appropriate governmental regulations advising the Ministry of Finance on the financial affairs of each parastatal organisation advising the relevant line ministry on the extent to which each parastatal organisation is achieving its operational objectives and reporting to Parliament, through the responsible minister, on the performance of each parastatal organisation. Relationships between a parastatal organisation and the oversight body 1.38 The accountability relationships between the parastatal organisation and its oversight body can be problematic. The theory is that the management of the organisation should be given the incentives to provide the goods or services required in the most efficient manner. Thus they should not be unnecessarily constrained by the detailed regulations which govern the management of the central government ministries and they should not be subject to detailed day-to-day management or oversight. Many parastatal organisations, however, provide key government services, for example, health and education. In these cases at least, the government and Parliament have an obligation

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to ensure that the goods and services are provided equitably and in the agreed manner. 1.39 One of the problems with giving the managers of parastatal organisations more discretion over the way they deliver services and more financial autonomy is that this may provide precisely those conditions which lead to increased corruption and financial irregularity. To strengthen the accountability of parastatal organisations, there should be a performance agreement between it and its oversight body. These agreements should identify the key objectives and accountabilities of the governing body and chief executive. THE ROLE OF MINISTRIES OF FINANCE AND OTHER LINE MINISTRIES 1.41 Ministries are usually responsible for the development of government policy and parastatal organisations are responsible for the day-to-day management and delivery of government services in the most efficient manner. The dividing line between these two sets of responsibilities may in practice be difficult to draw. The Ministry of Finance has responsibility for setting and monitoring the overall financial plans of government. Thus parastatal organisations should consult with and report to the Ministry of Finance on matters relating to the control and management of public funds and resources. They may also be required to manage their affairs in line with financial regulations set by the Ministry of Finance. Line ministries will also have responsibility for co-ordinating the work of parastatal organisations and other entities working in the same area. They may also have the responsibility for ensuring that the plans of parastatal organisations are consistent with poverty reduction plans and the objectives and requirements of international aid agencies. Ministers may be able to dismiss governing bodies and chief executives, but this will often be subject to the advice and review by the parastatal oversight body. The members of the governing body and the chief executive should have the right of appeal against unfair dismissal and such acts may be subject to a Parliamentary enquiry.

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If implementation of any directive from a minister (or other executive authority) to the governing body or chief executive is likely to result in non-compliance with legislation or could infringe the requirements of integrity or objectivity, the governing body and chief executive will be held responsible unless he or she has informed the minister in writing of the likelihood of that non-compliance. Any decision of the minister (or other executive authority) to proceed with the implementation of such a directive should be in writing and the governing body and chief executive should file a copy of this decision with the Auditor-General or equivalent. INDEPENDENT ASSURANCE FUNCTION OF EXTERNAL AUDITORS

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The financial statements of all parastatal organisations should be subject to an independent audit. This is usually undertaken by the Auditor-General or by private-sector auditors working on his or her behalf. The audit reports should be primarily addressed to Parliament rather than to the parastatal organisation itself. In addition, the Public Accounts Committee of Parliament should use the audit reports to assist with holding the governing body and the chief executive to account for their decisions and for the management of the organisation. The Auditor-General represents the wider public-sector interest in parastatal organisations and thus has a wider scope compared with an auditor in the private sector. The audit of parastatal organisations, as for other public-sector entities, should be of the whole of the financial management of the organisation, including specific consideration of probity and regularity, rather than of its accounts alone (see Chapter 5 below for further details). ROLE AND RESPONSIBILITIES OF THE GOVERNING BODY

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The members of the governing body of a parastatal organisation should be appointed by the relevant minister on the advice of the parastatal oversight body. The governing body should oversee the delivery of specific services with the resources which are allocated by Parliament. The governing body of a parastatal organisation is authorised by Parliament (and/or the oversight body) to spend (within an overall budget), invest, borrow and administer programmes in accordance with any laws and regulations that apply. The governing body and chief executive are also responsible for authorising the acquisition and use of

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financial resources, within the authorisation by Parliament, and for overseeing and monitoring the implementation of the approved budget or financial plan. 1.50 The governing body should be responsible to the oversight body, to the relevant ministry and ultimately to Parliament for the regularity, probity and efficiency with which it achieves its objectives (for more details see Chapter 3 below).

PRINCIPLES OF GOVERNANCE 1.51 The Report of the Committee on the Financial Aspects of Corporate Governance4 (the Cadbury Report) defined corporate governance as the system by which organisations are directed and controlled. It identified the three fundamental principles of corporate governance as: openness integrity and accountability. 1.52 These principles are relevant to all parastatal organisations. Parastatal organisations usually have to satisfy a complex range of political, financial and social objectives, which subject them to external constraints and influences. They are also subject to different forms of accountability to their various stakeholders. These three principles have been developed and redefined to reflect the public-sector context, as shown in figure 1.2 below.

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Cadbury Committee (UK) (1992). Report of the Committee on the Financial Aspects of Corporate Governance.

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Figure 1.2: Principles of governance in the public-sector context Openness Openness is required to ensure that stakeholders5 can have confidence in the decision-making processes and actions of parastatal organisations, in the management of their activities, and in the individuals within them. Being open through meaningful consultation with stakeholders and communication of full, accurate and clear information leads to effective and timely action and stands up to necessary scrutiny. Integrity comprises both straightforward dealing and completeness. It is based upon honesty and objectivity, and high standards of propriety and probity in the stewardship of public funds and resources, and management of an organisations affairs. It is dependent on the effectiveness of the control framework and on the personal standards and professionalism of the individuals within the organisation. It is reflected both in the organisations decision-making procedures and in the quality of its financial and performance reporting. Accountability is the process whereby parastatal organisations, and the individuals within them, are responsible for their decisions and actions, including their stewardship of public funds and all aspects of performance, and submit themselves to appropriate external scrutiny. It is achieved by all parties having a clear understanding of those responsibilities, and having clearly defined roles through a robust structure. In effect, accountability is the obligation to answer for a responsibility conferred.

Integrity

Accountability

Stakeholders will include the electorate, elected representatives (Parliament), providers of resources (taxpayers, lenders, bondholders and creditors), service providers and partners (employees and their trade unions, contractors and other government organisations) users of services (individuals and businesses who benefit from the services that the organisation provides), interest groups, analysts and other statistics gatherers (policy analysts, economists, financial analysts, rating agencies), the media and the wider community.

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1.54

These fundamental principles are reflected in each of the dimensions of the governance of parastatal organisations: standards of behaviour how the governing body, chief executive and senior management of the organisation exercise leadership in determining the values and standards of the organisation, which in turn define the culture of the organisation and the behaviour of everyone within it organisational structures and processes how the governing body, chief executive and senior management within organisations are appointed and organised, how their responsibilities are defined, and how they are held to account control the network of various controls established by the governing body, chief executive and senior management of the organisation to ensure: the achievement of the organisation's objectives the effectiveness and efficiency of operations the reliability of internal and external reporting compliance with applicable laws and regulations and internal policies and external reporting how the governing body and chief executive and senior management of the organisation demonstrate their financial accountability for the stewardship of public money and the organisation's use of resources.

1.55

From these fundamental principles of openness, accountability and integrity it is possible to derive a set of recommendations on governance.

18

Figure 1.3: Recommendations on governance in the public sector

Standards of behaviour (Chapter 2): Leadership Code of conduct & ethics: openness and objectivity integrity and honesty accountability ethical relationships. Organisational structures and processes (Chapter 3): Internal Control (Chapter 4): External reporting (Chapter 5):

Appointment of governing bodies Accountability for public money and performance Communication with stakeholders Roles and responsibilities: governing body chairman, chief executive and director of finance remuneration policy complaints and whistleblowing.

Budgeting & financial management Staff training Internal audit + audit committees Risk management Anti-corruption commission

Annual reporting Use of appropriate accounting standards Performance measures Auditor-General

19

20

2. Standards of Behaviour
INTRODUCTION 2.1 The openness, integrity and accountability of individuals within a parastatal organisation are fundamental to effective governance. The reputation of the organisation depends on the standards of behaviour of everyone working within it, whether senior managers, staff or agents contracted by it. Therefore, effective procedures and safeguards should be put in place to ensure that all management and staff: are committed to the highest standards of personal behaviour and maintain open and honest relationships with the public, with people from other organisations, and with other employees and officers of the organisation. 2.3 The IFAC Financial Management and Accounting Committee (FMAC) published Study 8 Codifying Power and Control: Ethical Codes in Action in May 1999.6 The study focuses on ethical codes as one way in which corporations make explicit their values, guide and direct decision making, and define the ground rules of behaviour. Study 8 notes that: Corporate Codes serve three purposes. First, they are vehicles through which the power of overarching forms of social morality is drawn on for use as corporate power. Second, they are vehicles for deploying corporate power over values, choices and behaviours in ways designed to induce appropriate responses to contextual requirements.

2.2

2.4

Study 8 Codifying Power and Control: Ethical Codes in Action, published by the IFAC Financial Management and Accounting Committee in May 1999.

21

Third, they are vehicles for establishing control over the exercise of values, choices and behaviours so that appropriate responses to contextual requirements are induced. 2.5 A suitable standard of behaviour or ethical conduct will probably be one which would not cause any problems for the individual or his or her organisation if it were to become public knowledge. Complaints and whistle-blowing procedures are essential safety measures for all organisations. Each parastatal organisation should ensure that these procedures are formally documented, that there is a named senior officer who is responsible for monitoring any internal or external complaints or worries that are received and that there is a suitable appeal process to ensure that all complaints are adequately dealt with and appropriate action is taken to address any residual issues. LEADERSHIP 2.7 The King Report7 said that corporate governance is essentially about the following aspects of leadership: 1. Leadership for efficiency in order for companies to compete efficiently in the global economy, and thereby create jobs 2. Leadership for probity because investors require confidence and assurance that the management of a company will behave honestly and with integrity in regard to the companys shareowners and others 3. Leadership with responsibility as companies are increasingly called upon to address legitimate social concerns relating to their activities 4. Leadership that is both transparent and accountable because otherwise business leaders cannot be trusted and this will lead to the decline of companies and the ultimate demise of a countrys economy.

2.6

The King Report on Corporate Governance for South Africa 2002 (King II Report), Institute of Directors in Southern Africa.

