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A Blueprint for Effective Government Controls In Third World Countries
By Lal Balkaran, MBA, FCMA, FCIS, CGA, CIA
Guyana Journal
March 2006


Classification of Nations

Given the overwhelming and rapid political and economic changes that swept the world within the last decade, nations can now be classified into five economic groupings:

(1) the advanced market economies dominated by the G8 group of countries;
(2) the Newly Industrialized Economies (NIEs) or Asian Tigers;
(3) the emerging market economies (countries of the former Soviet bloc);
(4) the centrally planned economies (Cuba and North Korea are the last of this dying breed); and
(5) the semi-developed and underdeveloped countries known as the Third World (TW).

This last category includes most of Asia, Africa, the Caribbean and Latin America. Differences in cultural, economic, infrastructural, legal, physical and political environments in these countries vary dramatically. Consequently, general standards of control, accountability and good government taught in the G8 nations are difficult to implement and enforce.

Importance of Third World

TW countries will be the engine of growth in the next millennium for the rich industrial north. A survey entitled “Global Economy” that appeared in a past issue of the Economist stated that “over the next 25 years, the world will see the biggest economic strength for more than a century. Today the so-called industrial economies dominate the globe as they have for the past 150 years or so. Yet within a generation several are likely to be dwarfed by newly emerging economic giants.” Indeed, the prospects for the TW have never looked better especially considering the wind of democracy that is opening up these economies to trade and investment.

However, the economic plight of TW countries is formidable as they collectively owe more than $1 trillion to developed nations. Repaying this debt virtually leaves no money for these struggling countries to spend on important areas like agriculture, education, healthcare and infrastructure. Indeed, relief of these onerous debt charges to help these countries move towards self-sufficiency is one of the underpinnings of Guyana’s first democratically-elected President, the late Dr. Cheddi Jagan’s program for a “new global human order” which is receiving momentum and serious attention from the North.

While debt restructuring and loan forgiveness are one solution, problems will inevitably continue if effective and proper controls are not carefully conceived and implemented. In short, repaying all of one’s debts and taking out new loans with the same non-existent, weak and ineffective controls will put these countries back to square one leading to perpetual poverty.

Poor controls in government departments have a rippling effect in general and can cause havoc on the poor and weak in particular. Ultimately, such deficiencies lead to the lack of accountability thereby weakening effective government and leading to corruption and outright fraud. This is good breeding ground for tyrants, autocrats, get-rich-quick businessmen, tax evaders and international exploiters.

In this article, I will attempt to demonstrate how customized government controls can be established and enforced in TW countries under ten broad streams.

What is control?

In one of my earlier books (Managerial Control Techniques published in 1989 by the Chartered Institute of Management Accountants in London, UK), I argued that control basically entails ensuring that an action conforms with a plan. Thus, actual events must comply with pre-established policies, plans and instructions, with differences analyzed, investigated, and corrective action taken. This is undoubtedly a generic definition. However, TW countries can tailor it to their needs and ensure it works. Consider the following, for instance:

Acculturation

Research has proven that cultural diversity and instincts tend to undermine the application of effective controls. This can be overcome by integrating established professional standards in the various disciplines with those of local customs and laws, e.g., accounting, auditing, architecture, medicine and law. Consider, for instance, where one component of the loans underwriting process in certain parts of Asia requires consulting an astrologer to determine the recipient’s ability of repayment. This takes precedence over other underwriting tools used. In case of default, the recipient’s spouse is seized as collateral until the arrears are cleared. If borrowers strongly believe in this procedure, then simply incorporate it as part of the lending process but with the overriding proviso that security (other than the borrower’s spouse) for the loan is valued, documented and assigned to the lender up front. Consulting an astrologer may thus be purely for formality purposes only.

Religion and culture run deep in people living in TW countries, a situation that may conflict with professional practice. For instance, the rigid practice of Hinduism’s caste structure (a system based on social stratification) prevents lower caste Hindus from dealing face to face with members of the upper caste. The reason: it is a deadly and unforgivable sin to do so. How then can lower caste professionals challenge the corrupt practices of the upper castes? That is why professional standards have to be carefully structured and tailored to consider such practices.

Qualified personnel

Appropriately qualified and experienced people with integrity are an integral part of an effective control system. Potential hirees must have relevant and recognized qualifications coupled with requisite experience. Academic and professional qualifications are benchmarks against which certain standards of proficiency can be measured, but these must be complemented with experience. A passed ACCA or LL.B. finalist with no experience is analogous to courting chaos unless properly supervised. Such an individual becomes a textbook worker whereby everything must conform to what he has just learned at school.

