MANUAL FOR FINANCIAL MANAGEMENT AND CONTROL

Republic of Macedonia MINISTRY OF FINANCE Public Internal Financial Control Department Central Harmonisation Unit for Financial Management and Control

MANUAL FOR FINANCIAL MANAGEMENT AND CONTROL

Skopje, December 2010

Financial Management and Control Manual

Dear, The reforms undertaken by the Government of the Republic of Macedonia in the European integration process of the Republic of Macedonia requires the establishment and development of sound and efficient system of financial management and control within the public sector entities. Law on Public Internal Financial Control ("Official Gazette of the Republic of Macedonia" no.90/09) adopted by Parliament of the Republic of Macedonia on July 22, 2009, secondary regulations for financial management and control and this manual is the legal framework of financial management and control within the public sector entities in the Republic of Macedonia. Manual for financial management and control model is structured to establish a sound control environment, which aims to provide reasonable assurance that activities are carried out according to the principles of sound financial management, transparency, efficiency, effectiveness and economy, as well as current legislation and the budget. This Manual provides a comprehensive overview of the main principles of modern management and hopefully will serve as a guide and tool in performing everyday tasks and activities of all officers and persons involved in financial management and control. This Manual has been prepared by the Public Internal Financial Control Department in the Ministry of Finance which is the central unit for the harmonization of financial management and control within the EU twinning project "Strengthening of the Public Internal Financial Control and MATRA project" Strengthening and implementation of public internal financial control at the central level realized in cooperation with the Kingdom of the Netherlands. Manual for financial management and control will be published on the website of the Ministry of Finance .mk, and will be updated and improved.

Sincerely,

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Financial Management and Control Manual

CONTENT

CHAPTER I...............................................................................................6

INTRODUCTION

1.1. Purpose of the Manual on Financial Management and Control .......................7 1.2. Users of the Manual ...............................................................................7 1.3. Structure of the Manual on Financial Management and Control ......................8 1.4 Style of the Manual ................................................................................8

CHAPTER II ..............................................................................................9

FINANCIAL MANAGEMENT AND CONTROL - GENERAL RULES

2.1 Public Responsibility .............................................................................10 2.2 Public Internal Financial Control ..............................................................10 2.3 Managerial Responsibility ......................................................................12 2.4 What can be achieved by internal control ...........................................................12 2.5 Limitations of internal control ..................................................................12 2.6 Checking and evaluating internal control ...................................................13 2.7 Financial management and control ..........................................................14 2.8 Components of financial management and control - COSO framework.............17 2.8.1 Component 1 - Control environment ......................................................18 2.8.2 Component 2 - Risk management.........................................................21 2.8.3 Component 3 ? Controls......................................................................23 2.8.4 Component 4 - Information and Communication ......................................28 2.8.5 Component 5 - Monitoring ...................................................................30 2.9 Interconnectivity (synergy) of the five components of internal control ..............30

CHAPTER III ...........................................................................................33 ESTABLISHMENT OF FINANCIAL MANAGEMENT AND CONTROL

3.1 Conditions for the establishment of financial management and control ............34 3.2 Establish financial management and control ..............................................37 3.2.1 Organizational establishment ...............................................................39 3.2.2 Preparation of the plan for the establishment and development of financial management and control ............................................................................43 3.2.3 Preparation of statements for the vision and mission and key business objectives ................................................................................................47 3.2.4 Assessment of the five components of internal control ..............................51 3.2.5 Inventory or book (map) of business processes .......................................53 3.2.6 Determining the risk level of process, risk assessment and ranking of risk

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Financial Management and Control Manual

management ..........................................................................................62 3.2.7 Consider the establishment of control ...................................................73 3.2.8 Analysis of existing and required controls ..............................................74 3.2.9 Preparation of a plan to eliminate weaknesses in internal control - the establishment of corrective measures............................................................75 3.2.10 Preparation of reports on internal control ..............................................75

CHAPTER IV ...........................................................................................78

ROLES AND PARTICIPANTS IN THE SYSTEM OF FINANCIAL MANAGEMENT AND CONTROL

4.1 Organizational role ...............................................................................79 4.1.1 Ministry of Finance ............................................................................79 4.1.2 Head of the entity...............................................................................79 4.1.3 Head of Financial Affairs Unit ...........................................................................81 4.1.4 Coordinator for Financial Management and Control ........................................85 4.1.5 Authorized persons incur .....................................................................86 4.1.6 Ex ante financial controller ...............................................................................87 4.1.7 Ex-post financial controller ...............................................................................87 4.1.8 Central Harmonisation Unit (CHU) at the Ministry of Finance ..........................88 4.1.8 The Financial Management and Control .................................................89 4.2 Conclusion .........................................................................................90

CHAPTER V ...........................................................................................92

ANNEXES

Annex 1 internal financial control in the public sector - Concepts Definitions of terms ...................................................................................93 Annex 2 Useful Tips for components of financial management and control .........106 Annex 3 Form of record of issued authorizations (Register of authorizations) .......115 Annex 4 Decision on internal distribution of total approved budget .....................117 Annex 5 Checklist for undertaking financial obligations ...................................120 Annex 6 Form a plan for the establishment and development of financial management and control (the methodology for implementation of the plan) .........123 Annex 7 Chart of the financial issues in the entity of central and local level .........135 Annex 8 Decision on granting authorization ..................................................137 Annex 9 Form establishing / inventory of business processes ...........................140 Annex 10 Map of the work processes...............................................................143 Annex 11 Form of Risk register ..................................................................155 Annex 12 Example of a Strategy for Risk Management ...................................157 Annex 13 The role of internal audit in developing

system of financial management and control ...................................166

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Financial Management and Control Manual

CHAPTER VI REGULATION

- LAW ON PUBLIC INTERNAL FINANCIAL CONTROL - RULEBOK FOR THE MANNER OF GIVING AUTHORISATION - RULEBOOK FOR THE MANNER OF IMPLEMENTATION OF GENERAL

FINANCIAL PROCESSES - RULEBOOK FOR THE MANNER OF EXECUTION OF THE WORKS FROM

THE COMPETENCES OF THE FINANCIAL AFFAIRS UNIT - STANDARDS FOR INTERNAL CONTROL IN THE PUBLIC SECTOR - RULEBOOK FOR THE FORM AND CONTENT OF REPORTS AND

STATEMENT OF QUALITY AND CONDITION OF THE INTERNAL CONTROLS OF ANNUAL FINANCIAL REPORT

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