22

2.8

The highest standards of behaviour should be demanded of all staff of parastatal organisations. Governing bodies, chief executives and other senior managers have a special responsibility to demonstrate in practice the standards they expect of others within the organisation. They should demand and show through their work that whenever there is a choice between ethical behaviour and choosing other means to operate, that their social conscience and the good name of the organisation always come first. The governing body and chief executive of each parastatal organisation have a leadership role their actions should set high standards: formally by setting rules and regulations and communicating those standards, and informally through personal adherence to the highest standards of behaviour and through the setting of a good example. Parliament, or a specific agency, such as the public service commission, may set codes of conduct which apply to all public service officials. Governing bodies and chief executives are, however, still responsible for determining the values and standards which define the culture of their organisation and govern the behaviour of everyone within it. CODES OF CONDUCT AND ETHICS

2.9

2.10

2.11

In the absence of a government-wide code of conduct, each parastatal organisation should adopt a formal code of conduct defining the standards of behaviour that the governing body, chief executive, senior managers and all other staff are required to follow. Guidance from the UN on developing such a code is included as Appendix 2 and an example of such a code is included as Appendix 3 to the companion volume to this Guide. A staff code of conduct and ethics should: commit staff to the highest standards of ethical behaviour be developed in a consultative manner and involve the organisations staff and other stakeholders, including staff trade unions

2.12

23

 receive total commitment from the governing body, chief executive and senior management of the organisation they should set an example in practice for other employees to follow be sufficiently detailed, so as to give a clear guide to the standard of behaviour expected of all employees. 2.13 On appointment, members of the governing body, the chief executive, senior managers and staff of the organisation should undertake to uphold and abide by the relevant code of conduct and ethics. They should be made aware that failure to follow the code may lead to disciplinary action and in appropriate circumstances could result in their dismissal. Codes of conduct and ethics should reflect the three fundamental governance principles of openness, integrity and accountability. They should also address: objectivity honesty and ethical relationships. OPENNESS AND OBJECTIVITY 2.15 Openness is more than structures and processes. It is also an attitude and belief among key players, politicians, staff of parastatal organisations and other stakeholders that information is to be shared and is not owned by any particular organisation it is a public resource. Governing bodies and chief executives should establish appropriate mechanisms to ensure that senior managers and other staff of the organisation are not influenced by prejudice, bias or conflicts of interest.

2.14

2.16

24

2.17

Governing bodies and all staff of parastatal organisations who are involved in the decision-making process should be, and be seen to be, objective and should put the interests of the organisation and society generally above their private interests. This imposes an obligation to be fair, honest and free of conflicts of interest. Conflicts of interest

2.18

The governing body, chief executive and employees of parastatal organisations are required to observe not only the law, but also other relevant rules on disclosure of personal interests. In disclosing interests, complete openness should be observed. The appearance of a conflict of interest could be as damaging as the existence of a real conflict, and public office holders should do their utmost to ensure that in all their activities, both professional and private, even the appearance of a conflict of interest does not arise. Avoiding conflicts of interest should mean that governing bodies, chief executives and other employees do not use their position in the parastatal organisation for private gain in a social or business relationship outside the organisation. Such relationships may include: outside employment, directorships or material shareholding if they involve any potential links to the organisation or are contrary to the objectives and interests of the organisation official decisions or official actions being improperly influenced by any relationship (e.g. kin, marriage or partnership) or by any personal or financial consideration receiving fees for performing services which form part of official duties (e.g. lecturing); these must be disclosed to the organisation, which establishes procedures for their treatment and political interests that may be related directly or indirectly to the work of the organisation.

2.19

25

2.20

Each parastatal organisation should have a register of interests to record all the relevant personal and business interests of the members of the governing body, the chief executive, senior managers and other staff. This register of interests should be available for public inspection. On first appointment and at least once a year thereafter, all members of the governing body should, in good faith, disclose to the rest of the governing body and to the relevant oversight body (for recording in the register of interests) any business or other interest that is likely to form a potential conflict of interest. This may include, for example: relevant business or political interests membership of a trade, business or other economic organisation significant shareholding, share options and/or other interests in organisations with which the parastatal organisation may do business and any gifts, monies, commissions, benefits or other favours extended or received from a party in respect of, or in relation to, any business dealings with the parastatal organisation.

2.21

2.22

In some countries, members of the governing body of a parastatal organisation and the chief executive of a parastatal organisation may be required to provide an annual declaration of their assets. Such a declaration should be provided to the Auditor-General (among others) and should be available for public inspection. This procedure enables such individuals to be held to account for any increase in their assets and may indicate assets which have been obtained as a result of corruption or other irregularities. In addition, in meetings of the governing body or senior managers, participants should formally declare whenever they have a personal interest in the subject being discussed. Whenever a conflict of interest is established, or an interest appears to conflict with public office, the person concerned should play no further part in the relevant discussion, decision or action.

2.23

26

2.24

Relevant political interests will include, for example, engaging in any significant political activity, including holding office in a political party, standing for elected positions, making public appearances or statements in support of a political party or a candidate in an election, during the previous five years. Any such activity should be disclosed in the register of interests. Gifts, hospitality and entertainment

2.25

Staff of parastatal organisations should never offer or accept any payment, bribe, favour or inducement. Gifts, hospitality and entertainment should be offered or accepted only if there is a genuine need to impart information or represent the organisation and the hospitality is appropriate. To resolve any doubts about the appropriateness of offering or accepting hospitality or a gift, the person concerned should follow the guidelines below. He or she should consider whether the offering or acceptance of any such gifts or hospitality could be regarded as normal and reasonable. Normal and reasonable is defined for this purpose as no more than the organisation would be prepared to offer in equivalent circumstances. Organisations should provide guidance as to what may be considered appropriate. Staff must not exceed such guidance without the specific and written authority of the governing body, chief executive or other designated senior manager. Where there is no guidance, the person should ensure that any hospitality or gift is not of a level or an amount which would lead any person to believe that he or she might be influenced by it. The person should ensure that a full record is kept of all hospitality or gifts offered, given or accepted above a minimum limit. This record should be held centrally and be made available to the organisations auditors and at meetings of the governing body. The person should decline the gift if there is any doubt as to the objectivity and openness of making or accepting such an offer.

27

INTEGRITY AND HONESTY 2.26 All staff of parastatal organisations should conduct themselves in accordance with the highest standards of behaviour to maintain the organisation's good reputation. In particular, staff should be trustworthy in the handling of public funds. They should clearly demonstrate: integrity and honesty in handling money, assets and resources entrusted to them care in safeguarding property, assets and confidential information to ensure it is not stolen, abused, damaged or destroyed proper observance of the organisations rules and procedures, particularly when handling or accounting for its financial affairs economy to avoid waste and extravagance and personal honesty, for example, when making orders or paying for goods and services, in claiming expenses and ensuring that official assets and resources are not used for private advantage. ACCOUNTABILITY 2.27 Accountability can be interpreted as a means of enabling a parastatal organisation to explain and report to Parliament on the regularity and efficiency with which it pursues its objectives and the extent to which it achieves them. This should be distinguished from political accountability, whereby politicians are accountable directly to the public (e.g. through an election), and managerial accountability, whereby officials are accountable to their superiors through the hierarchy up to the political head or minister. Accountability to Parliament should address: the stewardship of assets and resources the equitable appointment and treatment of employees

2.28

28

 the financial performance, that is, the efficient use of resources in the delivery of agreed services and non-financial aspects of performance, including accountability for the achievement of the organisations objectives and the quality of services provided. ETHICAL RELATIONSHIPS The public and people from other organisations 2.29 All staff should uphold the reputation of their organisation by treating the general public and people from other organisations: in a helpful and courteous manner on a timely, reliable and, where appropriate, confidential basis and in an open, fair and efficient way. Other staff 2.30 All staff should have a general duty to treat colleagues: openly, honestly and courteously with consideration for others health, safety and personal welfare and without harassment, discrimination or abuse of any kind. 2.31 The governing body and chief executive should seek to establish an open climate and culture in which staff can have confidence in the fairness and impartiality of procedures for registering and dealing with their interests and concerns. Similarly, it is the responsibility of the

29

governing body, chief executive and senior management to ensure equality of opportunity and to establish open and fair procedures for making appointments and for determining terms and conditions of service. 2.32 The governing body and chief executive should nominate one of the most senior managers of the organisation to be responsible for investigating any concerns raised by members of staff about standards of conduct (see also paragraphs 3.633.66 below). Trade unions 2.33 Membership of a trade union should be a democratic right for all employees. Trade unions can also play a useful role in the management of all parastatal organisations. This can include: providing a useful channel of communication between the staff and the senior management, the chief executive and the governing body providing the governing body and the chief executive with a formal means of consulting staff outside the normal management hierarchy and providing the governing body and the chief executive and senior management with early warnings of staff grievances and concerns. 2.34 Arrangements should be put in place to facilitate regular formal consultation and negotiation between management and trade union representatives. The trade unions and their representatives should be given appropriate facilities to enable them to communicate with their members and to ensure that they are actually representing the members views. This will include providing trade union representatives with: suitable paid time off from their usual work for training, consulting with their members, preparing for and attending meetings with the organisations senior management access to suitable notice boards, the right to distribute information and other means of communicating with their members

30

and the right to organise meetings for union members on the organisations premises and during work time. Suppliers 2.35 All staff should take care to maintain the reputation of the parastatal organisation for honouring contracts and other agreements to which it is a party. This implies building trust through fair, open and consistent dealing. Staff involved with suppliers should display high standards of competence, ethics and integrity. Individuals should be aware of the risks involved in contracting and purchasing relationships. Suppliers should be selected on the basis of quality, suitability and value for money. Staff should be fair, straightforward and honest in their dealings with suppliers. They should take care at all times to avoid becoming, or appearing to become, obliged to an individual supplier, e.g. by accepting gifts, hospitality, entertainment or other inducements. When dealing with suppliers, staff need to: ensure that value for money is achieved comply with the law and the organisations internal rules and procedures, for example, public procurement legislation and regulations of the tender board ensure that the procurement process is operated with due regard to openness, accountability and integrity ensure that quality standards are met and procedures followed, and be diligent in ensuring that suppliers comply with the standards specified and pay for supplies within the time agreed.

2.36

2.37

31

32

3. Organisational Structures and Processes

INTRODUCTION 3.1 Parliament should have responsibility for holding a parastatal organisation to account for the quality of its governance and general management. It may be aided in this task by a dedicated oversight body and one or more specific ministries. A parastatal organisation may have a range of different legal forms. Those parastatal organisations with commercial objectives should be established as limited companies to protect the government from inappropriate financial liabilities. The governing body of a parastatal organisation should usually be appointed by the relevant minister on the advice of a parastatal oversight body. The governing body and the chief executive should also have responsibility for establishing effective organisational structures and processes to ensure: proper accountability for public money and performance clear communication with stakeholders and clarity about roles and responsibilities of key players, and in particular the relative roles and responsibilities of the governing body, chief executive and director of finance. APPOINTMENT OF GOVERNING BODIES 3.3 There should be a formal and transparent process to ensure that appointments to the governing body of each parastatal organisation are made in accordance with specified criteria of competence, on the basis of merit and the individuals ability to carry out a defined role within the organisation.

3.2

33

3.4

The chairman and members of the governing body of each parastatal organisation should usually be appointed by the relevant minister on the advice of the parastatal oversight body. In some countries, the President may be responsible for these appointments; however, experience has suggested that this may concentrate too much power in the hands of one person. In line with the principles of openness and accountability, such appointments should be subject to the recommendations of an independent appointments commission, which may be the same body as the oversight body for the parastatal organisation. Such a body should ensure that each appointment is: publicly advertised, including details of any fees payable and the conditions associated with the appointment subject to a pre-determined term of office and based on the principles of free and open competition so that appointments are on the basis of the relative merits of the individual candidates.

