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N SYSTEM ON THE FINANCIAL MANAGEMENT OFPUBLIC SECTOR IN KENYABYHAWO.M. CHADOA RESEARCH PROJECT SUBMITTED IN PARTIAL FULFILMENT OFTHE REQUIREMENTS FOR AWARD OF THE DEGREE OF MASTER OFSCIENCE FINANCE, UNIVERSITY OF NAIROBIOCTOBER 2015
DECLARATIONThis research project is my original work and has not been submitted for examinationin any other University.Signature: .Date: .Hawo .M.ChadoD63/72991/2014This research project has been submitted for examination with my approval as auniversity supervisor.Signature: .Date: .Prof. Josiah Adudaii
ACKNOWLEDGEMENTI wish to acknowledge my family, my supervisor, all my course lecturers and myFriends for their moral support and patience while undertaking this research project.Most of all I would like to thank Allah, the most beneficent the most merciful for hisGrace and faithfulness that enabled me to complete this worthwhile and taxingundertaking. Thank you and God bless you all.iii
DEDICATIONI dedicate this research to my parents who laid the moral groundwork in my life andfor constantly pushing me to be the best that I can be. I will always treasure you. Ialso dedicate this research to my loving Husband who has stood by me through thickand thin to ensure I complete my project.iv
TABLE OF CONTENTSDECLARATION. iiACKNOWLEDGEMENT . iiiDEDICATION. ivLIST OF TABLES . viiiABBREVIATIONS & ACRONYMS . ixABSTRACT . ixCHAPTER ONE .1INTRODUCTION.11.1 Back Ground of the Study.11.1.1 Integrated Financial Management Information System (IFMIS) .21.1.2 Financial Management .51.1.3 Integrated Financial Information Management System and FinancialManagement .71.1.4 Public Sector in Kenya.81.2 Research Problem .101.3 Research Objectives .131.3.1 General objective .131.3.2 Specific study objectives.131.4 Value of the Study .13CHAPTER TWO .15LITERATURE REVIEW .152.1 Introduction .152.2 Theoretical Framework .152.2.1 Meta Theory Model .152.2.2 Contingency Theory.162.2.3 System Theory .17v
2.3 Determinants of Financial Management .182.3.1 IFMIS and Cash Management and Budgeting .182.3.2 IFMIS and the Quality of Financial Reporting .192.3.3 IFMIS and the Strength of Internal Controls .212.3.4 IFMIS and Organisational Transparency and Accountability .222.4 Empirical Review.232.5 Summary of Literature Review .27CHAPTER THREE .28RESEARCH METHODOLOGY .283.1 Introduction .283.2 Research Design.283.3 The target Population .283.4 Data Collection .293.5 Data Analysis .293.5.1 Test of Significance .313.6 Data Validity and Reliability .31CHAPTER FOUR .33DATA ANALYSIS, PRESENTATION AND INTERPRETATION .334.1 Introduction .334.2 Demographic Characteristics .334.3 Cash Management and Budgeting Systems .364.4 Financial Reporting Systems .404.5 Internal Control Systems.444.6 Accountability Systems .474.7 Financial Management of Public Sector .504.8 Regression Analysis .514.9 Summary and Interpretation of Findings .55vi
CHAPTER FIVE .59SUMMARY, CONCLUSION AND RECOMMENDATIONS .595.1 Summary of Findings .595.2 Conclusions .605.3 Recommendations for Policy and Practice .625.4 Limitations of the Study.635.5 Recommendation for further studies .64REFERENCES .66APPENDICES .71Appendix I: Research Questionnaire .71vii
LIST OF TABLESTable 4. 1: Gender of the respondents . 34Table 4. 2: Age of the respondents . 34Table 4. 3: Academic Qualifications . 35Table 4. 4: No of years worked in the organization . 36Table 4.5: Extent that cash management and budgeting systems in IFMIS affectfinancial management in the ministries . 37Table 4. 6: Extent that aspects of cash management and budgeting systems in IFMISaffect financial management in the government ministries . 38Table 4. 7: Level of agreement with statements on cash management and budgetingsystems . 39Table 4. 8: Extent that financial reporting systems in IFMIS affect financialmanagement in government ministries . 40Table 4. 9: Extent that aspects of financial reporting systems in IFMIS affect financialmanagement in government ministries . 41Table 4. 10: Level of agreement with statements on financial reporting systems . 42Table 4. 11: Extent that internal control systems in IFMIS affect financialmanagement in government ministries . 44Table 4. 12: Extent that aspects of internal control systems in IFMIS affect financialmanagement in government ministries . 45Table 4. 13 Level of agreement with statements on internal control systems . 45Table 4. 14: Extent that organisational accountability systems in IFMIS affectfinancial management in government ministries . 47Table 4. 15: Extent that aspects of organisational accountability systems in IFMISaffect financial management in government ministries . 48Table 4. 16: Level of agreement with statements on organisational accountabilitysystems . 49Table 4. 17: Trend of the various aspects of financial management in governmentministries since adoption of IFMIS. 50Table 4.18: Model Summary . 51Table 4. 19: Summary of One-Way ANOVA results . 53viii
