FINANCIAL M ANAGEM ENT

ACCOUNTABILITYINDEX
Financial Management Accountability Index

CONTENTS

Message from the Auditor General II

Preface IV

Introduction 5

Elements of Financial Management Accountability Index 6

Score and Rating 15

Conclusion 16

Appendix I Example of FMAI Calculation of a 19
Federal Department

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 Financial Management Accountability Index

Message from the Auditor General

Since the promulgation of the Audit Act in 1957, the National Audit
Department (NAD) of Malaysia has undertaken various efforts and
introduced various initiatives to enhance accountability and integrity
of public fund management in all government ministries, departments
and agencies at the Federal and State levels. Besides the attestation,
compliance, performance and management audit on ministries,
departments and agencies, the NAD also introduced other measures
such as audit presence and surprise inspection/spot checks to uplift
their financial management capabilities. Beginning 2007 and as part of
its continuing efforts to enhance financial management accountability,
NAD introduced Financial Management Accountability Index (FMAI)
and the results of FMAI is reported in the Auditor General’s Report and
tabled in Parliament and State Legislative Assembly.

The rationale of introducing the FMAI is to respond to the concern of

Government leaders over the instances of non-compliance and internal
control weaknesses that were repeatedly mentioned in the annual audit
reports. Through the implementation of an objective and transparent star
rating system that formed the basis of the FMAI, it is hoped that agencies
will be sufficiently induced to take corrective actions on the weaknesses
on a timely basis and to undertake the necessary corrective action on
shortcomings highlighted in the audit report. Thus, it is hoped that the
FMAI will motivate heads of ministries, departments and agencies to
walk the talk in ensuring accountability and integrity in their respective
ministries/departments/agencies and to diligently resolve the persistent

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Financial Management Accountability Index

weaknesses in their financial management.

The FMAI is a first attempt to provide a structured and consistent
approach to measure and compare the level of financial management
compliance among Federal and State ministries and departments as well
as agencies such as Federal and State Statutory Bodies, Local Authorities
and Islamic Religious Councils. As a benchmarking mechanism,
FMAI can assist the auditees to measure the progress of their financial
management over the years.

The quality of financial management performance will be evaluated

on nine elements which include organisational management control,
budgetary control, receipts control, expenditure control, Trust Funds/
Trust Account and Deposit Accounts management, asset and inventory
management, investment management, loans management and financial
statement. The FMAI provides scores and ratings on how the ministries,
departments and agencies perform the best practice principles in those
financial management elements.

I hope this booklet will provide readers with sufficient information of

the concept and methodology in implementing the FMAI of financial
management. We welcome any views and suggestions that would
strengthen the FMAI as a viable instrument to ensure excellence in
public sector financial management.

(TAN SRI DATO’ SETIA AMBRIN BIN BUANG)

Auditor General of Malaysia
9 August 2011

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 Financial Management Accountability Index

PREFACE

Financial management compliance is a fundamental requirement

which has to be adhered by the government ministries, departments
and agencies at the Federal and State levels to ensure financial
accountability of public monies. As of August 2011, there are 25
ministries, 110 departments and 118 statutory bodies at the federal
level, and 13 State Treasury offices, 251 departments, 145 statutory
bodies, 145 local authorities and 16 Islamic Religious Councils at the
state level in Malaysia. It is vital for the ministries, departments and
agencies to be aware of the importance of financial accountability and
the consequences for failing to account for their financial management
performance. Without financial accountability, there will be no effective
financial management control.

This booklet provides a concise explanation of the implementation of

Financial Management Accountability Index of the Federal and State
Government ministries and departments as well as Federal and State
Statutory Bodies, Local Authorities and Islamic Religious Councils. It
describes the main elements of FMAI, outlines the main indicators and
sub indicators of each element as well as the scoring and ratings system
relating to the elements of the financial management being assessed.

In applying the FMAI, the auditor should consider the audit objectives
and exercise of professional judgment. Federal and State Government
ministries and departments are not subject to certain indicators hence
their financial management performance should be assessed to the extent
applicable to them. It is important that the auditors use professional
judgment wisely in giving reasonable scores on the assessment.