3.5

3.6

Where members of governing bodies are chosen as representatives of stakeholder groups, such as those above, care should be taken to ensure that the governing body represents the interests of all such groups and the public in general. The code of conduct for governors of parastatal organisations should emphasise the requirement to consider the general public good rather than just the interests of their own group. Members of governing bodies may be chosen to represent different stakeholder groups, for example: the government may include officers from the parastatal oversight body, senior officers from relevant ministries, and/or senior officers from other parastatal organisations users, customers or local community

3.7

34

 staff and their trade union representatives representatives of other interest groups, for example civil society, business people and the trade union movement. 3.8 Methods of nomination and appointment by such groups should be clearly regulated and documented. If the governing body appoints its own members it should establish a nomination committee to advise the governing body on its membership. To preserve the independence of Parliament and the parastatal organisations which are accountable to it, no one who is or was a Member of Parliament should be appointed as a member of the governing body of a parastatal organisation. Irrespective of whose responsibility it is to make appointments to the governing body, the key criterion for an appointment should always be the skills and experience an individual can contribute to the governing body. The governing body as a whole needs the right balance and mix of individuals, representing a range of relevant backgrounds, experience and professional skills. These should include operational and technical, financial, legal, governmental and regulatory environments. The composition of the governing body should also take into consideration gender balance, geographical distribution and ethnicity. Non-executive members of the governing body should be appointed for a specified term subject to re-selection. Their tenure should be fixed at three to five years. For the chief executive and other senior officers, tenure should be five years or until retirement, whichever is earlier. Reappointment to the governing body after the end of an initial period of membership should not be automatic, but subject to a formal performance appraisal by the chairman and the nomination committee (and/or the oversight body). Letters of appointment should be provided to each non-executive governing body member. These should set out clearly the duties, responsibilities and levels of fee (if applicable) for members of the governing body. The governing body of each parastatal organisation should have a minimum of seven and a maximum of 15 members. No more than half the membership should be functional senior officers, including the chief executive. No director should hold such a position in more than three organisations concurrently.

3.9

3.10

3.11

3.12

35

ACCOUNTABILITY FOR PUBLIC MONEY AND PERFORMANCE 3.13 The governing body, chief executive and senior managers should establish effective organisational structures and processes to ensure: compliance with all applicable statutes and regulations, and other relevant statements of best practice proper accountability for public money and performance, especially to their oversight body, relevant ministries and Parliament clear communication with all their key stakeholders and clarity about roles and responsibilities of key players, and in particular the relative roles and responsibilities of the governing body, chief executive and other senior managers. 3.14 Accountability for public money will be secured by having clear organisational objectives and by the establishment of an effective framework of internal control, and it will be discharged by means of timely, objective, balanced and understandable reporting to stakeholders. Accordingly, the governing body has responsibility for ensuring that the organisation keeps proper financial records and accounts, and maintains an effective system of internal control (see also Chapter 4 below). The governing body also has the responsibility for: developing and agreeing the strategic and operational objectives and plans for the organisation holding the chief executive and other senior officers to account for the extent to which the organisation has achieved its objectives and the efficiency it has displayed and the extent to which the organisation complies with relevant laws, rules and regulations.

36

COMMUNICATION WITH STAKEHOLDERS 3.15 The governing body and chief executive should each make an explicit commitment to openness and transparency in all the activities of the organisation, subject only to the need to preserve confidentiality in those specific circumstances where it is proper and appropriate to do so. There is a presumption that as much information as possible about the activities of parastatal organisations, including policy decisions and actions, should be in the public domain, with information being withheld only when it falls within strictly defined criteria. Some countries have legislation designed to improve transparency and protect the publics right to information. Parastatal organisations should ensure there are procedures in place to comply with any such legislation and should aim to provide positive and timely responses to any reasonable request for information. Nonetheless, the confidentiality of personal and commercially sensitive information should also be respected at all times. In some countries the confidentiality of such information is backed up by data protection legislation. In any communication with the stakeholders, the governing body and chief executive should ask themselves the following five questions. Is the communication open, honest and transparent? Is it relevant and substantial or merely a communication of form? Is the communication prompt and clear? Does it fairly and comprehensively set out the position? Are details provided to enable individual stakeholders to obtain specific additional information?

3.16

3.17

37

3.18

To ensure openness and transparency, the governing body and chief executive may also institute periodic external reviews of the organisation and establish consultative groups with key stakeholders. To improve effective communication with stakeholders, parastatal organisations should: publish formal predetermined standards and measures of performance, and record actual performance against them in reports that are public documents these standards of performance usually relate to key financial and non-financial objectives (also see paragraphs 5.145.19) inform stakeholders of their rights to services and information, and how, if necessary, to complain and inform stakeholders of contracting and partnership arrangements and how to become involved. ROLES AND RESPONSIBILITIES Balance of power and authority

3.19

There should be a clearly defined division of responsibilities at the head of each parastatal organisation to ensure a balance of power and authority. One way of achieving this is for the governing body to include a balance of executive and non-executive members (including independent non-executives), so that no individual or small group of individuals can dominate the governing body. The governing body should include non-executive members of sufficient status and number for their views to carry significant weight in the governing bodys decisions. The majority of non-executive members of the governing body should be independent of management and free from any business or other relationship that could materially interfere with the exercise of their independent judgement. Non-executive members considered by the governing body to be independent in this sense should be identified in the annual report.

3.20

38

3.21

Other ways of balancing power and authority are the use of the complementary, but different, roles of the governing body and the chief executive and in appropriate cases the chief executive and the chairman of the governing body. It is often considered that the roles of the chairman and the chief executive should be separated and that the chairman should be a non-executive member of the governing body. Others argue that, with parastatal organisations having additional oversight bodies and considering the role of Parliament, it is more effective to combine the roles of chairman and chief executive so that there is clearly one individual who can be held to account for the success or otherwise of the organisation. Whichever model is adopted, there should be a strong and independent non-executive element on the governing body, with a recognised senior member, other than the chairman, to whom concerns can be conveyed by other members of the governing body. Areas of accountability should be clearly defined. In particular, the roles and responsibilities of the governing body, the chairman, the nonexecutive members of the governing body and executive management need to be explicitly documented. The information to satisfy this need for accountability may be substantially derived from the legislation that established the parastatal organisation. This should require each parastatal organisation to produce an annual report that includes its annual financial statements and appropriate non-financial performance information. The governing bodys responsibilities

3.22

3.23

Every parastatal organisation should be headed by an effective governing body to lead and control the entity, and monitor the executive management. Governing bodies should meet regularly. This should occur at least four times a year and more frequently if necessary. The governing body has responsibility for the stewardship of the entity, including: the adoption of a strategic planning process within the policy and resources framework laid down by Parliament, ministers and/or the oversight body; this framework should include:

3.24

39

 defining and challenging the vision, mission, annual and longerterm objectives and agreeing plans to achieve them overseeing the delivery of planned results by monitoring performance against agreed strategic objectives and targets, and ensuring corrective action is taken when necessary and ensuring that adequate formal reports to the relevant minister, regulatory body and Parliament are produced when required at least an oversight of the appointment, remuneration, development and succession of the senior management, including the chief executive confirmation of the appointment and dismissal of the head of internal audit and, if relevant, the external auditor the formal approval and adoption of the annual report of the entity, including its financial statements the implementation of an effective communications policy the establishment, monitoring and maintenance of an effective system of internal control and the identification and monitoring of the principal risks and opportunities the entity faces and assurance that appropriate systems are in place to manage these risks (this includes safeguarding the public reputation of the entity). Training, skills, information and advice 3.25 Members of the governing body should receive appropriate training on joining the body and subsequently as necessary. On appointment, new governing body members should make a commitment to undertake induction training that includes awareness of public-sector values, and

40

standards of probity and accountability. They should also commit themselves to undertaking other training as appropriate. 3.26 Each governing body should establish appropriate arrangements to ensure that it has access to all such relevant information, advice and resources as are necessary to enable it to carry out its role effectively. Written information on the entitys aims and objectives, control environment and control activities, including key policies and procedures, organisational risks and risk management practices, key personnel, delegation arrangements, governing body and staff structure, as well as its budgeting, planning and performance arrangements, should be supplied to all members of the governing body. Management has an obligation to provide the governing body with appropriate and timely information, but information volunteered by management is unlikely to be enough in all circumstances and members should make further enquiries where necessary. They should question managers about the information provided to ensure that it is complete and that they clearly understand its implications. The agreed procedure for individual members of the governing body to take professional advice should be laid down formally, for example, in a governing body resolution, or in the letter of appointment/service contract. Before seeking such professional advice, however, the member concerned should normally discuss and clear the matter with the chairman or compliance officer unless there are particular reasons why this is not appropriate, for example if it concerns the ethical behaviour of these officers. Training of members of each parastatal organisations governing body should include a formal programme covering at least the following aspects: principles and practice of corporate governance role and functions of the governing body legal and regulatory context in which the organisation operates explanation of financial reports

3.27

3.28

3.29

41

 fiduciary duties and duties of care and skill internal control and risk management and disclosures, monitoring and evaluation.

Delegation and reserved powers 3.30 Where it has power to do so, the governing body may decide to delegate responsibility for specified matters to individual members or its own committees. However, there will be matters that the governing body specifically reserves for its collective decision, to ensure that the direction and control of the entity remains firmly in the governing bodys hands and to safeguard against misjudgements and possible illegal practices. These matters are likely to include issues of strategy, key strategic objectives and targets, significant decisions involving the use of financial and other resources, and personnel issues, including key appointments and standards of conduct. Where responsibilities have been delegated by the governing body, it should ensure that individual responsibility for management decisions can be established, and that such managers are made properly accountable. Every employee should be accountable for his or her expected contribution towards the successful delivery of the parastatal organisations outputs. The governing body should allow managers to manage, but should hold them to account and ask them to explain their actions. The governing body should formulate a definition of materiality on matters such as acquisition and disposal of assets, investments, capital projects, authority levels, and so clearly specify levels of delegation. To ensure that the direction and control of the entity is firmly in their hands, governing bodies should establish and maintain an up-to-date framework of delegated or reserved powers that includes a formal schedule of those matters specifically reserved for their collective decision.

3.31

3.32

3.33

42

Procedures 3.34 To support them in carrying out their duties, governing bodies of publicsector entities should establish clearly documented and understood management processes for policy development, implementation and review; decision making, monitoring, control and reporting; and formal procedural and financial regulations to govern the conduct of their own operations. This should include a list of matters which must be decided by the governing body itself and a scheme of delegation of other issues. Procedural regulations to govern the conduct of the governing bodys operations are also needed; these normally include the procedures for: giving notice of meetings to members of the governing body, including procedures for non-executive members to call meetings voting by members recording attendance and recording decisions of the governing body. Meetings of the governing body 3.36 It is imperative that members of the governing body of each parastatal organisation devote adequate time to their role. It is, however, often difficult to find individuals with the necessary knowledge and experience who are also available for the necessary amount of time. Good practice with regard to the meetings of governing bodies includes the following criteria. The governing body should meet as regularly as required by needs of the parastatal organisation, but at least once every three months. The members of the governing body should be involved in the development of the agenda for each of their meetings.

