The Role of Government Financial Managers in Combating Corruption

                        Government Financial Managers Play a Key Role in Preventing, Discouraging, Disclosing and Identifying the Responsibility for Fraud and Corruption by Fostering Sound Financial Management and Internal Control Policies and Practices

                                    by Jim Wesberry, CPA, CIA, CFE, CGFM, CFSA

                                                Principal Adviser on Accounting & Auditing

                                                for Latin America & the Caribbean

                                                The World Bank

The Little Known Weapon Against Corruption

Professionally qualified financial managers strongly supported by top management are indispensable to the growing global fight against corruption in government

One of the most powerful, yet least recognized, anti‑corruption weapons at the command of government is the establishment of sound financial management and internal control practices including a timely and efficient accounting system, made credible by punctual, professional review by internal and independent auditors.

Often where plans are made to combat fraud and corruption legislators, government commissions and officials  place great emphasis upon legal and prosecutorial mechanisms together with punitive measures. Many persons do not realize that in business one of the major purposes of  a sound financial management system is to combat and disclose internal white collar crimeÿand so it should be in government.  Others mistakenly think that the requirement of an annual audit is all that is needed not realizing that auditors= hands are tied where inadequate accounting systems obscure  the Aaudit trails@ which permit auditors to find irregularities and determine who is responsible for them.  Poor,  disconnected and untimely  accounting systems and  disintegrated approaches to financial management provide opportunities for fraud, serve to cover it up, and, worse yet, if  fraud is discovered or reported, make it impossible to determine and punish the person(s) responsible.

The tools of the trade of the professional government financial managerÿsound financial management and internal control systems and practices including timely and professional internal and external auditÿcounteract corruption in many ways and, perhaps even more importantly in these days of wide media exposure of fraud and corruption, protect honest employees from unjust accusation by making it possible to identify the guilty.

Where We Stand Now Nationally and Internationally

In the United States there have been a number of laws passed since 1977 to enhance and improve governmental financial management and audit.  More recently the Reagan, Bush and Clinton administrations have acted to improve government financial management with strong support from the legislative branch.  Acting in opposition to these efforts has been the need to balance the Federal budget by strong austerity measures and the well-intentioned reinvention of government programs which have proposed and achieved severe staffing cutbacks in financial management areas as well as in Inspector General Offices and GAO.  The fact is that the United States government today has more good intentions enacted into law in this area than it can possibly implement with present resource and staffing restrictions.  There is a clear and present danger that the public may lose confidence in the credibility of the Federal government=s accountability systems if the present trend toward more and more collusion, corruption and fraud in government and business continues to dominate the media and transfix a populace which has already lost faith in its political parties and their politicians.

A major challenge before government financial managers today is how to implement all the improvements in government financial management already in process and newly available through advanced technology, yet maintaining consistency with the trend toward smaller, less invasive government.  But this challenge must be met, because we government financial managers are one of the major defenses in the escalating war against fraud and corruption.

The International/Bilateral Financing Institutions (IFI=s) have supported  improved budgeting in the public sector for many years, but this did not attack the problem of poor financial management since a budget is only the plan for financing activities.  These efforts were more directed toward improving the usage of public funds, including those received as international assistance/lending.  Because of their limited focus projects aimed at improving public budgeting failed across the world between the 1950=s and the 1980=s.   As a by‑product they also made public sector financial management more complicated by divorcing budgeting from accounting and actually served to increase tremendously the opportunity for corruption and mismanagement.  Most international/bilateral Donors  failed for many years to take note of the large amounts of international assistance/loans, as well as national financial resources which were being filtered away for person gain by corrupt officials.  These amounts have been estimated  to be between 15% and 50% of  all financial resources handled by developing countries.  They also failed to consider the importance of  developing a cadre of professional government financial managers in each country which received large amounts of assistance/loans.  For many years all IFI=s relied upon audit covenants/clauses in agreements which they felt provided adequate protection.  Often they did not, however, actually enforce or professionally review compliance with such requirements.  Little attention was paid to financial management or to financial managers.

More recently, the IFI=s have taken measures to improve financial management both in their own projects (the enclave approach) and in national governments.   The strengthening of project financial management and audit protects the Donor from embarrassment, but does not protect the recipient government against fraud and waste since funds are fungible and national funds may easily be taken and replaced by those from international sources, leaving no record of any irregularity in the books of the project or their Aaudited@ financial statements.  The World Bank has specifically improved procurement and financial management policies in the past few months, but these relate only to its own projects and it remains to be seen whether the new measures will be strongly enforced.  Similar measures to improve financial accountability and auditing initiated around 1982 were never fully enforced.

Prospects look good for a much stronger position  by the World Bank as its president, James D. Wolfensohn speaking at the October 1, 1996 World Bank-IMF Annual Meeting said:

       "...let's not mince words: we need to deal with the cancer of corruption. In country after country, it is the people who are demanding action on this issue.  They know that corruption diverts resources from the poor to the rich, increases the cost of  running businesses, distorts public expenditures, and deters foreign investors...it is a major barrier to sound and equitable development...

       ...Working with our partners, the bank Group will help any of our member countries to implement national programs that discourage corrupt practices.  And we will support international efforts to fight corruption...

       ...Let me emphasize that the bank Group will not tolerate corruption in the programs that we support..."

In early January, 1997 the Ukraine news agency INTELNEWS citing Ukrainian Radio reported that Wolfensohn had sent a letter to that country's president criticizing corruption within the government.  The report went on to say: "That same day, Deputy Prime Minister Victor Pynzenyk admitted that the problem of government corruption exists, noting that international criticism has begun because of increased foreign investment in the country.  He said budgetary laws currently under review would limit the opportunities for corruption the government."

This is an indication that corruption is being taken seriously at the highest levels and that improvement of financial management and strong budgetary controls are part of its solution.  For too many years corruption across the globe has been aided and abetted by lax, undisciplined financial management and untimely, unprofessional auditing in national governments.  The recognition of corruption's effect upon a country's credibility before foreign investors and lenders will have a profound effect in coming years in four areas:  (1) providing better weapons, information and audit trails to fight corruption itself; (2) improving governance through informed decision-making based on reliable financial data; (3) placing a high priority upon timely, accurate internal and external financial reporting by governments; and (4) accelerating the demand for professional auditing by government auditors, not only of financial reports and statements, but of the underlying internal managerial controls which permeate financial management and other information systems while at the same time depoliticizing government auditors and audit institutions.