By providing unbiased and objective assessments of whether public

monies are responsibly and effectively managed to achieve intended
results will help the government organisations achieve accountability,
improve operations and instill confidence among the public and
stakeholders.
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Financial Management Accountability Index

INTRODUCTION

The financial management audit is essentially to provide assurance as

to whether the integrated collection of financial controlled systems used
by an entity to achieve its objectives and goals are effective. It is also
to ensure compliance with prescribed managerial policies, plans and
procedures as well as statutory requirements of the laws and regulations
besides to ensure the completeness and accuracy of the records.

Financial Management Accountability Index is an objective, quantitative

assessment of the extend of the financial management performance of
the auditees. The auditees involved are the Federal and State Government
Ministries, Departments, Statutory Bodies, Local Authorities and Islamic
Religious Councils. The introduction of the FMAI is in line with the
emphasis on Quality Management System and Key Performance
Indicator envisaged by the Government.

The FMAI will enable the government ministries/department/agencies

to assess the trend of their financial management performance which
will become the basis for benchmarking towards striving for excellence
in financial management. This will help them to instill a work culture of
best practices among its personnel. The index also serves as a healthy
competition among the auditees to improve their financial management.
This will enhance accountability, transparency and efficiency of the
public delivery system performance. The auditees who have achieved
excellent rating can be the role model for the others.

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 Financial Management Accountability Index

Key Elements of FMAI

There are 9 key elements of FMAI comprising of Organisational

Management Control, Budgetary Control, Receipts Control,
Expenditure Control, Trust Accounts/Trust Funds/Deposit Accounts,
Assets Management, Investment Management, Loan Management
and Certification On Financial Statement. Ministries and departments
at the Federal and state levels is assessed based on six elements i.e
Organisational Management Control, Budgetary Control, Receipts
Control, Expenditure Control, Trust Accounts/Trust Funds/Deposit
Accounts And Assets Management whilst for the financial management
of the States Financial Offices and Treasuries; Federal and State Statutory
Bodies; Local Authorities; and Islamic Religious Councils, additional
three elements i.e Investment Management, Loan Management and
Certification On Financial Statement will be assessed.

i. Organisational Management Control

The role of management is vital in ensuring that financial management

is administered efficiently, effectively and achieved the desired
objectives. The management of any government agency must comply
with the financial management regulations and guidelines, established
effective internal controls and monitored the financial performance
continuously. The assessment of the organisational management control
is to ascertain to what extent the agencies have established an effective
structure, system and procedure on financial management.

The organisational management control of the Federal and State

ministries/departments; States Financial Offices and Treasuries; Federal
and State Statutory Bodies, Local Authorities; and Islamic Religious
Council is evaluated based on several main indicators as depicted in
Table 1.

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Financial Management Accountability Index

Table 1
Main Indicators for Organisational Management Control

No. Main Indicators

Organisation Structure
Organisation Chart
Delegation of Powers
1. Segregation of Duties
Board of Directors*
Top Management*
Council Members*

System and Procedure

Financial and Accounting Regulations*
2. Work Procedure Manual
Desk file
Surprise/spot checks

Committees and Internal Audit Unit

Financial Management and Accounts Committee
Audit Committee*
3.
Development Action Committee**
Management Integrity Committee
Internal Audit Unit

Human Resource Management

Establishment
Work Transition Plan
4.
Human Resource Development Panel**
Training
Surcharge
* Additional Sub-Indicators applicable to States Financial Offices and Treasuries;
Federal and State Statutory Bodies; Local Authorities; and Islamic Religious Councils
only
** Additional Sub-Indicators applicable to Federal and State Ministries and Departments
only
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 Financial Management Accountability Index

ii. Budgetary Control

Budgetary controls are management’s policies and procedures for

managing and controlling the use of appropriated funds and other forms
of budget authority. The Assessment on the budgetary control aims to
ensure that the agency budget is properly planned, prepared, allocated
and managed according to the stipulated legislations and objectives.
The five main indicators to assess the budgetary control applicable to
all Federal and State ministries/departments, Federal and State Statutory
Bodies, Local Authorities and Islamic Religious Council are shown in
Table 2.