3.35

3.37

43

 Agenda papers for each meeting should be issued to the members of the governing body at least two weeks before the meeting. Agenda papers should be tabled at meetings of the governing body only in exceptional circumstances. Members of the governing body are expected to prepare themselves adequately in advance of their meetings. The governing body should prepare a work plan or calendar as a guide to its activities. The minutes of each meeting should be recorded accurately, issued in draft to the members of the governing body within two weeks of the meeting date and stored safely. The chairman of the governing body 3.38 The role of the chairman should include responsibility for providing effective strategic leadership to the governing body and ensuring that the governing body successfully discharges the overall responsibility for the activities of the entity as a whole. The role of the chairman should be to: provide leadership to the governing body, ensuring that the individual governing body members work together as a cohesive team to enable it to carry out its responsibilities effectively enable all governing body members to make a full contribution to the governing bodys affairs facilitate training and appraisal of individual governing body members ensure that there is an effective process of review regarding the performance of the governing body as a whole ensure that key and appropriate issues are discussed by the governing body in a timely manner

3.39

44

 ensure that the governing body, in reaching decisions, takes proper account of statutory and other requirements ensure that members of the governing body have access to relevant information on which to base their decisions and ensure that the minutes of meetings of the governing body accurately record all decisions taken and, where appropriate, the views of individual governing body members. Non-executive members of the governing body 3.40 Non-executive members of public-sector governing bodies should provide an independent judgement on issues of strategy, performance, resources and standards of conduct. Apart from any fees they may receive as members of the governing body, it is appropriate that they be independent of management and free from any other relationships which may materially interfere with their role. Their duties, terms of office, remuneration and the review thereof, should be clearly defined and documented, and publicly recorded. In the public-sector context, non-executive governing body members are those governing body members (including, where relevant, the chairman) who are independent from management, free of relationships and other interests which could, or could reasonably be perceived to, materially interfere with the exercise of judgement that is in the best interests of the entity. Executive management 3.42 The chief executive and director of finance are key managers and have particular responsibilities for which they should be held accountable by the governing body, the relevant ministries, the oversight body and Parliament.

3.41

45

The chief executive 3.43 The chief executive should have line responsibility for all aspects of executive management. He or she should be accountable to the governing body for the ultimate performance of the organisation and implementation of the governing bodys policy. Even if the chief executive is not a member of the governing body, he or she should attend all its meetings, although he or she may be excluded for certain items which the governing body wishes to discuss in private. The chief executive should also be responsible to the governing body for ensuring that the governing bodys procedures are followed, and that all applicable statutes and regulations and other relevant statements of best practice are complied with. The chief executive should be appointed by the public service commission or the parastatal oversight body. The chief executive should be responsible for: providing leadership to senior managers and other employees and planning, directing and controlling day-to-day operations interpreting and implementing government policy and the decisions of the governing body ensuring the development of suitable business plans, operational plans and budgets for approval by the governing body ensuring that procedures are followed, and that all applicable statutes and regulations and other relevant statements of best practice are complied with the appointment, development and succession of senior managers, or at least for providing appropriate advice on these issues to the public service commission developing and recommending the human resource policies and plans for the governing bodys approval

3.44

3.45

46

 ensuring that senior managers have access to all relevant information and that there is effective communication between them and the governing body ensuring that key and appropriate issues are discussed by senior managers in a timely manner ensuring that there is an effective process of review of the performance of senior managers and, if necessary, that appropriate disciplinary action is taken ensuring that the organisation has and maintains an effective, efficient and transparent system of internal control, including internal audit and risk management and ensuring that the quality of services provided by the organisation is appropriate. 3.46 Personal responsibility for internal control and wider governance may be given to the chief executive as the executive head of the parastatal organisation. The chief executive may be designated as the accounting officer to indicate that he or she will be held to account in this way. There are instances where the lines of responsibility and accountability can become blurred, however, particularly where legislation requires the chief executive to be accountable both to the responsible minister(s) and the governing body. In such instances, the governing body should develop and implement appropriate arrangements, relevant to the specific circumstances, to manage this issue. One approach may be to issue a set of formal directions to the chief executive, reinforcing his or her statutory responsibility and clarifying the role of the governing body. The director of finance 3.48 A senior executive, whether a member of the governing body or not, should be made responsible for ensuring that appropriate advice is given to the governing body on all financial matters. This officer should also be responsible for the financial management of the organisation.

3.47

47

This director of finance should be a fully qualified professional accountant and a member of a recognised accountancy body. Membership of such a body will require compliance with professional (that is ethical and technical) standards over and above any requirements imposed by statute and regulations, and other relevant statements of best practice. 3.49 The director of finance should also be responsible for: keeping proper and accurate financial records and accounts, including selecting and applying appropriate accounting policies ensuring the effective, efficient, economical and transparent use of the financial and other resources of the organisation concerned ensuring arrangements for safeguarding assets, and the management of the liabilities of the organisation taking effective and appropriate steps to: collect all revenue due to the organisation concerned and prevent wasteful expenditure, losses resulting from criminal conduct, and expenditure not complying with legislation. REMUNERATION POLICY 3.50 In many countries, the salaries of chief executives, senior managers and other staff of parastatal organisations are set centrally by the public service commission or equivalent. This should help to ensure objectivity and consistency across the public service. Some parastatal organisations may, however, be authorised to set the salaries of their own staff. In this case, parastatal organisations should establish a formal and transparent procedure for developing their staff remuneration policy. No staff should be involved in deciding their own remuneration. To avoid potential conflicts of interest, governing bodies should establish remuneration committees with responsibility to give independent advice. Such committees should make recommendations

3.51

48

to the governing body and chief executive, within agreed terms of reference, on the remuneration for senior managers; and determine on their behalf specific remuneration packages for each senior manager, including pension rights and any compensation payments. 3.52 Where a parastatal organisation has the power to determine the salaries of its staff, these should be negotiated between the chief executive (and/or other senior managers) and the relevant trade union(s). Any changes to salary scales and salary increases should be subject to ratification by the governing body. DISCLOSURE 3.53 Governing bodies of public-sector entities need to report publicly the processes for making appointments to the governing body, and need to make publicly available the names of all governing body members, together with their relevant other interests. If public-sector entities are to be accountable to their stakeholders it is important that the identity of the members of the governing body be publicised, together with information about both how and why they came to be appointed. The annual report of a parastatal organisation should contain a statement on the remuneration policy and details of the remuneration and all benefits of each of the members of the board and senior managers. The governing body should report to its minister (or oversight body) and to Parliament each year on the organisations policy on staff remuneration. The report should form part of, or be annexed to, the organisations annual report. Separate and full disclosure should be made in the annual report of: the names and brief background details of the Chairman, chief executive and other members of the governing body the total fees or remuneration paid to each member of the governing body, including the chief executive, including, for example, any house, car, health, education or pension contributions

3.54

3.55

3.56

49

 details of all expenses paid to each member of the governing body, and any car, office, computer or mobile telephones, etc. made available to any member of the governing body or senior manager and the total remuneration package of the senior managers within the organisation. 3.57 Separate figures should be shown for salary, fees, other benefits and other performance-related elements. The basis on which performance is measured (for performance-related remuneration) should also be explained. Recently, good practice has increased the level of detail about salary and other remuneration that is disclosed. It is now considered good practice for the organisation's annual report to contain details of the total remuneration of each member of the governing body, the chief executive and each of the organisation's senior managers. COMPLAINTS AND WHISTLE-BLOWING PROCEDURES 3.59 Complaints and whistle-blowing procedures are essential for the good governance of all organisations. Complaints procedures should ensure that complaints from users and other stakeholders external to the organisation are adequately monitored, investigated, resolved and appropriately reported. Whistle-blowing procedures aim to ensure that all significant staff concerns over the management of the parastatal organisation are adequately dealt with by the organisation, to minimise the need for staff to report their concerns to anyone outside the organisation, including the media. Complaints 3.60 All parastatal organisations should have a formal complaints procedure with the objective that all complaints are dealt with promptly and effectively and, where possible, to the satisfaction of all concerned. Such a complaints procedure should include the following aspects:

3.58

50

 the complaints procedure should be published, with copies made available on request and reference made to it in the organisations annual report the existence of the complaints procedure should be advertised at each of the organisations public enquiry points, with the name and contact details of the person to whom complaints should be raised where possible, any complaint should be dealt with, as soon as it is raised, by the person who receives the complaint where this is not possible, the complaint should be referred to the head of department or dedicated complaints officer, and this officer should investigate the complaint and provide a response as promptly as possible if the person raising the complaint is still not satisfied he or she should be provided with the contact details of a director or the chief executive, who will consider the complaint if the complaint is still not resolved the opportunity should be provided for the complaint to be considered by the governing body or its complaints panel and the internal complaints procedure should not prevent complaints being referred to the relevant oversight body, ombudsman, Member of Parliament, minister or other relevant official, and details should be provided of how to make such external complaints. 3.61 Complaints should be used as a method of identifying aspects of the service provided by the parastatal organisation which need to be improved. A regular report should be provided (at least annually) to the governing body giving the number of complaints received and an outline of how each was ultimately resolved. A complaints register should be maintained, which records each formal complaint received by the organisation. This should include all written complaints and any complaints which are not resolved by the person

3.62

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who first receives the complaint. The complaints register should be available for inspection at all meetings of the governing body. Whistle-blowing procedure 3.63 Each parastatal organisation should develop clear procedures for staff to voice concerns or complaints about maladministration, breaches of the law or ethical concerns, in an environment where they will be supported and protected from reprisals (whistle-blowing policy, for example, see the Annex to Appendix 3 of the companion volume to these Guidelines). Staff should normally be expected to raise such concerns with their supervisor or manager. If this is not appropriate, however, staff should be provided with the contact details of a senior manager or the chief executive to whom they can provide details of their concerns in confidence. They may also raise appropriate concerns with internal audit or the fraud investigation officer. This officer should investigate the case and provide an indication of his or her response and the action planned, which should be taken within a fixed period of time. Such concerns should be treated confidentially and staff should be provided with the assurance that they will not penalised if they raise concerns in good faith through the appropriate channels. If there is a need to break this confidentiality, the person who raised the concern should be consulted. This whistle-blowing procedure should ensure that in most cases concerns are dealt with within the organisation. There will be cases, however, when it would be appropriate for concerns to be raised externally, for example, with the external auditor, the Auditor-General, the anti-corruption commission or the police.