ABBREVIATIONS & ACRONYMSERPEntrepreneur Resource PlanningGoKGovernment of KenyaICTInformation and Communications TechnologyIFMISIntegrated Financial Management Information SystemIMFInternational Monetary FundIPPDIntegrated Personnel Payroll DataITInformation TechnologyPFMPublic Financial ManagementPIFRAProject to Improve Financial Reporting and AuditingPSWPPublic Sector Work ProgramSPSSStatistical Package for Social SciencesUSAIDUnited States Agency for International Developmentix
ABSTRACTGenerally, the objective of implementing Integrated Financial ManagementInformation System (IFMIS) is to increase the effectiveness and efficiency of statefinancial management and facilitate the adoption of modern public expenditurepractices in keeping with international standards and benchmarks. The mainobjectives of the study was to analyse the effectiveness of cash management andbudgeting systems; financial reporting systems in IFMIS; internal control systems inIFMIS; and the effectiveness of organisational accountability systems in IFMIS onfinancial management in public sector in Kenya. The study adopted a descriptiveresearch in this study with a targeted population of 18 National GovernmentMinistries in Kenya. The primary data was collected using questionnaire that relatesto specific objectives of the study. Secondary data involved past reports such asannual budget data, progress reports and internal audits reports since the systemimplementation started and had key information that will be helpful to the researchstudy. The study used both quantitative and qualitative method of data analysis.Collected data was first coded and then quantitatively analysed according to statisticalinformation derived from the research questions. Secondary data were derived fromdesk review of annual information on IFMIS for all variables for a period of threeyears (2013-2015). The study found that organizational accountability systems, cashmanagement and budgeting systems, internal control systems and financial reportingsystems positively and significantly influenced the financial management in the publicsector. The study recommends that mmanagers can use this information to plan andformulate budgets; examine results against budgets and plans; manage cash balances;track the status of debts and receivables; monitor the use of fixed assets and monitorthe performance of specific departments or units.x
CHAPTER ONEINTRODUCTION1.1 Back Ground of the StudyGenerally, the objective of implementing Integrated Financial ManagementInformation System (IFMIS) is to increase the effectiveness and efficiency of statefinancial management and facilitate the adoption of modern public expenditurepractices in keeping with international standards and benchmarks. Much of the workin automating IFMIS systems has focused on financial management informationsystem, including general ledger, accounts payable, accounts receivable, procurement,payroll, asset management, debt management, budgeting. Other points in this regardwere to start from where you are in terms of PFM system development, rather thanfrom where you want to be and also to recognize that not everything may need to beautomated. As IFMIS systems evolve, the needs will change, so the scope of theautomation can be expanded. Given the rapid change in technology, it may not befeasible to plan all of these potential needs or IT options in advance (Bartel, 2009).Governments in developing countries are increasingly exploring methods and systemsto modernise and improve public financial management. For example, over the years,there has been an introduction of the IFMIS as one of the most common financialmanagement reform practices, aimed at the promotion of efficiency, effectiveness,accountability, transparency, security of data management and comprehensivefinancial reporting. The scope and functionality of an IFMIS varies across countries,but normally it represents an enormous, complex, strategic reform process (Husnan &Pudjiastuti, 2006).1