Table 2
Main Indicators for Budgetary Control

No. Main Indicators

1. Budget Preparation

2. Allocation Distribution

3. Approval of Virement/Supplementary Allocation

4. Monitoring of expenditure/performance

5. Reporting

6. Analysis *
* Additional Indicator applicable to Federal and State Ministries and Departments only

iii. Receipts Control

Receipts are broadly classified as tax revenues, non-tax revenues and

non-revenue receipts. Tax revenues include both direct (individuals
and corporations income tax, petroleum income tax, stamp duty and
real property gains tax) and indirect taxes (import duties, export duties,
excise duties, sales tax and service tax). Non-tax revenues comprise fees

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Financial Management Accountability Index

for issuance of licences and permits, fees for specific services, proceeds
from sale of government assets, rental of government property, bank
interests, returns from government investments, fines and forfeitures.
Non-revenue receipts consist of repayments and reimbursements such
as refunds of overpayments in previous years and repayment of loans
from the Federal Government’s Consolidated Fund received from other
Federal Government Agencies and State Governments.

Control of Receipts is to ascertain whether the receipts are effectively

managed according to the stipulated procedures, laws and regulations.
It is important to ensure the safekeeping, accuracy and completeness
of the accounting records. The main indicators of the Receipts Control
applicable to all Federal and State ministries/departments, Federal and
State Statutory Bodies, Local Authorities and Islamic Religious Council
are illustrated in Table 3.

Table 3
Main Indicators for Receipts Control

No. Main Indicators

Control of Revenue Forms
1. Usage of Revenue Forms
Recording of Revenue Forms*
Receipt of Monies
Authority/Approval
2. Security Controls
Receipts Through Mails
Receipts Controls
3. Bank-in Collections
4. Accounting of Receipts/Revenues
5. Management of Account Receivables
* Additional Sub-Indicators applicable to States Financial Offices and Treasuries;
Federal and State Statutory Bodies; Local Authorities; and Islamic Religious Councils
only

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 Financial Management Accountability Index

iv. Expenditure Control

Government expenditure is categorized according to their functional

purpose and objectives. Specifically, there are three types of expenditure
to carry out government’s initiative; that is charged, operating and
development expenditure. Charged expenditure refers to expenditure
that is directly charged on the Consolidated Fund which includes royal
allowances, remuneration to the Auditor General, Attorney General,
Chief Justice & Judges, Speaker of the House of Representative,
payment on pension, retirement allowances and gratuities. Operating
expenditure is the expenses incurred to finance the routine programmes
and activities of a ministries, departments or agencies. Development
expenditure is the capital expenditure either for a short or medium term
which entails long term returns.

Assessment of expenditure is conducted to determine whether all

expenditures have been made according to the controls objective.
An appropriate accounting treatment should be carried out for the
expenditure incurred and any procurement along with payment should
be conducted according to the rules and regulations. Effective controls
over expenditures are able to prevent wastage, misappropriation and
shortfall to the government. Table 4 represents the main indicators and
sub indicators for expenditure control of the Federal and State ministries/
departments, Federal and State Statutory Bodies, Local Authorities and
Islamic Religious Council.

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Financial Management Accountability Index

Table 4
Main Indicators for Expenditure Control

No. Main Indicators

1. Accounting Controls

Procurement Management
Direct Purchase
General Controls on Quotation/Tender
2. Purchases Through Quotation
Management of Tender/Direct Negotiation
Records and Contract Agreements/Central Contracts
e-Procurement*

Payment Management
Authority
Management on Accumulative Payment*
3. Internal Control on Payment Process
Bill Register
Management of Petty Cash Imprest
Expenditure Requiring Special Approval*
* Applicable to Federal and State Ministries/Departments only

v. Trust Funds, Trust Accounts and Deposit

Ministries/Departments/Agencies are permitted to maintain a Trust

Account under the establishment of the Financial Procedure Act 1957/
Incorporation Act. All moneys paid and received from any person or
government bodies which are subject to a trust should be credited to the
Trust Account/Consolidated Trust Fund.