3.64

3.65

3.66

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4. Internal Control
INTRODUCTION 4.1 The governing body and chief executive of a parastatal organisation should ensure that a sound framework of internal control is established, and operates in practice, and that a statement on its effectiveness is included in the organisations annual report. Internal control has been broadly defined by the Committee of Sponsoring Organisations of the Treadway Commission (COSO) in Internal Control Integrated Framework, as: a process, effected by an organisations Governing Body of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: effectiveness and efficiency of operations reliability of financial reporting and compliance with applicable laws and regulations. 4.3 The Criteria on Control Governing Body of the Canadian Institute of Chartered Accountants (CoCo) and the Internal Control Working Party of the UK Institute of Chartered Accountants (Turnbull) have similar definitions of internal control. Both refer to internal and external reporting, rather than just financial reporting, however, and to compliance with internal policies as well as with laws and regulations. While internal control is a process, its effectiveness is a state or condition of the process at one or more points in time. Internal control systems operate at different levels of effectiveness. Control is effective to the extent that it provides reasonable assurance that the organisation will achieve its objectives reliably. Internal control can be judged

4.2

4.4

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effective in each of the above three categories respectively, if the governing body, chief executive and senior managers have reasonable assurance that: they understand and can predict the extent to which the organisations agreed operational objectives are being achieved and that all its resources are being used for these purposes published and internal financial statements and reports are reliable and are produced regularly and applicable laws and regulations are being complied with. 4.5 In reporting on the effectiveness of the organisations framework of internal control, governing bodies and chief executives should include, in the annual report, a statement to the effect that the framework of internal control that they have established is both appropriate to the nature of the organisation and effective in practice. The statement should outline the arrangements that they have established to enable them to make the required statement. These may take the form of a review of the various systems, risks and opportunities, and of the monitoring of the key control processes and procedures. The criteria against which the system is measured are thus identified, as well as the date on which the conclusion is made. Care should be taken to provide staff with the skills required to implement and maintain an adequate internal control process, and to ensure that staff responsible for securing significant changes in the process are suitably experienced (see also paragraphs 4.234.27 below). Objectives change over time and therefore management should assess periodically the effectiveness of control in the organisation and communicate the results to the governing body and chief executive. Procedures and control activities should be revised from time to time to ensure their continuing relevance and reliability, especially at times of significant change. The effectiveness of internal control should be reviewed and tested regularly. These reviews should cover all control activities, including those related to finance, operations, budgetary control, compliance and risk management, and governance. They may

4.6

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be undertaken by the organisation's Internal Audit section (see paragraphs 4.284.34 below). Responsibility for ensuring sound internal control should, however, remain with management, specifically with the governing body and chief executive. BUDGETING AND FINANCIAL MANAGEMENT 4.8 Governing bodies and chief executives should ensure that that effective and efficient budgeting and financial management procedures are in place. Budgeting 4.9 Budgeting is an essential element of the financial planning, control and evaluation processes of parastatal organisations. By its nature it is a means of allocating resources to achieve objectives. It is a management tool for planning, as well as a means of controlling funds to ensure that, as far as possible, the stated objectives can be met. Plans are inevitably not implemented exactly as intended, and any material differences should be clearly explained to the governing body. Whenever possible, the governing body should give prior approval for significant departures from their agreed budget. Parliament is responsible for sanctioning the overall public-sector budget and for authorising the executive to incur expenditure (see also paragraph 1.29 above). The income and expenditure of all parastatal organisations should be included within the budget approved by parliament. The budget should also include all loans to parastatal organisations and a note of any financial guarantees which have been provided. The governing body of a parastatal organisation should also approve the annual budget or financial plan, within the overall level of expenditure approved by Parliament. It is also responsible for overseeing and monitoring the implementation of this budget. Budgeting will be more successful if it is linked to a medium-term framework (a plan that usually covers a period of three to five years) containing measurable statements of the objectives of the parastatal organisation, policies and priorities, strategies for achieving the objectives, and a resource framework (projections of revenues and ceilings) to plan for the period. It is often impossible to achieve the objectives within one year, thus it is necessary to plan ahead to ensure that the best use is made of resources.

4.10

4.11

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4.12

Emphasis should be placed on identifying objectives, priorities and activities (or outputs and outcomes). The format of the budget documents should provide a clear explanation of the rationale for the proposed allocation of resources. Where possible, public feedback should be taken into account in the formulation of the budget. To be effective, budgeting should be integrated with accounting. If a similar basis of accounting is adopted for budgeting purposes and financial reporting, it will provide a framework of accounting information to provide a more rational basis for planning and controlling expenditure and for decisions about financing. Cash-flow budgeting is an essential element of effective cash management, and therefore a forecast of the timing of cash inflows and outflows will always be needed. Regular monitoring of actual financial performance against the budget is vital. The figures for revenue or expenditure reported against budgets should be reliable and readily available for discussion and management action, and projections revised where necessary. The governing body should receive, at least quarterly, budget reports comparing actual payments and receipts with the agreed budget. Such reports should be issued within a month of the end of each quarter and contain explanations of any material divergences from the agreed budget. Financial management

4.13

4.14

4.15

The objectives of financial management in the public sector should be to: support senior management in the allocation of financial resources in line with strategic policy objectives facilitate and ensure the regularity and propriety of the organisations financial affairs minimise and detect fraud, irregularity and corruption and

56

 encourage value for money by monitoring the extent to which the organisations outputs are provided economically, efficiently and effectively. 4.16 Financial management should include cash and treasury management as well as the formulation of medium-term and long-term financial objectives, policies and strategies, in support of the operational plan of the organisation. It includes the planning and control of capital expenditure, working capital management, and funding and performance decisions. It includes financial and management accounting functions, and the internal control environment, as well as supporting financial information systems. Financial management will be more effective if it has strong high-level support that is complemented by: medium-term contracts, supported by performance agreements, for members of the governing body, the chief executive and other senior managers clearly defined objectives and specified outputs for each department clearly defined responsibility for the governing body, chief executive and other senior managers for resources committed and outputs produced strategic planning and operational plans and non-financial measures for outputs in terms of quantity, quality and timeliness being introduced and used, together with financial measures in the evaluation of performance.

4.17

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4.18

The governing body and chief executive should have: flexibility in the use of resources within clearly defined limits discretion to determine cost allocations and full responsibility to determine staffing requirements and remuneration.

4.19

A sound financial management system should be supported by appropriate legislation, regulations, instructions and systems. Trained and competent staff are essential, informed by an efficient, preferably computerised, management information system. There should be guidelines, manuals or instructions setting out the procedures and regulations with which public-sector financial management and reporting must comply. These documents should be reviewed every two or three years (or when significant change has occurred) and updated accordingly. The governing body, chief executive and other senior managers should receive sufficient relevant and reliable information to enable them to monitor the operations of the organisation. The information system and its operators should ensure that full and proper records are kept of the affairs of the parastatal organisation. Information systems should be designed in such a way as to measure costs and the key performance indicators considered essential by the governing body, chief executive and other senior managers, in their assessment of the organisations success or failure. The accounting system that produces the financial statements should be integrated with other management systems (e.g. cash and debt management, and budgeting). The governing bodys ability to manage the financial affairs of the organisation will be improved if: periodic financial reports include year-to-date actual and budget figures, full-year budget figures and full-year forecasts there is a detailed analysis of any variances, and a written explanation where any of these are material

4.20

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 the director of finance is a member of the top management team and attends all meetings of the governing body it has assurance over the accuracy of the organisations financial records through, for example, the undertaking of regular reconciliations between the cash book and the bank statements and it is able to monitor the extent to which the organisation complies with statutory and regulatory requirements and appropriate accounting standards. OPERATIONAL REPORTING 4.22 The objectives of most parastatal organisations are to provide nonfinancial goods and services. Thus the management of these organisations operations is vital to the efficient achievement of their objectives. For this reason: the governing body should be provided with regular reports on the extent to which its operational objectives are being achieved appropriately defined non-financial performance indicators should be established so as to facilitate effective assessment of the corporations performance reporting of these performance indicators should be tailored to the particular levels of responsibility so that the governing body members are provided with high-level summary reports for decisionmaking purposes and operational managers are provided with greater details appropriate to their managerial responsibilities and implementation status reports should be included to enable the monitoring of progress, with all significant initiatives approved by the governing body.

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STAFF TRAINING 4.23 The governing body and chief executive should ensure that training programmes are in place so that all staff are competent to perform their work. Sound recruitment policies, acceptable conditions of employment and appropriate training programmes can contribute to the competence of staff. The quality of management in a parastatal organisation is directly related to its ability to obtain and retain experienced managers, accountants and other specialist staff. Salary levels in parastatal organisations should be sufficient to attract and retain staff of the right calibre. Public-sector managers should be proficient in the following areas: strategic planning formulation of output objectives, performance measures and operational plans organisation (people and structure, operational processes and technology) performance measurement, financial and performance reporting management of funds, working capital and other assets managing reliable and relevant accounting and information systems procurement and contracting for goods and services and management and motivation of staff. 4.26 An assessment of the performance of staff should ensure that individual performance is linked to the operational plan of the parastatal organisation. Incentives should be given for good performance to ensure

4.24

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continued improved efficiency, and sanctions should be instituted for non-performance or sub-standard performance. 4.27 Staff should be appropriately supervised and their performance evaluated against an appropriate profile. Training should be tailored to fit the immediate requirements and career aspirations of staff. The training programme should integrate formal training with on-the-job training. Management training opportunities should be provided to all staff to ensure that they perform competently. Staff with specialised responsibilities require appropriate additional training. INTERNAL AUDIT 4.28 Internal auditing is an independent objective assurance and consulting activity designed to add value and improve an organisation's operations. It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes. The governing body and chief executive should ensure that an effective internal audit function is established and maintained as part of the organisation's framework of internal control. Acceptable standards should be applied by the internal audit function, in particular relating to independence, professional proficiency and audit approach. The Standards for the Professional Practice of Internal Auditing issued by the Institute of Internal Auditors are the most authoritative international standards for internal auditing (http://www.theiia.org/iia/index.cfm?doc_id=1499). The Eastern and Southern African Association of Accountants General (ESAAG) has developed Guidelines on Internal Auditing with an associated commentary and explanatory notes. The Guidelines are reproduced as Appendix 4 in the companion volume to these Guidelines The head of Internal Audit should gain the respect and co-operation of the governing body, chief executive, other senior managers and the audit committee (see also paragraphs 4.354.39 below). The Internal Audit section should have unrestricted rights of access to all personnel, records (both electronic or otherwise) and assets, and be able to obtain such information and explanations as the head of Internal Audit considers necessary for the proper fulfilment of its responsibilities.