In recent years the World Bank and other IFI's have greatly increased the number of country projects which assist in the modernization and professionalization of government financial management and auditing systems.  While these projects have not been primarily designed as anti-corruption efforts, just good public sector management measures which permit informed decision-making by officials, they have important side effects in the battle against corruption as this article intends to point out.

In the Latin America and Caribbean Region the IFI's now have in place or in planning Integrated Financial Management Systems (IFMS) Projects in Bolivia,  Argentina, Guatemala, Honduras, Ecuador, Colombia, Venezuela, Nicaragua, El Salvador, Panama and the Dominican Republic.   The Spanish government is collaborating with Uruguay and Costa Rica.   USAID pioneered in the field with its Model Integrated financial Management System for Latin America   (SIMAFAL) which has served as the conceptual model for all such systems after being accepted by the Donor Consultative Group on Improving Governmental Financial Management in LAC.  Other Regions have begun to take the IFMS approach including projects in Ghana and Vietnam for example.   The approach has been widely disseminated through conferences held by the International Consortium on Governmental Financial  Management during the past two years cosponsored by USAID and the World Bank.

IFMS projects have not included specific anti‑corruption components to date with the exception of USAID's Panama IFMS Project which included funding of development of a Code of Ethics for Public Servants, the establishment of a government ethics office charged with conducting training in the government and in high schools, and the offering of courses in forensic auditing for the staff of the Comptroller Generals Office.  Many of the projects have not fully developed the concept of internal managerial control as a management responsibility, nor included the strengthening of the internal audit function.  

Most heads of Latin American Supreme Audit Institutions are not qualified auditors, but rather political appointees, a factor which severely limits the efforts their organization can contribute to anti‑corruption efforts, even where TA and training is offered them.  For example, the Comptroller General of one country (a very vocal supporter of anti‑corruption efforts) who had resigned a few hours earlier due to corruption allegations, was impeached and discharged from office by the Congress.  The allegations involved the Vice President of the country who had already fled into exile.  Subsequently, the next elected President  bullied the Congress into appointing one of his closest personal friends as Comptroller General, notwithstanding legal provisions for independence of that office.  Within six months both President and Comptroller General had been thrown out by the same Congress for blatant corruption at the urging of an estimated two million citizens who demonstrated in the streets against widespread abuses.  The action of the Congress was criticized for violating the Constitution and imperiling democracy.  Many of the allegations in both administrations revolved around Areserved@ or secret bank accounts containing funds for which no accountability was required.  Corruption could not have been eliminated by professional financial management in this country, but it certainly could have been reported earlier and more clearly and its more blatant aspects might have been reduced or prevented.

Donor  Aenclave‑based@ efforts to strengthen international project accountability have largely ignored entirely the importance of sound internal controls and the role of internal auditors in reviewing and reporting upon them.  Most Donors have been extremely lax in enforcing their own accountability requirements and have chosen austerity over accountability where accountability oversight staffing has been involved.   Most Donors, except USAID, have not exploited the resources available through the accountancy profession which has long played a leadership role in this area in the private sector.

In summary, while IFI=s have begun to face up to the problem of financial corruption in several ways, there is much more that can be done.  One thing that is urgent is to ensure that the IFI=s themselves as well as their beneficiary country governments employ professionally qualified and experienced government financial managers.  USAID has long been a leader in using professionally qualified financial managers and auditors. The World Bank is now moving to greatly increase its professional staff of professionally qualified financial managers and auditors.  Other IFI=s are beginning to do likewise.  But there is a monumental challenge at the country level as most developing countries have little or no professionally qualified financial managers in government, nor any means for developing, remunerating or retaining them.

One major obstacle has been the absence of  global generally accepted accounting principles and practices for the public sector.  Recently the Public Sector Committee of the International Federation of Accountants (IFAC) has launched a major effort to develop International Government Accounting Standards as compatible as possible with the already existing International Accounting Standards issued by the International Accounting Standards committee, sister body of IFAC.  The World Bank, International Monetary Fund and other organizations are providing financial support to assure that a highly professional job is done in this important area.  Once issued these new international standards will provide guidance for professional government accountants and financial managers throughout the world.

How Financial Managers Counterattack Corruption

Professional government financial managers are proficient in the techniques and practices of sound accounting budgeting, cash and debt management including the required internal controls which must be built into such systems.  These techniques and practices inhibit, disclose and help confirm and identify corrupt practices and their perpetrators in the following ways:

1.   Impose Discipline.  Financial manager supported practices and procedures force a disciplined, on‑time approach to public activity and financial reporting, as opposed to laxity permitting long delays in presenting information thus impairing its usefulness and making its acceptance long after the fact practically automatic since to question it would be to waste time on long past transactions.  Professional financial managers set up requirements that all transactions adhere to the same rules, eliminating the loopholes and alternative mechanisms which foster and cover up corrupt activities.

2.   Strengthen Probability of Detection.  Strong internal managerial controls put in place by professional financial managers, including appropriate Aaudit trails@ (requisites of sound financial management), increase the probability that corrupt practices will be discovered and identified as such permitting more prompt investigation.

3.   Create a Disadvantage for the Corrupt.   A professionally directed financial management system surrounds the potential corrupt person with internal control mechanisms as well as vehicles which promote and require transparency and timeliness in reporting placing that person at a real disadvantage, as compared to what the situation often is where lax controls and/or Afalse controls@  provide cover.  False controls are those controls, often legally imposed which appear to impede criminal conduct, but actually foster and camouflage it.  They are abundant in developing countries and often are designed intentionally to aid the corrupt or are well intended but facilitate corruption.  They now seem to be growing in the developed countries and are also often found in the IDI=s themselves.