This follows a growing interest in the quality of public sector financial managementin developing countries by the donor community. In the early years after the fall of theBerlin Wall in 1989, interest in the state affairs was limited, but following the WorldBank‘s report, the role of the state became increasingly prominent in developmentefforts, and particularly in the drive against poverty (World Bank, 2008). As a result,consultants and other advisors of governments in Africa started toying with idea ofthe introduction of modern information technology, the Integrated FinancialManagement Information Systems -IFMIS (World Bank, 2004).The government of Kenya has for a long time been very much concerned over thepersistent poor performance in financial management due to lack of reliable andtimely information for decision making. A review by the department of accountantgeneral at treasury, financial management, accounting systems and role of auditsrevealed weaknesses in the management of financial information. The review focusedon the need to develop a strategic plan aimed at improving the financial managementsystems; skills and capacity within the government financial operations units. It alsoreviewed how timeliness of financial information, if improved, could form the basisfor improving control of expenditure against budget (Kinyua, 2003).1.1.1 Integrated Financial Management Information System (IFMIS)An IFMIS is a fiscal tool for government that bundles all financial managementfunctions into one suite of applications. It is an Information Technology (IT) basedbudgeting and accounting system designed to assist the government entities on how toplan budget requests, spend their budgets, manage and report on their financialactivities, and deliver services to the public more efficiently, effectively andeconomically. IFMIS operates on a common structure and platform that will enable2
improved compatibility and consistency of fiscal and financial information, reducesgovernments overall investment in the development of expensive accounting systemsin each government entity (Diamond & Khemani, 2005).One of the basic features of the IFMIS is the ability to interface with a number ofexisting and planned automated systems such as the Integrated Personnel Payroll Data(IPPD) and Government Payments Solution (G-pay). IFMIS software to Kenyagovernment was contracted to oracle financials in 2003. Oracle financials being anEntrepreneur Resource Planning (ERP) was designed to consolidate the core modulesto all ministries, these are; purchasing module, accounts payable module, generalledger module, cash management module and public sector budgeting module(Ministry of Finance, 2013). Effectiveness and improved outcomes are importantgoals for any IFMIS acquisition. The benefits of an IFMIS include: better fiscalmanagement, more optimal resource allocation, improved management of resources(value for money), reduced fraud and corruption, improved transparency andaccountability, lower transaction costs (Ministry of Finance, 2003). Diamond andKhemani (2005) said that an IFMIS consists of several Elements with differentfunctions. He identified the core of an IFMIS to include the following Modules andsystems, General ledger, budgetary accounting, Accounts payable and AccountsReceivable, and the noncore or other modules as, Payroll system, Budgetdevelopment, Procurement, Project ledger and Asset module.Integration is the key to any successful IFMIS. In a nutshell, integration implies thatthe system has the following basic features; standard data classification for recordingfinancial events, internal controls over data entry, transaction processing, reporting, acommon process for similar transactions and a system design that eliminates duplicate3
data entry. Integration often applies only to core financial management functions thatan IFMIS supports, but in an ideal world it would also cover other informationsystems within which the core systems communicate such as human resources,payroll, and revenue. At a minimum, the IFMIS should be designed to interface withthese systems. IFMIS can improve an organization‘s financial management byenhancing management of cash, debt and liabilities. It also has the ability to usehistorical information to provide better budget modelling processes.Integrated financial management information system in public financial managementinvolves a number of steps which are simulated from single point of data entry widelyaccepted as the basic requirement to accomplish real time financial data or fiscaldiscipline. This format may use functional structured approach for all financialmanagement functions under one umbrella for the purpose of transparency, accuracyand timeliness. United States Agency for International Development guide consideredfunction of budgeting in PFM as illustrated in figure 1 below. This demonstrated thecomplex set of various functions of government that may be supported by IFMIS.These include the typical functions that make up the PFM cycle, from budgetformulation to budget execution and review, to audit and evaluation of financialperformance and results (USAID, 2008).4