4.29

4.30

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4.32

Internal Audit should be objective, and, as far as possible, operationally independent of the organisation's management. It is the responsibility of the audit committee to ensure that conflicts of interests do not arise and that its objectivity and independence are not compromised. The head of Internal Audit should report directly to a senior manager, preferably the chief executive, with direct access, as necessary, to the governing body, chief executive and chair of the audit committee (or equivalent). An effective internal audit function should include the systematic review, appraisal and reporting of the adequacy of the systems of managerial, financial, operational and budgetary control and their effectiveness in practice, including, at a minimum: the adequacy of established regulations, guidance, policies, plans and procedures the appropriateness of organisational, personnel and supervision arrangements the extent of compliance with the above the adequacy of accounting for assets and interests and the extent that these are safeguarded from losses of all kinds arising from waste, extravagance, inefficient administration, poor value for money, fraud or other cause the appropriateness, reliability and integrity of financial and other management information and the means used to identify, measure, classify, report and act upon that information the economy and efficiency with which resources are employed the integrity of computer systems, including systems under development the adequacy and effectiveness of risk management and governance processes and

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 the follow-up action taken to remedy previously identified weaknesses. 4.34 The Internal Audit section should have relevant documented procedures (e.g. an audit charter and manuals) and other guidelines. In some countries, Internal Audit has a direct role to play in the checking and authorisation of payment vouchers through the pre-audit process. The governing body and chief executive may consider that this is a necessary role for Internal Audit. However, Internal Audit will often be more effective in a wider role. This would include the following changes: Internal Audit should undertake independent reviews of internal controls (rather then just the transactions) under the direction of an audit committee there should be management support for Internal Audit and the creation of a climate where managers and those responsible for Internal Audit co-operate for their mutual benefit and Internal Audit should develop a constructive role: as an aid to risk assessment and a proactive approach to contributing to good management and effective internal control. AUDIT COMMITTEES 4.36 The governing body should establish an audit committee, with the responsibility for independently reviewing, on behalf of the governing body, the organisations framework of control and its internal and external audit processes. To be effective, the audit committee should be independent of the organisation's senior management. To achieve this: it should be established as a high-level committee, and its members should be given written terms of reference that deal adequately with their membership, authority and duties

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 the terms of reference of the audit committee should be agreed by the full governing body (or may be provided by the oversight body); they should be reviewed and revised as necessary every three years the majority of members of the committee should not be employed by the organisation; they may include senior managers from other parastatal organisations or from the private sector the governing body, chief executive, director of finance, the head of Internal Audit and the external auditor should normally attend meetings of the audit committee and have direct access to the chairman as they require; other relevant senior managers should also attend as necessary the head of Internal Audit and the Auditor-General should bring all their significant findings to the attention of the audit committee to ensure that there are no unresolved issues of concern, the audit committee should have private discussions with the head of Internal Audit and the external auditor at least once a year, without the chief executive and other senior managers being present and the committee should have explicit authority to investigate any matters within its terms of reference, the resources it needs to do so, and full access to any information it deems necessary. The committee should be able to obtain outside professional advice and, if necessary, invite outsiders with relevant experience to attend its meetings. 4.38 The effectiveness of the audit committee will largely depend on its having a capable chairman who has the confidence of the governing body, chief executive, the organisation's head of Internal Audit and the external auditor. The chairman of the audit committee should be independent of the senior management of the organisation. The chairman of the audit committee should not be the chief executive and should neither fulfil a management role within the organisation nor any other role that may conflict with his or her role as chairman of the audit committee.

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4.39

Members of the audit committee should be appropriately qualified, and receive sufficient information, advice and training to enable them to carry out their roles effectively. Members should have experience of managing organisations of a similar size and complexity. At least one member of the audit committee should be an experienced financial manager, preferably a qualified accountant. The names and terms of office of the members of the audit committee should be provided in the organisations annual report. The functions of an audit committee should include: reviewing the extent to which managers implement and maintain an adequate internal control process (including the adequacy of policies and practices to ensure compliance with relevant statutes, directions, guidance and policies) and managements ability to monitor compliance with relevant standards or codes of governance reviewing, with management, the adequacy of the financial information relied on to manage the organisation reviewing, with senior managers, the latters relationship with the organisations external auditor (see also paragraphs 5.205.25 below) ensuring that the Internal Audit function is properly resourced and has appropriate standing within the organisation recommending or approving the hiring or removal of the head of Internal Audit and, where appropriate, the external auditor (in recognition of the wider accountability of parastatal organisations to Parliament, the Auditor-General may be appointed as the external auditor or may be responsible for appointing the external auditor) reviewing the activities of the Internal Audit function, including recommending authorisation of its annual work programme to the governing body reviewing the approach, scope and results of both Internal Audit and the external auditor, for example, monitoring the extent to which Internal Audit adopts a pre-audit approach and authorising any nonaudit work undertaken by the external auditor

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 monitoring, on behalf of the governing body, all aspects of the organisations relationship with the Auditor-General; this should include: reviewing the audit report and other communication with management, as well as actions taken by management on recommendations included in previous communications and ensuring that adequate safeguards are in place to prevent possible conflicts of interest and guard the Auditor-Generals independence providing advice to the governing body and chief executive and/or relevant accounting officers on the above aspects of their work and holding formal meetings as required; this should usually be at least four times a year. RISK MANAGEMENT 4.41 The governing body and chief executive should ensure that effective systems of risk management are established as part of the organisations framework of internal control. Risk can be defined as the chance of something happening that will have an impact on the achievement of objectives. It can be expressed in terms of consequences and likelihood. Risk can have either a beneficial or a detrimental impact on the achievement of agreed objectives. Risk management can be viewed as a process of: understanding the organisational objectives identifying the risks associated with achieving the objectives

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 assessing the risks, including the likelihood and potential impact of specific risks developing and implementing programmes/procedures to address identified risks and monitoring and evaluating risks and the programmes/procedures in place to address them. 4.44 The governing body, chief executive and other senior managers should identify internal and external risks so they can react to (or initiate) changes in an appropriate and timely manner. Other staff should also understand the types of risk which are acceptable to the governing body, chief executive and other senior managers. In turn, the governing body and chief executive should understand what risks are acceptable to the relevant ministry or other oversight body. Risks that have been accepted by the organisation should be documented and communicated to the governing body, senior managers and relevant staff. ANTI-CORRUPTION COMMISSION 4.46 The governing body and chief executive should ensure that they and their staff support the work of the national anti-corruption commission, where one exists. They should also regularly consider the extent to which the work of their organisation can be co-ordinated with that of the anti-corruption commission to ensure that fraud and corruption are minimised. Most ECSAFA member countries have established, or are establishing, anti-corruption commissions. The creation of such an effective and credible watchdog organisation has been identified as a key pillar for sustaining or restoring national integrity. Governing bodies and chief executives should support the creation of a national anti-corruption commission where such an organisation does not yet exist.

4.45

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4.48

These organisations usually investigate cases of alleged fraud or corruption, provide advice on how to reduce corruption and play an educational or campaigning role. Their success is seen as being dependent on the extent to which they have been able to involve civil society organisations in their work. The functions of an anti-corruption commission may include: investigating any complaints or allegations of serious fraud or corruption in any public body assisting any law enforcement agency in the investigation of serious offences involving dishonesty or cheating of the public revenue reviewing the practices and procedures in public bodies in order to facilitate the discovery of corrupt practices and making recommendations to reduce the risk of corrupt practices occurring in future advising governing bodies and chief executives of changes in practices or procedures, compatible with the effective discharge of their duties, which the commission thinks necessary to reduce the likelihood of the occurrence of corrupt practices educating the public on the evils of corruption by providing information on its harmful effects and enlisting and fostering public support in combating corruption.

4.49

4.50

The anti-corruption commission may hold workshops in parastatal organisations to raise awareness of the problems of corruption and ways of reducing its occurrence.

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4.51

Perhaps the most important aspect of the work of anti-corruption commissions has been their public education role. Activities in this area have included: talk and phone-in shows on television and radio posters and pamphlets press releases, newspaper articles and advertisements and talks and presentations to various civil societies and other groups.

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5. External Reporting
ANNUAL REPORTING 5.1 Governing bodies should publish an annual report (including their financial statements), presenting a balanced and understandable account of the organisations performance, achievements, financial position and prospects. To discharge their accountability for public resources, governing bodies should ensure that they publish their annual report promptly (within at most 12 months and preferably 6 months of the financial year end). The report should include: audited financial statements and the auditors report a statement of the aims and objectives of the organisation, the performance measures against which future years performance will be judged and a comparison of the actual performance achieved in the year covered by the annual report with the performance measures as determined in the previous financial year a statement of the organisation's fees policy for members of the governing body and the remuneration policy for the chief executive and other senior managers, including details of their remuneration packages (see also paragraphs 3.383.45 above) and a statement that presents an objective, balanced and understandable commentary on the organisations financial performance and position, its non-financial performance, and on its future ability to meet liabilities and commitments. 5.3 The usefulness of financial statements is impaired if they are not made available to users within a reasonable period after the reporting date. International Public Sector Accounting Standards 1 (IPSAS 1) Presentation of Financial Statements provides guidance that an

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organisation should be in a position to issue its audited financial statements within six months of the reporting date. 5.4 To demonstrate their commitment to high standards of governance, governing bodies should include in their annual report a statement that they have complied with relevant standards or codes of governance. This statement should identify the standards or codes adopted as well as those standards or parts of codes with which they have not complied, should disclose for what part of the period such noncompliance continued, and give reasons for any such non-compliance. The governing body should include in its annual report a statement explaining (as a minimum) its responsibility for: approving the budget to provide authorisation for the acquisition and use of financial resources preparing and providing financial statements that fairly present the state of affairs of the organisation as at the end of the financial year and the results of its operations for that year maintaining an effective framework of internal control, risk management and appropriate governance procedures maintaining adequate accounting records and ensuring the consistent use of appropriate accounting policies, supported by reasonable and prudent judgements and estimates and ensuring adherence to applicable accounting standards unless departures are fully disclosed, explained and quantified. 5.6 The annual report should also include a statement explaining the external auditors responsibility for reporting on whether the organisations financial statements are presented fairly. The annual report should be made available to staff, their trade unions, users of the organisation's services and the general public.

5.5

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5.8

It is good practice for an annual meeting to be held at which the annual report is presented. Members of the governing body, the chief executive, the director of finance and the organisations external auditor should attend the meeting and should be available to answer questions. The meeting should be advertised to: users and customers of the organisations services employees and their trade unions and the general public through the media.

5.9

The governing body should also ensure that the following aspects of external reporting are adequately and promptly implemented: The long-term corporate strategies covering a period of five years should be tabled in Parliament. The governing body should submit its five-year corporate strategy including business plans and budgets, to Parliament for information, through the responsible minister (after review by the parastatal oversight body). The governing body should submit its annual report through the responsible minister (after review by the parastatal oversight body) for tabling in Parliament. This report should highlight the corporations achievements and any constraints it has experienced and the measures it has put in place to overcome these constraints. The annual report should be made available to the following stakeholders: users and customers of the organisations services employees and their trade unions and

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the general public through the media.