4.  Protect Highly Vulnerable Areas.   Internal managerial controls implanted by professional financial managers especially as regards discretionary power over those resources and expenditures which are typically subject to a high degree of vulnerability (typical areas of abuse are travel expenses, consulting contracts often subdivided to come below thresholds of review, particularly valuable or attractive and portable assets such as vehicles and portable computers, etc., not to mention the inevitable temptation for kickbacks posed by very large capital expenditure projects or acquisitions in large amounts).

5.  Permit  Proper Management and Oversight.   Proper and timely managerial reporting on financial operations produces the feedback necessary to supervisory and oversight levels within the organization.

6.   Facilitate Audit.   Professional and timely internal and independent audit which focuses upon highest risk areas is made possible where financial managers are present to insist upon adequate systems,  especially accounting systems which comply with internationally accepted professional standards.

7.   Provide Psychological Control.  It has been well established that fear of discovery and punishment is a prime factor in discouraging corrupt

      practices.  The knowledge that internal managerial controls are in place,        constantly being emphasized and improved by financial managers and subject to selective audit review is a powerful disincentive to the potentially corrupt.

The Anti‑Corruption Advantage of Integrated Financial Management 

Integrated Financial Management Systems are required in the United States by the Office of Management and Budget (IFMS ‑ a term first coined and used to describe the new systems developed after the near financial collapse and impending bankruptcy of both the City and State of New York  due to financial management inadequacy and fragmentation in the 1970s).   Professionally directed IFMS provide powerful new high‑technology tools which can be applied in the fight against financial fraud and corruption as well as mismanagement.  Here are some of the ways that IFMS counteract corruption:

1.   Multilevel Budgetary Control.  Budgetary review and control may be exercised at the operating, supervisory and central levels based upon varying thresholds of activity or other factors.   Automatic flash points may be built in to call attention to deviations in areas of high vulnerability as well as to repetitive inappropriate budgetary manipulations.

2.   Avoidance of Cash Flow "Surprises."   Actual cash flows can be monitored at appropriate levels through effective and timely cash management practices (as is done in business), cash flow forecasts can be prepared and the typical cash unavailability "surprises" causing draconian austerity crises which destroy possibilities of achieving budgeted objectives can be avoided.

3.    Spotlighting Weaknesses.   Exception reports can be designed by professional financial managers to provide prompt feedback to operating managers in areas where weaknesses are trending.

4.   Internal Validation of Integrity.   The appropriate internal validation of the integrity of transaction data is provided for at each key step during the processing of transactions and duly documented electronically so that internal controls do not delay execution and external controls may be limited to the post‑audit function.

5.  Accounting Control Over Resources.    The accounting system maintains general ledger controls over all valuable resources which are independent of the operational level.  Many governments (both for internal purposes and project accountability) have heretofore been unable to control or account for important assets such as receivables, land, buildings, other fixed assets, vehicles, computer equipment, software, and all types of electronic equipment. 

6.   Transparency in Public Reporting.  Complete and timely monthly, quarterly and annual financial reports are available for disclosure as is appropriate to Legislative oversight committees and their staff and to the public at large as provided for in most national constitutions but rarely accomplished.  Once transparency is achieved it is hard for officials to cover up "bad news" when it is contained in financial reports.  The tendency to assure that Abad news@ was never published has been a major reason why disciplined and transparent financial reporting has long been avoided.

7.   Consistent Enforcement of Criteria.   The consistent  policies and practices required by a professionally directed IFMS as regards resource control such as the a single Treasury bank account for all public funds and the prohibition of "off budget" expenditures inhibit corrupt and collusive practices, and even where they persist result in the entry into the accounting system of  non‑acceptable transactions which are labeled and reported as such (unless responsible officials are fired which, in itself, results in disclosure of corrupt practice).  In the United States we have been unable to prevent off budget expenditures and even manipulations to move items Aon and off@ the budget in different years to suit non-professional needs thus proliferating inconsistency, but at least we do record all such items in our accounting systems and publicly report them.  In many countries Aoff budget@ also means Aoff accounting.@

8.   Decentralization of Authority and Accountability.   Each unit or activity chief is in charge of financial planning and transaction authorization within their specific area of responsibility, original transaction entry is at the operating level and managerial reports are immediately available, thus they may be held accountable for the planning and execution of their own financial transactions, yet are subject to either on‑line or very timely supervision and oversight from higher levels.

9.   Reduced Need for Accountants.   Typical and repetitive transactions are precoded according to type and amount entered and therefore appropriate accounting entries are made automatically, thus reducing the need for accounting expertise while at the same time reducing the possibility that transaction data can be manipulated.

10. Immediate Audit Capability.  Timely entry of transaction data at point of origin permits immediate attention of the internal auditors to areas and kinds of activity identified as vulnerable to corrupt practice.

11. Disclosure through Comparability.   High speed computer comparison of data available in comparable format (such as double salaried staff, retirees also drawing remuneration, duplicate payments to suppliers, etc.) can disclose patterns of corrupt practices and their overall impact.

12. Computer Assisted Audit.   Computer audit software may be utilized in selecting transactions for audit sampling, vastly decreasing audit costs and increasing attention to areas which demand  more frequent audit coverage.  This is an anti‑corruption measure which has traditionally been unavailable in developing countries due to the incompatibility and disintegration of any existing computerized systems.

Advantages to the Honest

Finally, there is a tremendous need to protect honest employees from temptation as well as from the shadow of suspicion which constantly falls over them where corruption is suspected or discovered involving either international projects or public sector activities in general.  Every professional government financial manager has a double duty to do everything possible to protect other public servants 1) from temptation to perform dishonest acts, and 2) from damage to personal reputation due to unproven or unprovable allegations of wrongful acts, by enduring that internal managerial controls are adequate. Here is how professional government financial managers provide an integrity safety net for the many dedicated and honest public servants:

1.   Limit Number Placed Under Suspicion.    Professionally directed, sound financial management and internal control systems, especially IFMS, establish clear lines of responsibility and authority, provide for appropriate segregation of incompatible duties and provide for clear audit trails which limit the number of  individuals placed under suspicion during investigations where irregularities are discovered.

2.   Appropriate Documentation.   Professionally designed, appropriate paper‑based and electronic documentation of evidentiary matter which supports financial flows assure the eventual exoneration of the honest even when they may temporarily be placed under suspicion.