The objective of the assessment is to provide assurance over the

efficiency and the effectiveness of the controls over the management of

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 Financial Management Accountability Index

trust accounts. The two main indicators for assessment of the Trust Funds/
Trust Accounts are management of loans/deposits and the management
of Deposit Accounts. Both indicators are applicable to all Federal and
State Ministries/Departments, Federal and State Statutory Bodies, Local
Authorities and Islamic Religious Councils. Summarize of the indicators
are shown in Table 5.
Table 5
Main Indicators for Trust Funds and Trust Accounts Management

No. Main Indicators

1. Trust Funds and Trust Accounts Management
Revolving Fund Management
Car Loans
2. Computer Loans
Personal Advances
Other Advances
3. Deposit Accounts Management

vi. Asset and Inventory Management

The assessment on the asset and inventory management is to ascertain

that the assets and inventories of the agency are properly managed,
safeguarded and recorded based on rules and regulations. There are
seven indicators to assess the asset and inventory management which
are applicable to all Federal and State Ministries/Departments, Federal
and State Statutory Bodies, Local Authorities and Islamic Religious
Councils. Details of it are indicated in Table 6.

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Financial Management Accountability Index

Table 6
Main Indicators for Asset and Inventory Management

No. Main Indicators

General Controls
Asset Committee
1.
Asset Management Unit
Asset Officer
Receiving
2. Receiving Officer
Receiving Regulations
Registration
3. Registration Management
Asset Identification (Labeling)
Usage, Custody and Inspection
Usage
4. Custody
Asset Inspection/Stock Verification
Usage of Department’s vehicles
Maintenance
5.
Maintenance Regulations (includes asset maintenance)
Disposal
6. Inspection Board
Disposal Procedures
Loss and Write-Off
7. Management of Loss
Management of Written off

vii. Investment Management

Investment management is essential to protect the interest of contributors

and shareholders. The objective of the assessment is to determine
whether the investment management is effective and complied with
regulation requirements. It is important to ensure that the investment is
properly managed in accordance to the approved/authorised limit and

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 Financial Management Accountability Index

records are appropriately maintained as well as updated. The two main

indicators to be assessed for the investment management are Investment
Committee (Establishment, composition, functions of committee) and
the management of investment (Authority, maintenance of records,
monitoring process and system).

viii. Loan Management

The objective of the assessment of loan management is to ensure that the

key controls on the process and the management of loan are properly
executed and compliance with applicable policies and procedures. The
assessment of loan management is based on four criteria: a designated
authority to acquire and to grant loan, records maintenance and
agreement on loan.

ix. Financial Statement

The objective of the financial statements is to provide the information

on the financial position of an entity. Typically it includes Balance Sheet
to report on assets, liabilities and equity. The Income Statement provides
information of the operation and reports on income, expenses, profit or
losse. The financial statement is also accompanied by the statement of
cash flows and other forms of financial analysis that are beneficial to
the management. The two main indicators to for assessing the financial
statement are the financial performance (Profit/Loss, liquidity ratio) and
the submission of financial statement (Completeness, timeliness). The
indicators are indicated in Table 7.

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Financial Management Accountability Index

Table 7

No. Main Indicators

Presentation of the Financial Statement
1.
Preparation and presentation of the Financial Statement
2. Submission of the Financial Statement*
3. Analysis on the Financial Statement*
* Applicable to Federal and State Statutory Bodies only

SCORING AND RATING

Government Ministry/Department/Agency will be assessed on its

performance management by applying the indicators/sub indicators
for the respective elements and associated with several criteria. The
assessment carries a score of 1 to 4. The score of each indicator/sub
indicator will be summed up based on a given weightage in order to
derive the overall marks. The basis of the given weightage is determined
by the level of criticality or impact of such element to the overall
financial management. Generally, the Federal and State Ministries/
Departments, the Federal and State Statutory Bodies, Local Authorities
and Islamic Religious Councils are having the same weightage elements
for the financial management assessment. However, the Federal
and State Statutory Bodies, Local Authorities and Islamic Religious
Councils have additional three weightage elements namely investment
management, loan management and financial statement. The summary
of the weightage are illustrated in Table 8.