It is generally recognized that educated people in positions of authority and responsibility are less likely to indulge in unethical practices such as corruption and fraud. Although such hirees are expected to be competent, political patronage cannot be totally ignored. Once in power, Third World governments are popular to find ‘jobs for the boys’. This is unavoidable as these ‘foot soldiers’, who were in the frontlines to have their part elected to govern, have to be rewarded in some way or the other. Even the industrialized north realizes this. However, except for cabinet appointments, some cushion has to be made for these political appointees who are, without doubt, loose cannons that can wreak havoc in government departments. A good control over them is to ensure that they are not hired in any decision-making or strategic capacity. Discretion must be used to have their work closely monitored without jeopardizing the implementation of government policies and the operations of the department where they work.

Education Programs and Professional Associations
During a visit to Toronto some years ago, Peter Drucker, business guru and “father of modern management”, admonished that ‘money is nothing compared with knowledge...the first thing you have to know is that knowledge has become the key resource.” Indeed, if virtue is rewarded in heaven, education gets its payoff on earth. Alvin Toffler, one of the greatest social thinkers of our time and author of The Third Wave, the million-sellers Future Shock and Power Shift, re-inforces this point by putting it in the context of his “three-wave model of human development”. The first wave of historical development was agrarian; the second, industrial; the third, knowledge.

In this age of ongoing global changes that are affecting the way we think and live, ‘archaic’ civil servants cannot be afforded and tolerated. Their influence on others who are eager to learn and do things differently will only be negative and may even jeopardize the implementation of government policy. These ‘antiques’ should be transferred to jobs of lesser importance or leave through attrition.

Affiliation with recognized professional public service-oriented bodies and pursuing their education programs ensure keeping current with developments in the machinery of government, sharing related and common knowledge, technical bulletins, technology and standards.

Some recognized professional bodies suitable for government employees that justify affiliation and pursuit of their education programs are:

Chartered Institute of Public Finance and Accountancy;
National Association of Government Accountants;
Association of Government Auditors; and
National Association of Local Government Auditors.

While a good education for public employees does not necessarily provide for an effective operation in government departments, its omission and lack of skills are guarantees of failure.

Fidelity Bond Insurance

Cash and other liquid securities are most vulnerable to being pilfered. The temptation is even greater where controls are weak and general economic conditions are depressed.

One good preventative measure is to take out fidelity bond insurance for those employees who deal with cash and other securities. With electronic banking, use of debit/credit cards and other technology for settling financial transactions still beyond the reaches of TW countries, taking out fidelity bond insurance will ensure financial restitution from the business world in the event of cash losses.

Code of Ethics

A distinguishing mark of a profession is acceptance by its members of responsibility to the interests of those it serves. Government employees should maintain high standards of conduct to effectively discharge this responsibility. Within this context, a Code of Ethics should be formulated, implemented and enforced for each Ministry. Such a code should encompass, inter alia:

Competence
Certain personal traits, e.g., morality, dignity, honesty,
loyalty, objectivity and diligence;
Conflicts of interest;
Bribery;
Use of resources;
Information Security;
Service quality; and
Proficiency

Such a code will relieve any government of many headaches in discharging its mandate to the voters and will assist in getting rid of deadwood and those bent on sabotaging the government from implementing its policies. This code can be used in a court of law in cases of alleged wrongful dismissal suits or ‘political’ dismissals. Each employee should read and sign this code, with a copy kept in his/her file. Penalties on an escalating basis should be established for any breaches.

Internal Audit
An internal audit is an independent appraisal function established to review and evaluate an entity’s activities on an ongoing basis. The focus of internal audits in a public sector environment should be future-oriented and proactive, i.e., identify control weaknesses to prevent problems before they happen. Each Ministry should have its own audit department (as exists in some countries) staffed with competent people with the function reporting to an independent agency overseeing government’s finances, e.g., Treasury. This will give the independence and objectivity of the function and will save on audit costs, expedite the annual audit, and be a value-added service to the Ministry.

Its mandate should cover extensive operational audits, fraud investigations, systems audit and continuous auditing within that Ministry to encompass:

Integrity and use of financial and operating information;
Systems and controls;
Compliance with government policies;
Safeguarding of assets; and
Recommending operating improvements.

Such a department can assess a Ministry’s operations by looking at the economical use of resources, efficiency of routines and effectiveness in the discharge and application of government policies. Such a function should complement that of the Auditor General’s mandate which will go a long way to ensuring the promptness of financial reporting, reducing audit costs and enhancing accountability.

Internal auditors have to be innovative in TW countries as some audit standards and tools taught in the industrialized nations may not apply. For instance, consider the use of barter in some instances. To sell copiers and printers to Brazil, Xerox sells Brazilian steel to Europe and venetian blinds to the U.S. to obtain payment. Under the Islamic sharia, interest charges are not permitted in banking. Certainly, new audit approaches are required to validate such transactions traditional auditing tools and techniques may be irrelevant.