3.   Discouragement of Pressure and Executive Override.   Pressure may be applied directly (by higher officials or peers) upon financial managers, staff or

     others to act in disobedience to established standards and policies which inhibit corrupt practices.  Pressure may also be indirect in that they are urged to (or rewarded for)  do nothing, where duty demands action or reporting of  irregularity.  In this situation professional financial managers can appeal for professional organization support and resist such pressures.  Tragically honest staff soon leave public service if they have no means to resist  undue pressures.  A cadre of professional government financial managers backed by a professional organization which supports them can strengthen their resistance capabilities and give those under attack the courage to resist.  Professionally directed IFMS provides a disciplined control environment and a series of specific control practices which act to diminish the force of corrupt official and/or peer pressure upon financial staff.   This in turn makes their professional career service more personally rewarding as opposed to being an unbearable burden upon their consciences.

Conclusion

The purpose of this presentation has been to point out how professional government financial managers supporting sound financial management policies and practices play a key role in preventing,  discouraging, disclosing and identifying responsibility for fraud and corruption.  Much more could be written about the role of the internal system of managerial controls which must accompany a sound financial management system.  The Treadway Commission and the Committee of Sponsoring Organization (COSO), in the United States, the Cadbury Commission in the United Kingdom and the Criteria of Control Board in Canada have focused great private sector attention upon the importance of internal control to the safeguard of resources and assets.  Internal controls still need great emphasis in the United States government and are basically in their infancy in the governments of most developing countries, which heretofore have preferred to rely upon false and external controls thus fomenting fraud and corruption.

The concept of internal control, which originated in the accountancy profession during the 1940's, has been expanded to now encompass the entire scope of managerial responsibility.  It forms today's generally accepted framework for the safeguard and maximization of limited resources in the private sector and should do the same in the public sector and as regards international development projects.

Fraud and corruption can never be eliminated, but they can be substantially counteracted and hopefully diminished by professional governmant financial managers duty bound to insist upon sound financial management policies and practices accompanied by appropriate internal managerial controls applied together with other disciplinary measures in the criminal prosecutorial and justice fields. 

Finally it is imperative that the areas of government auditing, criminal investigation and justice administration be completely depolitized in order that they be independent, effective and credible in our global society.

 ________________

 NOTE:  Variations of this presentation without the references to the U. S. government have appeared in exposure draft format in the APA Letter, the newsletter of the World Bank's Association of Professional Accountants, and in article format in the Public Fund Digest published by the International Consortium on Governmental Financial Management.  A more extensive version also appeared as Chapter 17 of the first edition Integrity Sourcebook published by Transparency International .  Spanish language versions have been published for their members by the professional accountancy organizations in Peru and Ecuador.

__________________________________________________________________

                        "...you can't make rapid, drastic changes in the

                       technology and the economy of a society without

            causing rapid nges in all other aspects of the society as well."

                                                                Unabomber's Manifesto, 1995

About the time we started this conference ten years ago there was an irreverent joke making the rounds of meetings like this about the computer researcher who was working with one of the world's largest mainframes the memory of which had been filled with great volumes of information for research purposes.  The computer had also had been outfitted with one of the first voice reply systems.  One night when no one was around the researcher had an inspiration.  He typed into the computer console the question, "Is there a God?".  The big console's lights blinked and its memory drums and tapes rolled for a long time and finally he heard a weak mechanical voice answer, "Trying to answer.  Not enough computing power."  

Well this computer was linked to several large university mainframe systems, so intrigued by the possibility of actually getting the computer to answer mankind's greatest question all were activated together and again the question was typed in the console, "Is there a God?"  After about two suspenseful hours of whirring and blinking lights again there was a very weak response, "Trying to answer.  Not enough computing power."

Now getting somewhat fanatic the expert called his colleagues around the country and after several weeks arranged to have all the principal computers in the whole country interconnected and again asked the same question.  Now the voice was a bit stronger, "Almost able to answer.  Need more computing power."

By this time the computer community across the entire world had heard about the pioneering attempt so there was a tremendous effort made worldwide and finally after three months time every single computer on earth was tied in to the research project and again the question was typed into the console, "Is there a God."  Lights flashed disk drums whirled, tapes rotated and suddenly the computers speakers boomed out "ON YOUR KNEES MORTAL, THERE IS NOW!"

My friends and colleagues, that is no longer funny...if it ever was.

While it hopefully takes more than a worldwide computer network to constitute deity, we certainly are well on the way to achieving the criteria for a higher power set forth in that old joke.  And it is said that some persons become quite devoutly attached to the Internet.  In fact my own wife felt that I had become to attached to it a couple weeks ago when I lost all track of time and spent almost all day one Saturday hypnotized by the attraction of being able to instantaneously leap from one Web site to another via HyperText.

Originated as a defense effort to secure computer communications against an attack Arpanet, as it was then called, linked four sites in the decade of the "60s.  By 1975 it had grown to about 100 sites, primarily universities and others doing defense work and research.  Another 100 sites had joined by 1983.

In 1995 there were an estimated 12 million computers linked to the Internet, half of them permanently attached, the rest PCs and laptops only intermittently on line.  Three of these were mine, one PC at home and one at the office, plus a laptop for travel.  I think the estimate of 12 million is low and have seen estimates up to 30 million.

The Internet is a network made up of about 50,000 lesser networks in 160 countries.  Traffic is about 20 trillion bytes per month and is increasing at a rate of 100% annually. Daily 50,000 new individuals join in.  It is a new planetary group wherein time and space have new meanings, national boundaries are largely ignored, and gender, race, religion, age and personal identity are completely irrelevant.  It is changing society, culture, hierarchies, economics, communication, language and thought processes.  It is also changing governmental financial management and reporting and may be the greatest force for public sector accountability since the advent of governance.

Speaking only for myself, I find surfing the Internet one of the most fascinating things I have ever done in my life...and I can do it from home.  The problem is there is not enough time to fully explore the mysteries of cyberspace.

Perhaps we should get on our knees to it after all, not in worship but in appreciation.  We'll hear more about the Internet and its children such as FinanceNet during the course of this conference.