Figure 1: IFMIS and the public financial management cycleSource: USAID IFMIS Practical Guide (2008)1.1.2 Financial Management"Financial" relating to finance, or money, and can also be interpreted as the science ofmanaging money. Management means to control something in a way that issatisfactory. Hence financial management is that managerial activity which isconcerned with the planning and controlling of financial resources. Planning,directing, monitoring, organizing and controlling of the monetary resources (Husnan& Pudjiastuti, 2006). There is need for basic numeracy skills such as the ability tocalculate returns on investments, the interest rate on debt, and basic arithmetic ability.The lack of knowledge in financial management contributes to the low survival ofnew venture creation and eventually the high rate of failure among the entrepreneurs5
and frequently the entrepreneurs are intimidated by financial management (Timmons& Spaneli, 2007).Financial management is concerned with the planning, organizing, procurement andutilization of government financial resources as well as the formulation of appropriatepolicies in order to achieve the aspiration of members of that society. Premchand(1999) sees public financial management as the link between the community‘saspirations with resources, and the present with future. It lies at the very heart of theoperations and fiscal policy of government .Financial management involves manystages which includes;Policy Formulation which is one of the most important stages in financialmanagement structure according to Premchand (1999), the transformation of thesociety‘s aspirations into feasible policies with well recognized financial implicationis at the heart of financial management. Budget formulation is the step that involvesthe allocation of resources before the submission to the legislature for review andfinal approval. According to Appah, (2009), the budget formulation involves thearticulation of the fiscal, monetary, political, economic, social, and welfare objectivesof the government. One of the fundamental aspects of public sector financialmanagement in Kenya is the issue of audit of government financial reports. Audit isthe process carried out by suitably qualified Auditors during which the accountingrecords and the financial statement of enterprises are subjected to examination by theindependent auditors with the main purpose of expressing an opinion in accordancewith the terms of appointment.6
Government accounting and financial reporting is a very important component of thepublic sector financial management process in Kenya.Government accountingentails the recording, communicating, summarizing, analysing, and interpretingfinancial statement in aggregate and in details. In the same vein, premchand (1999)argues that government accounts have the dual purpose of meeting internalmanagement requirement while providing the public with a window on governmentoperations. Kenya is expected to perform this very important task of controlling andregulating the revenue and expenditure estimates in any fiscal year. It is theresponsibility of the members of the national assembly to ensure that the budgetestimates are properly scrutinized to ensure accuracy, effectiveness and efficiency ofgovernment revenue and expenditure.1.1.3 Integrated Financial Management Information System and FinancialManagementIntegrated Financial Management Information System (IFMIS) is an informationsystem that tracks financial events and summarizes financial information. In its basicform, an IFMIS is little more than accounting system configured to operate accordingto the needs and specifications of the environment in which it is installed. GenerallyIFMIS refers to the use of information and communications technology in financialoperations to support management and budget decisions, fiduciary responsibilities,and the preparation of financial reports and statements. In the government realm,IFMIS refers more specifically to the computerization of the public financialmanagement processes, from budget preparation and execution to accounting andreporting, with the help of an integrated system for financial management of line7
ministries, spending agencies and other public sector operations (Timmons & Spaneli,2007).An IFMIS stores, organizes and makes access to financial information easy. It notonly stores all the financial information relating current and past years spending, butalso stores the approved budgets for these years‘ details on inflows and outflow offunds, as well as complete inventories of financial assets (e.g. equipment, land andbuildings) and liabilities (debt). A strong Public Financial Management (PFM) systemis a catalyst for economy‘s growth and development. It ensures that the governmentand its departments raise manage and spend public resources in an efficient andtransparent way. Sound systems, strong legal and regulatory frameworks as well as acompetent and productive civil service are the cornerstones of an efficient PFMregime. Public