Policy and Procedure Manuals

Well-formulated and effective policy and procedure manuals are an integral part of the control mechanism in any organization. Policies should reflect program guidelines that the government intends to carry out with detailed step-by-step methods or procedures on how they should be carried out. Compilation should involve coordination with other government departments. In addition, these manuals should be flexible, readily available and frequently updated.

Research suggests that properly compiled and enforceable policy manuals are critical to ensure a department operates effectively since they:

Set out the methodology on the accomplishment of objectives;
Represent clear guidelines of what is to be done and how it is to be done;
Encourage professionalism and a positive perception;
Aid in making effective decisions and staff appraisals;
Enhance morale and productivity; and
Assist in staff training and development.

Training and Development
A properly formulated program for effectively training and developing public sector employees should be established to cover areas like:

Global trends;
Public sector management techniques;
Negotiation;
Protocol;
Communication;
Other cultures;
Assertiveness; and
Image.

In communication for instance, understanding how to interpret verbal and non-verbal means in other cultures is critical especially as the world continues to move into one big global village. People from western cultures tend to be verbal while those from the East are more non-verbally oriented. For example, a Japanese who responds by smiling and nodding to a question is not saying “yes,” but rather “I understand what you’re saying, please continue.”

Continuing non-political training and professional development for public servants are key factors to ensuring that these employees keep abreast with changes in their profession and current trends. This is of pivotal importance especially given the rapid changes in technology that are increasingly impacting the way government works, employee productivity, global business and communication.

Employees in the public sector should not be subject to any ‘brainwashing’ from the political directorate. The results could be disastrous and negative.

Coordination for consistent controls

Determine that controls are generic across ministries to facilitate the implementation of policies, staff movements and ensure continuity. Government departments should not operate at odds with one another nor should their operations vary dramatically. While programs may be different, the overall objective is to carry out the policies of the government of the day. Therefore, effective coordination is required to carry out all that has been said above with some degree of consistency.

Quality Assurance

It is prudent for governments to have external periodic reviews performed by competent independent consultants to ensure that all of the above are in place. This will be like an overall check to ensure that controls, which have been so painstakingly devised and instituted are working as intended. Moreover, it will act as a means of ensuring compliance with established quality standards, criteria which some overseas agencies look for when measuring progress in Third World countries.

But be wary of hopelessly out-of-date and ‘antique’ consultants. Many of these, the products of downsizing, outsourcing or even outright firing in the industrialized nations, churn out highly impressive glossy brochures and offer their services through some middlemen in host countries. Like the average love-affair, these ‘shady’ consultants go through a fairly predictable cycle from infatuation to disillusionment. Governments should protect themselves by authenticating consultants’ résumés with independent third parties. It is far better to do a little checking to save a barrage of potential problems.

Parliamentary Approval

Effective controls in government departments are encouraged in democratic nations where checks and balances deter corruption and other unethical practices. With the increasing democratization of developing nations, there is hope now for such controls to be put into practice in these countries. However, controls are only effective if supported and endorsed by Parliament. TW countries should therefore ensure that a two-thirds majority in Parliament ratifies a general framework or blue-print for these controls incorporating all of the above thereby ensuring that good controls in government departments will prevail regardless of which government is in power.

Finale

The pace and complexity of the forces for change in the twenty-first century are enormous and daunting. TW countries cannot afford to be left behind. Instead, they should do a self-analysis by considering and implementing all of the above to improve their own shop.

These countries will be in the spotlight and the focus of economic activity in the next millennium. As long as they avoid political upheaval, they stand to gain from sustained economic growth and expansion. The World bank has forecasted that the next ten years will see annual growth in developing nations reaching an average 5% as opposed to a mere 2.7% in the rich industrial nations. Such a big difference will indeed drastically alter the world economy.

The industrialized world also has an obligation to ensuring that controls work in these fledgling democracies since we are all in the same boat and it is simply not true that only one end of a boat can sink.

About the author
Lal Balkaran has written several books including the world’s first dictionary on auditing published by LexisNexis in Toronto. He has also published dozens of articles in various journals across the globe. His books on Guyana include: Dictionary of the Guyanese Amerindians, Bibliography of Guyana and Guyanese Writers, The Rupununi Savannas: A Visual Journey, and soon-to-be-published, Immigrant #99094 and Canecutter #7074: The Story of an East Indian Family in Guyana.

He sits on the Board of Research and Education Advisors, IIA and the Internal Audit Advisory Committee of the Federal Government of Canada. Contact and web.

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