CYBERACCOUNTABILITY

                                                            "...the real problem with business in cyberspace isn't providing security, it's creating an atmosphere of accountability."

                                                                                   Lynch and Lundquist

                                                                                      in Digital Money

Accountability is the duty to respond or give an account before a higher authority or power for a task delegated and/or resources handled.  Financial accountability is normally achieved by means of a written financial statement or report.  Cyberaccountability is achieved by an electronic document or report.  It is communicated in bits rather than on paper; at the speed of light, rather than by messenger, mail or publication; and unlike traditional practice may be achieved and audited automatically as a part of the normal operational process, often without the need for human action or intervention.

At this point I would like to pay a special tribute to the Argentine government and specifically the Finance Secretariat in the Ministry of Public Works and Services, some of whom we'll also hear from later today.   Argentina is the first, and to my knowledge, the only country on planet earth that so far has published all during a complete year its financial information and statistics on the Internet for all to see.   All four quarterly Finance Bulletins were put up in the Internet on a timely basis by Ricardo Gutierrez, Marcos Makon, Piky Frenkel, Alberto Arolfo, Carlos Alvarez and their great Argentine Accountability Team.  This included 1995 year-end financial results made public to the world during the month of March, 1996.  This is probably the most historic and laudable action in the field of governmental financial management and accountability of this century.  I hope that all of your governments will follow Argentina's leadership before the century ends, even though it will be hard to equal their timeliness unless you already have reforms under way.

Let's applaud Argentina for their historic contribution to cyberaccountability.

CYBERSHENANIGANS

                                                            "I think that's one of the great challenges that we face as we come into the cyber age - how we can use that computer the right way...the additional challenge...is to work with law enforcement authorities around the world, recognizing that this technology brings the world so much closer together in communication."

                                                                   U.S. Attorney General

                                                                   Janet Reno at March 29, 1996

                                                                   Weekly Press Briefing

The Information Age, introduced by the advent of the microprocessor 25 years ago, displaces the Industrial Age, brought about by the invention of the printing press 542 years ago.  It brings with it tremendous new risks, as well as tremendous new opportunities.  Another triumph by an Argentine, but of which Argentina might not be publicly proud, illustrates these risks, and caused the US government some humiliation.

Last December Argentine officials confiscated the computer from the home of a 21-year-old Argentine student.  One month ago the US Attorney General publicly charged him with illegally entering computer systems at the US Defense Department and the National Aeronautics and Space Administration, including the Naval Command, Control and Ocean Surveillance Center in San Diego, California, the Naval Research Laboratory in Washington, the NASA Jet propulsion Laboratory in Pasadena, California, the NASA Ames Research Center at Moffet Field, California, and the Los Alamos National Laboratory in New Mexico.  He obtained access to unclassified information about satellites, radiation and engineering but apparently did not access any classified information...or at least if so it wasn't admitted publicly by the government.

He first gained access through the Internet to a computer system at Harvard University's Faculty of Arts and Sciences, then moved into the US government systems.  He was also reported to have gained access to computers at the California Institute of Technology, the University of Massachusetts, and Northeastern University as well as others in Korea, Mexico, Taiwan, Chile and Brazil...all without leaving his home in Buenos Aires.

The Attorney General used cybersurveillance through court ordered wiretaps to gather evidence on the Argentine hacker but he is not extraditable under existing treaties.  One of the major problems of the  Information Age is that most people don't feel like they are doing anything wrong when they are just "borrowing," perhaps not even printing out, electronic data from across the world which someone left unprotected.

It appears that Argentina will have another very skilled computer security consultant available soon.  Many of the best such consultants in the US come from a similar background.  Some even begin their consulting careers from jail.

HYPERCHANGE

                                                            "You are living in the period of time that will produce more change for humanity than any previous era in history.  It is a time of extraordinary importance that will fundamentally reshape almost every aspect of your life during the next two decades.  Wholesale change is taking place in almost every segment of your reality - and the pace will only increase in the coming years."

                                                                                    John L. Petersen in

                                                                                     The Road to 2015

At the same time government financial managers are straining to  develop the skills tools and techniques necessary for cyberaccountability, they are faced with the stupefying challenges of hyperchange...the torrent of changes unleashed on all aspects of society which the Unabomber so aptly described. Navigating Cyberspace author Frank Ogden, also known as "Doctor Tomorrow," calls this the "River of Change" and he says the river is flooding the world...flooding it with technology.  Ogden says that technology makes the laws and breaks the laws whether we like it or not.  Key technologies over time were the plow which permitted man to farm, the stirrup which enabled him to fully control a horse, the astrolabe which enabled Portuguese sailors to navigate unknown seas, the printing press and movable type which caused schools in England to increase from 34 in 1480 to 440 eight years later and made possible the 300,000 new books now be printed annually across the world, and in recent years the flurry of new inventions which in turn spawn more new inventions.

Ogden, a Canadian and perhaps the most radical, flamboyant and controversial futurist of his generation (he was born in 1920), says that print is an outmoded medium and that the new aristocrats of technology now publish their ideas on computer disks.  By the time we hold our 20th Anniversary "New Developments" Conference Ogden says, "Within ten years, technology that is hardly out of the starting gate will change 90 per cent of our culture and society, as well as the way we think, learn, love, understand, work, and survive."

"One can no longer depend on big government, big business, or organized labor," declares Ogden. "Their days are numbered."  He points out that 40% of the companies that were on the prestigious Forbes 500 list of the largest companies in the world no longer exist.  "Ninety percent of all the goods, services and new technological developments that we will be interfacing with by the year 2004 have not yet been developed," he reiterates, gleefully pointing out that soon one 4.5 inch disk "made of eight cents worth of plastic beads flattened like a thin pancake" will be capable of holding magnetically "all the records and accounts of a midsize company" or the total content of 1,000 books of 300 pages each.  "All the institutions of the industrial age are disintegrating," he warns.  "The university degree was once a guarantee of intelligence, knowledge and power.  For most practical purposes it is now worthless," but "Individuals can now teach themselves  what they want to know, not what others think they should know," so today "The best investment on the planet, in any currency, is your own brain."