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 Financial Management Accountability Index

Table 8
The Financial Management Assessment Matrix

STATE/
FEDERAL STATE
STATUTORY AGENCY/
MINISTRY/ MINISTRY/
BODIES RELIGIOUS
NO. ELEMENTS DEPARTMENT DEPARTMENT
COUNCIL
WEIGHTAGE WEIGHTAGE WEIGHTAGE WEIGHTAGE
(%) (%) (%) (%)
Organisational
A Management 10 10 10 10
Control
Budgetary
B 15 10 5 5
Control
Receipts
C 20 10 10 10
Control
Expenditure
D 25 10 20 15
Control
Trust Account/
E Trust Fund/ 10 15 10 10
Deposit
Asset and
F Inventory 20 15 20 20
Management
Investment
G * 5 5 5
Management
Loan
H * 5 5 5
Management
Financial
I Statement * 20 20 20
Certification

Total 100 100 100 100

* Not Applicable to Federal Ministry/Department

Based on the total marks, the Ministry/Department/Agency will be given

star ratings as depicted in Table 9:

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Financial Management Accountability Index

Table 9
Levels of Rating

Level Score Rating

Excellent 90% -100%

Good 70% - 89%

Satisfactory 50% - 69%

Not Satisfactory 49% and Below

Note: An example of the AI calculation of a Federal Department is shown in Appendix I.

There has been a significant improvement on the financial

management performance over the past three years. Results of the
Financial Management of Accountability Index from 2008 to 2010
were represented in Table 10.
Table 10
Comparisons of FMAI Results For The Financial Year 2008 - 2010

LEVEL 2008 2009 2010

Excellent 10 20 47

Good 141 196 289

Satisfactory 61 57 49

Not Satisfactory - 1 1

Total 212 274 386

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 Financial Management Accountability Index

CONCLUSION

Sound financial management and internal control are crucial to ensure

that the government’s fund are safeguarded and moneys are utilised
in the most efficient and effective manner. The Financial Management
Accountability Index is introduced as an initiative to promote good
governance in the public sector financial management. The underlying
indicators and criteria that are specific, measurable, achievable and
relevant will go a long way to enable the government ministries/
departments/agencies to be assessed and rated objectively based on
their financial management performance. The results will be used to
identify the areas of weaknesses so that the organization will embark
on improvements to enhance its financial operations and performance.

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Financial Management Accountability Index

Appendix I

EXAMPLE OF AI CALCULATION OF A FEDERAL DEPARTMENT

Compliance
(/) or Non-
ELEMENTS
Compliance
(x)
A. Organisational Management Control (10%)
Indicator 1 – Organisation Structure
Organisation chart has been prepared,
1.1 /
complete and updated
Delegation of power has been properly
1.2 /
authorised
1.3 Segregation of duties has been made x
Indicator 2 – System and Procedure
Work Procedure Manual has been properly
2.1 x
prepared and updated
Desk File has been properly prepared and
2.2 x
updated
Surprise Checks has been carried out
2.3 /
according to the schedule
Indicator 3 – Committees and
Internal Audit Units
Financial and Management Account
3.1 /
Committee has been established
Intergrity of the Governance Committee has
3.2 /
been established
3.3 Audit Committee has been established /
3.4 Internal Audit Unit has been formed /

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 Financial Management Accountability Index