A summary of the annual report and financial statements should be advertised in the main national newspapers as soon as it is published. Full versions of these documents should be made available to the public on request at no, or a minimal, charge. These documents should also be published on the Internet. USE OF APPROPRIATE ACCOUNTING STANDARDS

5.11

Governing bodies and directors of finance should ensure that the financial statements are prepared in accordance with an authoritative and recognised set of accounting standards, and applicable legislation. Accounting standards are authoritative statements of how particular types of transaction and other events should be reflected in the financial statements. Accordingly, compliance with accounting standards will normally be necessary for financial statements to give a fair representation. In addition, compliance with accounting standards should promote the reliability, consistency and transparency of financial information. IFAC Public Sector Committee has developed International Public Sector Accounting Standards (IPSASs) on the cash and accrual basis. In addition, it states that government business enterprises should follow International Accounting Standards. In addition, in some countries there are national accounting standard-setting bodies which determine the standards to be followed by parastatal organisations. The notes to the organisation's annual financial statements should clearly state the accounting standards that have been followed and any exceptions to these standards that were considered necessary. In some cases there may be a conflict between the reporting requirements set out in the accounting standards and certain Parliamentary reporting requirements. While the Parliamentary requirements should take precedence in this situation, it may mean that the organisation will not be able to state that it complies with the accounting standards in question.

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PERFORMANCE MEASURES 5.15 The governing body and chief executive should establish and report relevant performance measures to demonstrate that all resources have been procured economically and are utilised efficiently and effectively. The public sector is under intense pressure to improve its operations and deliver its products and services more efficiently and at the least cost to the taxpayer. Performance measurement is a useful tool in this regard, since it formalises the process of tracking progress toward established goals and provides objective justifications for organisational and management decisions. To improve performance, it is also necessary to measure performance in non-monetary terms. Without information about what is being delivered (outputs), what it is costing (inputs), and what is achieved (outcomes) it is impossible to make efficient resource allocations within the public sector. Performance measures should include responding to accountability requirements, improving service delivery, and reducing costs, while maximising output and increasing productivity in the organisation. Performance measures usually work best when those people involved in the activity being measured have themselves been involved in creating the measures. A basis of comparison is needed for performance measures. The most usual bases are: comparisons with previous years comparisons with similar organisations and comparisons of actual results with targets. 5.19 Where comparisons over time are made by a particular organisation, then a consistent basis of measurement should be used.

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5.17

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5.20

Performance measures usually assess: economy this refers to the acquisition of the appropriate quality and quantity of financial, human and physical resources at the appropriate time and place, and at the lowest possible cost efficiency this refers to the use of resources so that output is maximised for any given set of resource inputs, or input is minimised for any given quantity and quality of output provided effectiveness this refers to the extent of the achievement of set or predetermined outcomes, objectives or other intended effects of programmes, operations, activities or processes and appropriateness that is, whether the objectives or outcomes of programmes, operations, activities or processes address the real needs of customers. EXTERNAL AUDIT

5.21

The governing body and chief executive should ensure that an objective and professional relationship is maintained with the organisations external auditor. An audit committee (see paragraphs 4.36-4.40 above) should be responsible for monitoring the relationship between the organisation's senior management and its external auditor. In most countries, public-sector external auditors have a wider range of responsibilities for reporting on the activities of parastatal organisations than do auditors working in the private sector, covering not only the financial statements, but also compliance audits, value-for-money audits and public-interest issues. The external auditor should be more concerned with financial management in general than with just the truth and fairness of the accounts. The prime role of the external auditor is to provide independent assurance that the financial statements of the parastatal organisation provide a true and fair view of the financial affairs of the organisation. The auditor may also undertake a number of additional roles: one of these is to provide a management report which should be addressed to

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the governing body. This provides details of weaknesses found in the organisations systems of internal financial control and recommendations to overcome such weaknesses. This management report can be an important source of information for the governing body on the soundness or otherwise of its organisations internal control systems. 5.24 The external auditor may also be required to submit his or her management report to the relevant minister or other supervisory body. The Auditor-General will also be required to report the results of his or her work to Parliament. In monitoring the organisations relationship with its external auditor on behalf of the governing body and chief executive, the audit committees responsibilities should include: considering, where relevant, the appointment of the external auditor, the audit fee, and any questions of resignation or dismissal considering the objectives and scope of any non-financial audit or consultancy work proposed to be undertaken by the external auditor, and reviewing the remuneration for this work discussing with the external auditor before the audit commences the scope of the audit and the extent of reliance on the Internal Audit section and other review agencies discussing with the external auditor any significant issues arising from the committees review of the financial statements (in the absence of senior managers where necessary) and any other work undertaken or overseen by the audit committee reviewing and considering communication between the AuditorGeneral and the organisation's senior managers and reviewing progress on accepted recommendations from the AuditorGeneral.

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5.26

Generally, the organisations external auditor should be contracted to carry out non-audit work only where the audit committee is satisfied that there are no conflicts of interest and the auditors independence will not be compromised. Such work may be prohibited in some countries. Independent assurance function of external auditors

5.27

The Auditor-General is usually appointed as the auditor or given responsibility for the audit of all parastatal organisations by statute; this is in recognition of the auditors wider responsibility, beyond the governing body, to Parliament. There are exceptions, for example, where a dedicated body is responsible for the audit of parastatal organisations or where private-sector audit firms conduct the audit of parastatal organisations, often on behalf of the Auditor-General. With the privatisation of many parastatal organisations in recent years, the independence of the audit of parastatal organisations will often be improved if the dedicated audit body is merged with the office of the Auditor-General. Where an audit firm undertakes the audit of a parastatal organisation, the independence of this function will be improved if the firm is appointed by and undertakes the audit on behalf of the Auditor-General. The Auditor-General should report to Parliament on his or her audit of parastatal organisations. Relevant, reliable and audited financial statements are a key aspect of good governance and accountability. Parastatal organisations should prepare their own financial statements. The external auditor provides assurance through the expression of an independent opinion on whether these statements provide a true and fair view of the financial affairs of the particular organisation (financial audit). The external auditor should follow generally recognised auditing standards when undertaking external audit. Auditors-General are members of the International Organisation of Supreme Audit Institutions (INTOSAI). The Lima Declaration of INTOSAI is reproduced as Appendix 5 to these Guidelines. Further details are provided in INTOSAIs Code of Ethics and Auditing Standards and the Guidelines for Financial Audit. The Guidelines will consist of an International Standard on Auditing (issued by the International Auditing and Assurance Standards Board IAASB)) and a practice note.

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Detailed auditing standards may be developed for the Auditor-General's Office from recognised international auditing standards and guidance or from local private sector auditing standards. The African Organisation of Supreme Audit Institutions (AFROSAI)(E), the regional body for Auditors-General, provides guidance, examples of good practice and training for the Auditors-General of the ECSAFA region. The financial statements of parastatal organisations may include information that is different from, or additional to, that contained in the financial statements of private-sector organisations, for example, comparison of expenditure in the period with limits established by Parliament in its budget. In such circumstances, appropriate modifications may be required to the nature, timing and extent of audit procedures, and the external auditors report. The external auditor may also be required to report on whether or not: expenditure has been applied for authorised purposes and conforms to the authority that governs it (regularity auditing/compliance auditing) and due regard has been paid to securing economy, efficiency and effectiveness (performance auditing/value-for-money auditing).

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Appendix 1 Good Governance: A Checklist for Governing Bodies and Chief Executives
This checklist is intended to assist governing bodies in identifying potential strengths and weaknesses in governance arrangements. Where the checklist uncovers weaknesses in the governance arrangements, the governing body will need to give further consideration to the specific areas identified. STANDARDS OF BEHAVIOUR Leadership 1 Has the governing body taken steps to ensure that its members exercise leadership by conducting themselves in accordance with high standards of behaviour? Codes of conduct 2 Has the governing body adopted a formal code of conduct defining the standards of behaviour that individual governing body members and all employees of the organisation are required to follow? Does the governing body periodically review adherence to the code of conduct? Objectivity, integrity and honesty 4 Has the governing body established appropriate mechanisms to ensure that members of the governing body and employees of public-sector entities are not influenced by prejudice, bias or conflicts of interest?

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ORGANISATIONAL STRUCTURES AND PROCESSES Statutory accountability 5 Has the governing body established effective arrangements to ensure compliance with all applicable statutes and regulations, and other relevant statements of best practice? Accountability for public money and performance 6 Has the governing body established appropriate arrangements to ensure that public funds and resources are: properly safeguarded? used economically, efficiently, effectively, appropriately and with due propriety? used in accordance with the statutory or other authorities that govern their use? Communication with stakeholders 7 Has the governing body made an explicit commitment to openness and transparency in all the activities of the organisation? Roles and responsibilities 8 Is there a clearly defined division of responsibilities at the head of the body to ensure a balance of power and responsibility? Does the governing body: meet regularly? effectively lead and exercise control over the entity? monitor the executive management?

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10

Do members of the governing body receive induction training on the first occasion of their appointment, and subsequently as necessary? Has the governing body established appropriate arrangements to ensure that it has access to all such relevant information, advice and resources as are necessary to enable it to carry out its role effectively? Has the governing body established a framework of strategic control (or scheme of delegated or reserved powers)? Does the governing body keep the framework of strategic control up to date? Does the framework of strategic control include a formal schedule of those matters specifically reserved for the collective decision of the governing body? Has the governing body established clearly documented and understood management processes for: policy development, implementation and review? decision making, monitoring, control and reporting?

11

12

13

14

15

16

Has the governing body established formal procedural and financial regulations to govern the conduct of its business? Where the governing body is responsible for making appointments to the governing body itself, has it established a formal process to ensure that such appointments are made: in accordance with specified criteria? on the basis of merit and the individuals ability to carry out a defined role within the organisation?

17

18

Where the governing body is responsible for making appointments of its own members, are such appointments dealt with by the governing body as a whole?

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19

Is the role of the chairman formally defined in writing, and does it include responsibility for providing effective leadership to the governing body and for the activities of the entity as a whole? Are non-executive governing body members: independent of management? free from any other relationships that may materially interfere with exercising an independent judgement on issues of strategy, performance, resources and standards of conduct?

20

21

Where the governing body is responsible for making appointments of its own non-executives members, are the appointments for a fixed term and are reappointments subject to a formal appraisal process? Does the chief executive have line responsibility for all aspects of executive management? Is the chief executive accountable to the governing body for the ultimate performance of the organisation and the implementation of the governing bodys policies? Are the duties, terms of office, remuneration and the review thereof, of non-executive governing body members defined clearly? Has the governing body made a senior executive responsible for ensuring that appropriate advice is given to it on all financial matters and for maintaining an effective system of internal and financial control? Has the governing body made a senior executive responsible for ensuring that governing body procedures are followed and that all applicable statutes and regulations, and other relevant statements of best practice, are complied with? Has the governing body established a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of its individual members?

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Has the governing body established procedures to ensure that none of its members is involved in determining his or her own remuneration? Does the annual report of the governing body contain a statement on the remuneration policy and details of the remuneration of its members? CONTROL Internal control

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Has the governing body taken steps to ensure that an effective framework of internal control: is established? operates in practice?