In the beginnings technology, and with it, change, was often unrecognized because it happened so seldom.  "But, whenever and wherever it did appear, life was irrevocably changed."  Now the flood of technology is creating waves of change.  Changes provoke more changes until we have hyperchange, excessive, unpredictable and likely to be uncontrolled change.

"No one is sure what is coming next.  Change itself is no longer predictable, either in acceleration, speed, direction or configuration," says Ogden.  Executives who can't make fast decisions find that "the new product they thought was so hot is, by the time it hits the global marketplace, overgoverned, overengineered, overpriced and over the hill.  This is why government grants are the kiss of death."  The lack of urgency of the bureaucratic process will cause competitors to gain the advantage against those who await government approvals. 

On planning under today's conditions of change Ogden says, "When change was nonexistent or painfully slow, we could plan what might be done next.  A plan could be tried, modified, and then put in place.  Time was abundant.  Now, because change is a constant part of our lives, there is no way, given existing knowledge, to plan for the multitude of technological surprises occurring every day.  One surprise can ruin an empire."  

Ogden's idea of long-range planning under today's conditions is planning for today's lunch.  He sounds a bit like the Unabomber when he says,  "Planners have problems anticipating what the next invention or innovation will be, so they are unable to cover the exigencies that will modify social structure.  Today the only effective planning is training for change.  Yesterday the best five-year plans belonged to the USSR and General Motors.  How is a corporation to survive if the planning process is erected in the quicksand of change?"

"Planning is not feasible.  You have no idea how long the journey will be, no sense of your destination or what will be required to get there.  You can only depend on the confidence that comes from experience...As the world enters the information age, you must rely on your experience and expertise to help you on trips to the unknown.  You are aboard a ship of change whether or like it or not."

Petersen is not as negative on planning but agrees that "A handful of extraordinary new advances in science are taking humans quickly and deeply into areas that will have profound implications for the future.  The process has already begun that will change every aspect of our lives."  He points out that "If you're an adult, during your lifetime science has learned more about how nature works than in the 5,000 years before you were born.  Fifty years ago, astronomers could only identify two galaxies.  Now we know that there are more than two billion.  Eighty percent of all the scientists who have ever lived are alive today...Some estimates say that the total amount of information in the world is now doubling every 18 months."

Hyperchange is here.  How can anyone be held accountable when everything is in a constant state of change?

This is the greatest challenge to government financial managers in the Information Age.

DIGITAL MONEY

                                                            "...a new world order is arising in mechanisms for value exchange among human beings.  Digital money is the cuneiform of a new age...Over the next ten years, the growth of electronic commerce will outstrip the growth of traditional commerce."

                                                                               Lynch and Lundquist in

                                                                                      Digital Money

How do we account for digital money?

How do we audit digital money?

Most importantly, how do we assure that digital money isn't digitally stolen, misused, mismanaged, or simply misplaced by being electronically erased?

In 1993 there were 1.3 credit cards in the United States for each citizen assisting in moving or borrowing $473 billion.  These transactions will be among the first be converted to digital money, The rest will follow.

The Internet is without a doubt, the centerpiece of the Information Age today, it is estimated that by the end of 1995 90% of all US major corporations were linked to it.  It is also estimated that 90% of these will experience at least one kind of security breach within one year of joining Internet.

A few banks are offering customers Internet access to account information.  Many more corporations are conducting electronic commerce pilots.   Some stockbrokers are operating on the Internet.   Governments must be very conservative here and let the private sector take the lead.

The ideal goal is full-scale EDI (Electronic Data Interchange) via the Internet.  Strong encryption is necessary to protect financial transactions on the Internet, yet this involves so many risks that the US government presently opposes because it might give an advantage to money launderers.  Many corporations are worried about its possible use to avoid detection by unscrupulous employees who might sell trade secrets to competitors.

The anonymity of the Internet user makes it possible to avoid accountability completely.

Lynch and Lundquist say that "Essentially the need for Internet security is just a symptom of the fact that no one has to be accountable in cyberspace -yet."  Going to the other extreme and imbedding identification in all users computers, smart cards, etc., would end all individual privacy since an individuals entire electronic life and credit history could be traced, possibly leading to a police state that would make Nazi Germany or Stalinist USSR look like a models of freedom.

Therefore, some balance must be struck between to much anonymity and too much authority, for us to really have all the undoubted benefits of digital money.

CYBERACCOUNTABILITY MECHANISMS FOR FINANCIAL MANAGERS CAUGHT UP IN THE VORTEX OF HYPERCHANGE

                                                            "Most of the contemporary and future history of the world through 2020 can be written in terms of the inexorable process of adaptation to the technological imperative."

                                                                             Carlson and Goldman in

                                                                                  Fast Forward

Cyberaccountability will be absolutely necessary in the coming years because there will no longer be hard copy records of any kind, nor visible, tangible audit trails.  All transactions and their support will be recorded digitally and filed magnetically. But there are tremendous risks involved where electronic media are employed and security measures must be taken which are just as technologically advanced as the financial management processes, perhaps moreso, since the Information Age also seems to be spawning a generation of brilliant informatics intruders intent on breaking into any system anywhere just to show they can do it, and others who see the path to electronic riches through digital fraud.

Government financial managers caught up in the vortex of the hurricane of hyperchange must develop mechanisms to achieve cyberaccountabily.  Obviously these will be based on those we now use to achieve paper-based accountability...the paper will just disappear.  We have to see that the money doesn't disappear with it.

The original accountability mechanism was a verbal report. This is where the word "auditor," as a hearer who gave assurance, came from.   Later the written papyrus-based, later paper-based financial report or "account" became the prime mechanism to achieve financial accountability.  It was necessary to "render an account" then in this century to issue annually audited financial statements.

We are now about to make a move just as dramatic as the move from voice-based accountability to paper-based accountability centuries ago.  We must move to cyberaccountability or digital-based accountability.  It will be quite a shock, especially to accountants and auditors.

