Basic guide to corruption in public financial management

A weak public financial management (PFM) system leaves the door open for corruption. This will damage public finances, public confidence in the government, the delivery of services, and the provision of public goods. Corruption reduces political competition, democratic and economic development, social equality, and the rule of law, and diverts public funds to unlawful ends.

PFM encompasses everything about public finances and government spending including:

• Revenue mobilisation and collection (e.g. taxation and customs)
• Budget preparation and resource allocation
• Budget execution and spending (e.g. procurement and payroll)
• Accounting and auditing of government expenditures (e.g. internal and external controls)

Government spending includes all government consumption, investment, and transfer payments. Every country has a public financial management system. It ranges from simple money-in, money-out cash-based systems to sophisticated, digital, all-encompassing systems that cover every transaction from tax to service. In a more simple system, a few individuals at the top of the state may control it all.

Actors and context

Corruption in PFM involves a particular set of actors: members of government (the executive), parliament (the legislature), and other state entities (e.g. tax authorities and auditors).

Officials in local and regional governments and central banks may also take part. When officials and others engage in PFM-related corruption, it affects several regulatory environments. Corrupt actions may breach the constitution and its power-balance clauses. They may concern national tax law, budget law and procedures, and civil service laws and regulation. It goes against principles of transparency, meritocracy, and public sector ethics.

Public financial management reforms

Most PFM-targeted anti-corruption efforts have so far relied on reducing discretion in the public service. Reforms most often aim to improve procedural transparency and standardise automated processes. But they also promote better monitoring and tougher sanctions. This should limit the opportunities and incentives for corruption in public administration.

International standards exist for the entire PFM cycle: taxation, accounting, budgeting, procurement/spending, and audits. Technological innovations are increasingly important, e.g. integrated financial management systems (IFMS or IFMIS), public expenditure tracking surveys (PETS), and e-procurement.

PFM is an ongoing reform process in most countries. This largely implies technical and administrative reforms. In developing countries, reforms may be both home-grown and supported or initiated by donors. Some have direct anti-corruption focus, others not.

Political will

The most important lesson on whether PFM reforms help reduce corruption is that technical measures and institutional reforms have a limited effect on public sector corruption. These reforms may reduce bureaucratic and petty corruption somewhat, but they will not reduce political corruption.

The second lesson is that PFM reforms require political support to have any significant impact on corruption. This is because corruption in PFM is a question of political will: Does the government want to reduce their own extraction possibilities? Is it really reform-oriented? And are the reforms meant to change the system or just to increase government’s control of it?

Corruption in PFM is a political corruption problem. This is because corruption in PFM includes extractive and high-level corruption, rent-seeking, and illegal extraction. It is a question of regime survival. It enables the few at the top to re-invest in prolonging their power-positions.

Corruption in PFM has traditionally been seen as a typical principal-agent problem. It is typically seen as a problem of political decisions and how the bureaucracy implements these at the administrative level, but corruption in PFM can also be a problem of political corruption and rent-seeking.

International standards exist for the entire PFM cycle: taxation, accounting, budgeting, procurement/spending, and audits. Technological innovations are increasingly important, eg integrated financial management systems (IFMS or IFMIS), public expenditure tracking surveys (PETS), and e-procurement.

The democratic principles of checks and balances, separation of powers, transparency and accountability are possible mitigation strategies. Participatory anti-corruption approaches that include public service users are also important. Controls by civil society, media, and independent oversight and control bodies may play a crucial role, too. You can read more about this on the people's engagement and anti-corruption agencies topic pages.

Costs, pitfalls and trade-offs

Public sector reforms meant to have an anti-corruption effect can sometimes be counter-productive. One example is fiscal decentralisation that can lead to decentralised corruption – which can be even harder to contain than centralised corruption. Another example is privatisations and indigenisations. By this we mean national private sector taking over former government-owned businesses and service provision. Such transitions can lead to rent-seeking, graft, clientelism and favouritism.

Some reforms – even so-called anti-corruption reforms – may strengthen the control and legitimacy of a corrupt government. This government may have no intentions to change the system of extractive, political corruption.