31

Does the governing body include, in the organisations annual report, a statement on the effectiveness of its framework of internal control? Budgeting and financial management

32

Does the governing body ensure that procedures are in place to ensure effective and efficient budgeting and financial management? Staff training

33

Has the governing body established training programmes to ensure that staff are competent to perform their work? Internal audit

34

Has the governing body taken steps to ensure that an effective internal audit function is established as part of the framework of internal control?

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Audit committees 35 Has the governing body established an audit committee, comprising independent members with responsibility for the independent review of the framework of control and of the external audit process? Risk management 36 Has the governing body taken steps to ensure that effective systems of risk management are established as part of the framework of internal control? Anti-corruption commission 37 Does the governing body ensure that all staff of the organisation support the work of the national anti-corruption commission, if one exists? Does the governing body also regularly consider the extent that the work of the organisation is coordinated with that of the anti-corruption commission, to ensure that the incidence of fraud and corruption is minimised? EXTERNAL REPORTING Annual reporting 39 Does the governing body publish promptly an objective, balanced and understandable annual report? Does the annual report contain a statement on whether or not the organisation has adopted specific standards or codes of governance? Does the governing body ensure that the organisation's financial statements comply with the relevant accounting standards?

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Performance measures 42 Does the governing body develop and report on relevant performance measures? External audit 43 Has the governing body taken steps to ensure that an objective and professional relationship is maintained with the external auditors?

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Appendix 2 Disclosure
INTRODUCTION Openness is one of the three pillars of good governance (the others being integrity and accountability). Thus parastatal organisations should be as open as possible with their stakeholders. This appendix summarises the main disclosures which should be provided promptly to these stakeholders. The governing body and chief executive should each make an explicit commitment to openness and transparency in all the activities of the organisation, subject only to the need to preserve confidentiality in those specific circumstances where it is proper and appropriate to do so. Openness is more than structures and processes. It is also an attitude and belief among key players, politicians, staff of parastatal organisations and other stakeholders that information is to be shared and is not owned by any particular organisation it is a public resource. In any communication with the stakeholders, the governing body and chief executive should ask themselves the following five questions. Is the communication open, honest and transparent? Is it relevant and substantial or merely a communication of form? Is the communication prompt and clear? Does it fairly and comprehensively set out the position? and

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 Are details provided to enable individual stakeholders to obtain specific additional information? THE ANNUAL REPORT Governing bodies should publish an annual report (including their financial statements), presenting a balanced and understandable account of the organisations performance, achievements, financial position and prospects. The annual report should be published promptly within at most 12 months and preferably 6 months of the financial year end. The annual report should include: the audited financial statements and the auditors report a statement of the aims and objectives of the organisation, the performance measures against which future years performance will be judged and a comparison of the actual performance achieved in the year covered by the annual report with the performance measures as determined in the previous financial year a statement that presents an objective, balanced and understandable commentary on the organisations financial performance and position, its non-financial performance, and on its future ability to meet liabilities and commitments a statement of the organisation's fees policy for members of the governing body and details of the total fees, expenses and any facilities made available to each member the remuneration policy for the chief executive and other senior managers, including details of their total remuneration packages details of any changes to the composition of the governing body during the year, including the appointment of new members, renewals or extensions to appointments and any removals brief details of the background of any member of the governing body who served at any time during the year

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 the number of full meetings of the governing body and the number of committee meetings held, committee composition and the details of attendance of each member of the governing body brief details of any significant complaints which have been made against the organisation and where non-financial information was subject to external validation, details in this regard. The annual report should also include a statement that the governing body has complied with relevant standards or codes of governance. This statement should identify the standards or codes adopted, as well as those standards or parts of codes with which they have not complied; should disclose for what part of the period such noncompliance continued; and give reasons for any such non-compliance. The governing body should also include in its annual report a statement explaining (as a minimum) its responsibility for: approving the budget to provide authorisation for the acquisition and use of financial resources preparing and providing financial statements that fairly present the state of affairs of the organisation as at the end of the financial year and the results of its operations for that year maintaining an effective framework of internal control, risk management and appropriate governance procedures maintaining adequate accounting records and ensuring the consistent use of appropriate accounting policies, supported by reasonable and prudent judgements and estimates and ensuring adherence to applicable accounting standards unless fully disclosed, explained and quantified.

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The annual report should include a statement explaining the external auditors responsibility for reporting on whether the organisations financial statements are presented fairly. The annual report should be made available to staff, their trade unions, users of the organisation's services and the general public. A summary of the annual report and financial statements should be advertised in the main national newspapers as soon as it is published. Full versions of these documents should be made available to the public on request at no, or a minimal, charge. These documents should also be published on the Internet. Disclosures in the annual financial statements The following details should be included in the organisations financial statements: the amounts paid to the external audit for audit and separately for non-audit services, including a description of the nature and amounts paid for each of the services undertaken an outline of the organisations structure a review of financial performance internal and external factors influencing the organisations performance significant events which may affect the organisations future performance judicial proceedings filed or likely to be filed against the organisation significant post-balance sheet events discussion of relations with stakeholders, referring to significant changes

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 financial and other effects of directions from the oversight body and a description of social service obligations. ANNUAL GENERAL MEETING It is good practice for an annual meeting to be held at which the annual report is presented. Members of the governing body, the chief executive, the director of finance and the organisations external auditor should attend the meeting and should be available to answer questions. The meeting should be advertised to users and customers of the organisations services employees and their trade unions and the general public through the media. DISCLOSURES TO THE PARASTATAL OVERSIGHT BODY The following details should be promptly reported to the parastatal oversight body and, as appropriate, to the Ministry of Finance and the relevant line ministry: details of the quarterly financial statements, including a comparison with the annual budget and cash flow statements for the following 12 months the results of any governing body assessments of the organisations performance information having a material effect on the organisations value and

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 capital and current budgets, and corporate and borrowing plans. These must be submitted for review at least one month before the start of the financial year.

DISCLOSURES IN CORPORATE PLAN The organisations corporate plan should be submitted to the parastatal oversight body for review and submitted to Parliament thorough the relevant ministry. The plan should include: where and how resources will be used, where they will be obtained, and what the organisation expects to accomplish the organisations proposed strategy and how it will be achieved the organisations vision, value and mission statement a justification to support proposed capital expenditure programmes assumption made by the governing body on the organisations business environment the organisations contributions to job creation, rural development, urban renewal, poverty alleviation, empowerment of women, skills and management development, and education and benchmark standards or baseline data against which the organisation is compared in future periods. OTHER DISCLOSURES The governing body should also ensure that the following aspects of external reporting are adequately and promptly implemented. The long-term corporate strategies covering a period of five years and which should be tabled in Parliament.

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 The governing body should submit its five-year corporate strategy, including business plans and budgets to Parliament for information, through the responsible minister (after review by the parastatal oversight body). The governing body should submit its annual reports through the responsible minister (after review by the parastatal oversight body) for tabling in Parliament. These reports should highlight the corporations achievements, any constraints and measures it has put in place to overcome these constraints.

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Appendix 3 Further Information

KENYA Commonwealth Association for Corporate Governance, CACG Guidelines Principles for Corporate Governance in Kenya and a Sample Code of Best Practice for Corporate Governance, 2000, http://www.ecgi.de/codes Private Sector Corporate Governance Trust, Good Corporate Governance in State Owned Corporations, 2002. ISBN 9966-9969-0-15.

MALAWI Department of Statutory Corporations, Code of Conduct for Boards of Directors of Statutory Corporations, September 1999.

SOUTH AFRICA Institute of Directors in Southern Africa, The King Report on Corporate Governance for South Africa 2002 (King II Report), ISBN 0-620-28851-5. http://www.iodsa.co.za Department of Public Enterprises, Protocol on Corporate Governance in the Public Sector, September 2002, http://www.dpe.gov.za Office of the Auditor-General, Public Entities: Best Practice Guide On Corporate Governance, September 2003, http://www.agsa.co.za

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TANZANIA The National Board of Accountants & Auditors, Tanzania Statement of Recommended Practice No.3 on Governance in the Public Sector An Accounting Officers Perspective, 2002.

UNITED KINGDOM Cadbury Committee, Report of the Committee on the Financial Aspects of Corporate Governance (Cadbury Report), December 1992. http://www.ecgi.de/codes The London Stock Exchange, The Combined Code: Principles of Good Governance and Code of Best Practice, 1998, http://www.ecgi.de/codes

UNITED STATES Committee of Sponsoring Organizations of the Treadway Commission (COSO), Internal Control Integrated Framework, September 1992 (July 1994 edition). Available from the Institute of Internal Auditors http://www.theiia.org

INTERNATIONAL Commonwealth Association for Corporate Governance, Principles for Corporate Governance in the Commonwealth Towards Global Competitiveness and Economic Accountability, 1999, http://www.ecgi.de/codes Commonwealth Association for Corporate Governance, CACG Guidelines: Corporate Governance in Government Companies, Best Practice Guide No. 3, June 2002. The CACG Guidelines may be found on the following websites: http://www.cacg-inc.com http://www.cbc.to http://www.combinet.net OECD Principles of Corporate Governance, 2004, http://www.oecd.org/dataoecd/32/18/31557724.pdf

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Kaufman, D; Kraay A; and Zoido Lobaton, P., Governance Matters, Working Paper 2196, The World Bank, 1999, http://www.worldbank.org/wbi/governance/pdf/govmatrs.pdf The IFAC Public Sector Committee, Governance in the Public Sector: A Governing Body Perspective, 2001, http://www.ifac.org The Institute of Internal Auditors, Standards for the Professional Practice of Internal Auditing, December 2000, http://www.theiia.org or www.iia.org.uk

CORPORATE GOVERNANCE BODIES IN ECSAFA COUNTRIES: Secretariat for the Corporate Governance Task Force P.O. Box 1 Blantyre Malawi. Tel: +265 1 620301 The Tanzania Institute of Corporate Governance Limited Teleconsult, 5th Floor, Wing B NIC Life House, Dar es Salam. Tel: +255 22 2111968 Institute of Corporate Governance Uganda [ICGU] Crusader House, P.O. Box 3034, Kampala. The Institute of Directors of Zambia Ms. M. Ncube, Acting Chief Executive, Plot 201 Kasangala Rd, Lusaka, Zambia. Centre for Corporate Governance Brokeside Grove, Westlands, Nairobi, Kenya. Tel +254 20 4440003/4443230/4456013 Fax +254 20 4442724 P.O. Box 13936, Nairobi, Kenya. Tel: +254 020 440003 http://www.ccg.or.ke http://www.corporategovernanceafrica.org

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EASTERN, CENTRAL AND SOUTHERN AFRICAN FEDERATION OF ACCOUNTANTS (ECSAFA) Hughes Building, Kenyatta Avenue, PO Box 42423, Nairobi, Kenya e-mail: ecsafa@africaonline.co.ke www.ecsafa.org THE ASSOCIATION OF CHARTERED CERTIFIED ACCOUNTANTS 29 Lincoln's Inn Fields, London WC2A 3EE United Kingdom www.accaglobal.com