Time does not permit a long discussion of this, but what will inevitably happen, in my opinion is that audited financial statements will soon become obsolete.   To me as an accountant/auditor this is pretty sad because most governments don't even have them yet and I have spent most of my professional career trying to help produce them.  On the other hand, there will be some tremendous advantages. Let's take a quick peek at how cyberaccountability may be achieved in Century 21.

Basically digits and digital data can now be arranged and rearranged in any sequence or order.  That is what manual accounting was all about, getting them in reasonably appropriate order for understanding and assurance.  The big difference is that it can now be done at the speed of light.  Therefore what is important is the digit-base or data base, if you prefer.   It must be correct, properly established, secure and accessible to those who need information without risk of unauthorized invasive intrusion.  Therefore the name of the cyberaccountability game is secure and store the data and assure its integrity permitting users to access and use it as needed.  We don't need to prepare financial statements.  The user will access download, analyze and organize the financial data however he or she desires.

Auditors, or whatever they may be soon called, will no longer issue opinions on paper documents, they will opine or give assurance regarding the integrity of the all important digit-base or data base.   Their work will devolve to something very similar to what it was originally.  At first auditors were real time, on-line hearers of verbal information.  Now they will be real time, on-line monitors of digital information.  They will develop their own tools for monitoring electronically on a continuous basis all data sent to the data base and all entry, modification and use of that data.  Much of the auditor's work will be done electronically, but major exceptions will be reported to humans.  Auditing firms will give on-line assurance that the data base is secure at all times and working properly.

Let's look at an example of this.  It's being called "data warehousing" by some.   Last July the State of Massachusetts in the US won the award for the "Best Data Warehousing Project for 1995."  State officials described the "warehouse" as more than just a database for decision support.  Financial, payroll and budget information that once took months to obtain is now available in minutes.  Old style after-the-action reports were phased out and more than 1,000 managers, financial analysts, budget analysts, accountants and auditors now have access to critical data in the Massachusetts government according to Emerging Technologies a special supplement to the monthly Government Technology magazine.  This is basically where we are going with the integrated financial Management systems being put in place by governments across the Western Hemisphere.  Our real problem is keeping up with new technology and the impacts its the related changes in everything we do.

Basically whatever we do today will be technologically obsolete by tomorrow.  Now let's talk about just two examples.

HYPEROBSOLESCENCE

                                                            "Some industry observers believe there will soon be 10 times more Web servers used for intranets than for the Internet."

                                                                    John Naisbitt's Trend Letter,

                                                                               April 11, 1996

Hyperchange accelerates everything.  Time itself is shrunk.  The greatest problem is that hyperchange leads to hyperobsolescence...everything new becomes obsolete even before its full benefit can be felt.   The best example I know is the fax machine.   I was saving my money to buy one for my home a few years ago when they cost around $700.  I was sure the price would drop as they do on all new electronic products.  Sure enough prices dropped.  Now fax machines go for just over $200.  I've got the money to buy one now.  But a funny thing happened on my way to the fax machine store.  Faxes are obsolete.  Totally and completely obsolete.  Not only the machine, the fax itself. 

Why would I today want to spend $200 on a fax machine when I have Internet access and e-mail capability in my office, my home and here in my room at this hotel where we are meeting?  I'm so busy that I rarely have time to answer mail or fax correspondence today, but if you want to communicate with me send me a e-mail and I'll be back to you within 24 hours.  Unfortunately, as the volume of e-mail accelerates it will soon be necessary to have an electronic assistant in the form of a program which assigns priorities to incoming e-mail, perhaps also automatically forwarding some items to others who may have more interest in them.

The other case I want to bring to your attention dropped on me like a bomb the other day.  How many of you have heard of an "Intranet?"

We have a new one at the World Bank but I did not know it by that name until recently.  An intranet is simply an application identical to the Internet using exactly the same technology, but with access limited only to the individuals within a company...or, soon to come, within a national government.

Basically an intranet can be used to post all company manuals, newsletters and other communications and in fact all company files of all kinds.  They are simply converted into internal "Web" pages and posted on the company's internal "Website."  To maintain security the company intranet is not linked to the Internet although some documents may be made available on both.

Draft documents can easily be circulated for comment on an intranet.  Different levels of internal security may determine access to segments of it.  Companies such as 3M, MCI, and Visa International are using intranets now for internal company communication across the globe.  Certainly intranets will also be useful to governments, especially because they are cheaper than all other forms of electronic networking.  An intranet avoids the need for special LAN cables because it runs on telephone lines which already exist.

But that's not the interesting part to us.  The March, 1996 issue of The Journal of Accountancy predicts that the LAN as we know it may soon be obsolete, and the personal computer as well.  All this means is that all the new and planned national and entity IFMS throughout the hemisphere will be obsolete before they get fully operative.

Instead of maintaining software on hard drives or servers software may be shared within the company and across the world using the new JAVA program, an operating system that can handle any application.   As a result cheaper models of computers with little or no memory storage capability may proliferate using services by renting applications from providers and paying only for the time used.  Those who see the hyperinformatics changes coming and adapt to first them will be the leaders in government financial management, as well as most other fields.

TRENDS MANY FUTURISTS IDENTIFY WHICH WILL AFFECT GOVERNMENT FINANCIAL MANAGERS

Based on a review of the forecasts of a number of futurists who have written books and articles recently here are some coming changes at the macro level of society and government that I believe will affect government financial managers across the world as Century 21 begins:

            ·           National governments are becoming increasingly ineffective and irrelevant in the global society.  There will probably be a proliferation of smaller national governments as tribalization, ethnic and religious fervor causes fragmentation of nation-states.  Because of the weakness of national governments global/regional organizations will be called on for a greater role in those aspects of governance which demand broad regional collaboration/enforcement, even though these too tend to be weak, hyperbureaucratic, and highly politicized.  Much power, however, will be devolved from the faltering nation-state to the local level where provinces, municipalities, NGOs and even private organizations will play major roles in sharing the burden of governance subject to monitoring by citizens groups.  There will be a great need for highly qualified  professional government financial managers and auditors at these levels who must be totally cyberlingual.   There will be no specialists or experts in information systems or "informatics."  Everyone will be expected to be able to apply information technology as necessary within their field of specialty; however, most financial managers will be generalists in the field of governmental financial management.

