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Accounting, Budgeting, and Financial Management

Results to Date

The process of decentralization and the transfer of selected authorities, power, and duties from the central to the local level began on July 1, 2005. The major decentralized authorities include management in the areas of education, culture, environment, fire protection, and local economic development (LED). Phase II of decentralization started on July 1, 2007 with additional responsibilities (such as complete authority over education) transferred to the municipalities. Municipalities perform all these responsibilities primarily with central government funds made available in the form of transfers of categorical (Phase I) and block (Phase II) grants to the various budget users. These transfers of central government funds in the second phase of fiscal decentralization are 70–80 % higher than in the first phase. This dramatic increase in budget resources increases the importance of proper accounting, budgeting, and financial management.

Therefore, the MLGA activities in the area of accounting, budgeting, and financial management over the past year were mainly focused in the following two areas: 1) introduction of independent external municipal audit as a tool for improving municipal financial management; and 2) implementation of International Public Sector Accounting Standards (IPSAS) as a tool for improving accounting and budgeting practices.
Independent External Municipal Audit

In virtually all countries with well-conceived decentralization strategies and high-quality, effective, well-managed local governments, external independent audits have a very important role in high quality financial management. Not the least of the benefits of an annual external independent audit is the development and preservation of a high level of municipal creditworthiness. There are many other benefits of independent external audits, including overall high quality financial management and, notably, improved transparency and accountability to citizens. However, the benefits of external independent audits of municipalities are as yet not well understood in Macedonia. As a result, the use of such audits is not yet widely practiced by Macedonian municipalities.

Following a very specific MLGA task order requirement to encourage municipalities to contract for independent audits of their accounts to improve citizen confidence and reduce the likelihood of corruption and fraud, MLGA initiated this activity by organizing a roundtable for audit companies to introduce the new municipal audit activity. A workshop for presenting all possible benefits from independent external municipal audits was organized for selected municipalities that agreed to be part of this pilot project.

The process of an independent external audit was initiated with six municipalities: Gostivar, Debar, Vasilevo, Veles, Probistip, and Karpos. The request for proposals (RFP) for procurement of audit services was developed. This is a very detailed document important for future use by the municipalities when independently procuring audit services. All six cooperating municipalities actively participated in the process, especially in the area of defining criteria for and selecting an audit company. It is very important that municipalities understand the purpose and benefits of this activity. In addition to improving the financial management area with the recommendations from auditors, financial transparency of the municipality towards its citizens will be increased with the publication of audit reports.

Auditing process started in October 2009 and final reports approved by the Municipalities were ready in January 2009. The findings of the audit will be presented on municipalities web sites.

Accounting, Budgeting, and Financial Management

Accounting is one of the most important functions of an organization, whether it is a non-profit, public institution, municipality, or multi-national business-oriented firm. Accounting is also a vital element of everyday municipal life, recording the entity’s development and, after analyzing figures, suggesting paths for the future.
Accounting summarizes and submits all financial information in reports and statements. The reports are intended for the municipality itself, for the central government, and for outside parties. Concise, accurate, and reliable accounting helps municipal management to formulate appropriate decisions for development, expansion, and sustainability of a financially healthy municipality.
Accounting as a function is regulated with standards. Macedonia is striving to join the European Union (EU) family, and therefore must adjust its national accounting standards to international ones, especially those that are required by EU Terms and Regulations.
For public sector cash basis accounting, IPSAS should be fully implemented and practiced by the Macedonian municipalities. The rulebook for standards was published in the Official Gazette No. 116 (page 117) with the recommendation for implementation from January 1, 2006.
Development and implementation of the accounting policies is the first step in the implementation of IPSAS. These policies establish guidelines for accounting and administrative consistency over long periods of time and connect the account activities with the appropriate finance laws and regulations:

  • General accounting principles
  • Revenues
  • Expenditures
  • Financial result
  • Limitations
  • Definition of the balance sheet items
  • Annual report and final balances
  • Internal control and internal audit
  • All other areas which municipality might find as a crucial for its everyday financial working. 

Based on the initial assessment with the MLGA financial management questionnaire, as well as the first MLGA Municipal Capacity Index (MCI) Assessment, only five municipalities reported having these accounting standards. With MLGA support, the Municipality of Probistip updated their existing accounting policies to be consistent with the municipality’s present situation. An additional article for internal audit and internal control was added in the accounting policies. MLGA began similar direct technical assistance to the Municipality of Berovo, which had no previous accounting policy. 

Next Steps

In Year 2, MLGA will continue to support municipalities in the area of accounting, budgeting, and financial management, and encourage practice of independent external municipal audits. The municipalities that were supported in the financial statement audit of 2007 will be considered for additional support in the 2008.  However, decisions to provide additional audit support will be based on the extent to which municipalities demonstrate the use of previous audits as a tool to improve municipal governance through better financial management, improved transparency and accountability and/or increased access to private credit markets.

In the area of accounting and budgeting, MLGA will continue the history of USAID assistance to municipalities in the use of well-developed financial management software.


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