Compliance
(/) or Non-
ELEMENTS
Compliance
(x)
Indicator 4 – Human Resource
Development
All posts have been filled-up according to
4.1 /
the approved Establishment Warrant
Training mechanism has been in place to
4.2 ensure every personnel has been trained at /
least 7 days per year
B. Budgetary Control (15%)
1 Budget is properly prepared /
2 Allocation has been distributed accordingly /
Approval obtained on any virement/transfer/
3 /
additional Allocation
Progress/performance of expenditure has
4 x
been monitored
Reports have been prepared and submitted
5 x
timely
6 Budget analysis has been prepared /
C. Receipts Control (20%)
Indicator 1 – Control of Revenue
Forms
Unused Revenue Forms are properly kept in
1.1 /
the safe place
Register on the control of revenue forms is
1.2 /
properly maintained
Indicator 2 – Receipts of Monies
2.1 Receipts of monies are properly authorised /

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Financial Management Accountability Index

Compliance
(/) or Non-
ELEMENTS
Compliance
(x)
2.2 Collection safety measures are in place /
Receipt of monies has been properly
2.3 /
managed
Mail register is properly maintained and
2.4 x
checked
Cash Book has been properly maintained
2.5 /
and checked
Indicator 3 – All collections have
/
been promptly banked
Indicator 4 – Accounting control on
receipts/revenues has been properly /
established
Indicator 5 – Account Receivables
/
have been properly managed
D. Expenditure Control (25%)
Indicator 1 – Accounting control has
been properly established /
Indicator 2 – Procurement
Management
Board of Procurement of an agency for
2.1 /
managing tenders has been established
2.2 Market research was properly conducted /
General controls for quotation/tender have
2.3 /
been complied

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 Financial Management Accountability Index

Compliance
(/) or Non-
ELEMENTS
Compliance
(x)
Contract has been made on behalf of the
2.4 government and signed by the authorized /
officer
e-Procurement has been implemented and
2.5 x
totally enabled
Indicator 3 – Payment Management
Vouchers have been signed by authorized
3.1 /
officer
3.2 Bill registered has been properly maintained /
3.3 Internal control for payment are adequate /
3.4 Petty cash has been properly managed /
Trust Funds and Trust Accounts/Deposit Accounts
E.
Management (10%)
Indicator 1 – Trust Funds and Trust
Accounts have been properly /
maintained
Indicator 2 – Loans Fund have been
/
properly managed
Vehicles and computers loans have been
2.1 /
properly managed
2.2 Advances have been properly managed /
Indicator 3 – Deposit Accounts have
been properly managed /
F. Asset and Inventory Management (20%)
Indicator 1 – General Controls

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Financial Management Accountability Index

Compliance
(/) or Non-
ELEMENTS
Compliance
(x)
Government Asset Management Committee
1.1 /
has been established
1.2 Asset Management Unit has been formed /
Asset officers have been appointed by the
1.3 /
Controlling officer in writing
Indicator 2 - Receipt Of Asset
Regulation on the receipt of asset has been
2.1 /
adhered
Clear control on the receipt of assets and
2.2 /
inventories has been established
Indicator 3 - Registration of Asset
Asset registers must be maintained and
3.1 x
regularly updated
All assets must be labeled or embossed as
3.2 “Ownership of the Government/name of an x
Agency”
Indicator 4 - Usage, Custody and
Inspection
4.1 Assets have been used for official purpose /
Assets and invetories are kept in the safe
4.2 /
place
Physical asset verification has been carried
4.3
out at least once a year x
4.4 Government vehicles are properly managed x

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 Financial Management Accountability Index

Compliance
(/) or Non-
ELEMENTS
Compliance
(x)
Statement of Purchase of Fuel/Fuel Indent
4.5 /
Card has been checked and verified
Indicator 5 - Asset Maintenance
Regulations on asset maintenance have
5.1 /
been complied
Assets have been maintained according to
5.2 x
the schedule
5.3 Safekeeping of vehicles /
Indicator 6 - Disposal
Disposal of assets and inventories has been
6.1
properly authorised /
Disposal has been done within 3 months of
6.2
approval x
Indicator 7 - Loss and Written-Off
7.1 Losses have been reported accordingly /
Investigating Committee has been
7.2 appointed within two weeks after the /
preliminary reports

Percentage of Compliance 75.49%

Based on the Star Rating System, this agency obtained 3 stars. In other
words, the financial management of this agency is categorised as Good.

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