            ·           Violent crime and terrorism will increase requiring governments to expend much of their time and resources upon law enforcement and administration of justice, including imprisonment. Electronic surveillance and probation mechanisms will somewhat reduce the demand for prisons.  However, they will also be costly.

            ·           Sexual promiscuity, drug usage, impulsive gambling, and general lack of individual self-control will continue to increase causing consequent increased costs to government for treatment of addictions, AIDS, and counseling services.  Health care will be so costly that governments will have to consider limiting it, privatizing it or abandoning it.  Government owned or authorized gambling will begin cost nearly as much as the revenues it produces due to the need for rehabilitation of bankrupt gambling addicts.

            ·           Expenditures for care and treatment of the growing number of elderly will continue to rise offset somewhat by an acceptance of some degree of euthanasia in some cultures

            ·           Revenue sources will top out and governments will not be able to finance the demands for services causing serious conflicts among elected officials and levels of governance and creating great stress for financial managers.  Citizens will rebel against further tax hikes but will accept charges reasonably related to services received.  Many will flee urban areas for lower taxed rural areas from which they can telecommute.  This will in turn reduce the tax base and cause even greater pressures.  Major controversies will be pushed to the lowest level for solution.  Where solutions ar not found, ungoverned anarchistic geographical areas may develop possibly governed by competing warlords.   This is turn will cause population shifts and new burdens on those areas which have found solutions.

The role of the government financial manager is the circumstances jus outlined will be extremely stressful.  There will be major disagreements about how to restrict expenditures.  We've just sen a taste of this in Washington this year as the Republican dominated Congress resisted and restricted spending by a Democratic President.  This will occur on every level of government.  And it will get worse.

On the positive side government financial managers can now do what they have longed to do, and at low cost.  They have the technology to establish and maintain on-line data base of all financial information from across a country, to mold it into any format they desire and to furnish to governments timely and useful information updated daily. 

Technology is our best friend and our worst enemy.  We must maximize the friendship by using it positively.

WHAT WILL THE 20th ANNIVERSARY "NEW DEVELOPMENTS" CONFERENCE LOOK LIKE?

Mort Dittenhoffer and I have developed a practically a tradition of setting the dates and sitting down to plan the next conference as each conference draws to a close.  I haven't consulted Mort yet but here are my predictions:

            ·           The brochure will have those stupid palm trees on it.  I've been trying to get rid of them for the past ten years but they appear every year.   Even chaotic change doesn't affect palm printed trees.

            ·           Mort will probably have gained some degree of maturity by the year 2006.  After all he'll be 92 years old.  (By coincidence I'll be 10 years older too, but no more mature...unless genetic engineering has made unforeseen progress in this area.  If necessary, we will both make arrangements for computer-assisted knees, backs and enthusiasm).

            ·           Mort will be head of the Board of Regents of the University System of the Participatory Republic of Florida Sur, a new Spanish-speaking nation only recently accepted into the 350 member Organization of American States.  I will have changed jobs five times and my new employer will be a new co-sponsor of the conference, maintaining the only twenty-year tradition left on earth besides our conference itself.

            ·           There will only be about 50 persons participating here in Miami.  Of course, there will be around 250,000 participating by interactive videoconferencing across the planet.  They will represent most of the 2,000 nation-states which will then be members of the United Nations Organization.   About one-third of the 250,000 cyberinteractive participant financial managers will be robots including all of those from Japan.

            ·           The topics, including silly prefixes, will not resemble what we discuss here this week, all of which will have passed into obsolescence by 18 months from today.  That's why we need conferences annually and soon will need them more often.  In fact, due to the accelerated pace of change the 20th Anniversary Conference will actually be held within the next three years starting simultaneously with the closing session of the 19th Conference.  From then on all conferences will be continuously held in real time on line by videointernet.

            ·           The language used will also be quite different (see the Glossary of Cyberterminology annexed to my formal paper) because of the changes imposed by technophonics which will result in every third word uttered incorporating the technoprefix of the day.  Those we now use such as "cyber-,"  "hyper-," and "digi-," will be long forgotten.  Perhaps a common prefix symbol such as *. (pronounced "hic") may be used for all prefixes greatly simplifying their use.  This will not make any difference anyway since digital voice conversion/interpretation will have made written words obsolete. (I wonder how Mort will get the palm tree on the electronic invitation).

            ·           The worldwide conference will be thought-transfer enhanced since those remaining human government financial managers will be severely hearing impaired like most of the world's citizens as a result of having heard too much loud popular music.

            ·           Mort will make the conference keynote address in Spanish while I interpret it in American Sign Language.  We will celebrate Mort's 100th birthday at the banquet on the fourth day of the Conference.  Sorry, Mort but it's that accelerated time compression again.

            ·           There will be no speakers.  Every participant will just think about what they would like to say about each session's topic and the Internet's cyberfacilitator, officially known as the Globally Organized Disseminator, but usually referred to by its acronym, will instantaneously transfer to each participant's mind the appropriate conclusions and recommendations.

CONCLUSION

Some final serious words.

Cyberaccountability in government will be accomplished despite hyperchange.

It will be accomplished by gaining expertise in the use of informatics and other new technologies to achieve it.

It will be accomplished by highly qualified professional government financial managers who constantly renew their knowledge through continuous self-education.

It will be accomplished because financial managers will find ways to guide and influence even the most chaotic change.

It will be accomplished because citizens will demand and get cyberintegrity in all information systems.

It will be accomplished because civililized governance requires it.

It will be accomplished because you, each of you, and others like you across the globe, will accomplish it.

THREE PARTING SHOTS

                                                            "Technology is like a steam roller.  If you are not on the steamroller, then you are destined to become part of the road."

                                                                                           Anonymous

"Nothing is constant but change!  All

existence is a perpetual flux of

"being and becoming"

                        Ernst Heinrich Haeckel (1834-1919)

                        German Biologist 

                                    The Hyperchange                                                    Victim's Prayer

                                     God give us the grace to accept with serenity the change that technology brings, the foresight to prepare for it in advance, the courage to manage it if we can, and the wisdom to accept it whether we like it or not.