Financial Management reforms have been identified as the key driversto efficient public service delivery and creation of wealth and employment(McKinney, 2004).1.1.4 Public Sector in KenyaIntegrated financial management information system in public financial managementinvolves a number of steps which are simulated from single point of data entry widelyaccepted as the basic requirement to accomplish real time financial data or fiscaldiscipline. This format may use functional structured approach for all financialmanagement functions under one umbrella for the purpose of transparency, accuracyand timeliness. United States Agency for International Development guide consideredfunction of budgeting in PFM. This demonstrated the complex set of variousfunctions of government that may be supported by IFMIS. These include the typicalfunctions that make up the PFM cycle, from budget formulation to budget execution8
and review, to audit and evaluation of financial performance and results (USAID,2008).The government of Kenya has for a long time been very much concerned over thepersistent poor performance in financial management due to lack of reliable andtimely information for decision making. A review by the department of accountantgeneral at treasury, financial management, accounting systems and role of auditsrevealed weaknesses in the management of financial information. The review focusedon the need to develop a strategic plan aimed at improving the financial managementsystems; skills and capacity within the government financial operations units. It alsoreviewed how timeliness of financial information, if improved, could form the basisfor improving control of expenditure against budget (Kinyua, 2003).The government of Kenya took an initiative to address the shortcomings of thefinancial reporting system and to ensure good governance. The InternationalMonetary Fund (IMF) carried out a survey in government accounting in early 1993followed by a diagnostic study sponsored by the World Bank; this led to introductionof IFMIS. The main objective of this project was to computerize the whole accountingand auditing system in the country. The idea behind computerizing the whole systemwas generation of accurate and reliable financial statements; to monitor fiscal deficit;to forecast flow of cash; to manage public debt and to achieve effective financialcontrols (Kinyua, 2003). The old accounting system lacked timeliness, accuracy andmost importantly transparency. Accounts of any organization, large or small, are themost important tool for curbing the corruption by keeping an eye on cash flows andmore importantly to give the overall inner picture of the organization to thestakeholders which helps them take informed decisions (Kearney, 2004).9
Peterson et al. (2008) noted that in modern cash management, the emphasis is usuallyon the part of the cash management which is responsible for many operations. Aperson responsible for the cash management function is primarily concerned withshort-term financial activities. In a changing money management environment, it ismore important to know how to improve the company‘s cash position, includingmanaging accounts receivable, improving cash flow, transferring funds, andcontrolling cash disbursements. It is therefore necessary to assess the effect ofIntegrated Financial Management Systems on cash management.1.2 Research ProblemDiamond and Khemani (2005) noted that in most developing countries, budgetexecution and accounting processes were or are either manual or supported by veryold and inadequately maintained software applications. They said that this has haddetrimental effects on the functioning of the public expenditure management (PEM)systems and that the consequent lack of reliable and timely revenue and expendituredata for budget planning, monitoring, expenditure control, and reporting hasnegatively impacted budget management resulting in a poorly controlled commitmentof government resources, often leading to a large build-up of arrears; excessiveborrowing, pushing up interest rates and crowding out private sector investment andmisallocation of resources thus underminingthe effectiveness and efficiency ofservice delivery. Further, they said governments have found it difficult to provide anaccurate, complete, and transparent account of their financial position and this lack ofinformation has hindered transparency and the enforcement of accountability ingovernment. In light of the
government was contracted to oracle financials in 2003. Oracle financials being an Entrepreneur Resource Planning (ERP) was designed to consolidate the core modules to all ministries, these are; purchasing module, accounts payable module, general ledger module, cash management module and public sector budgeting module
