Lecturers at the training are:

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1 FINANCIAL MANAGEMENT AND CONTROL AND RISK MANAGEMENT IN DUTCH PRACTICE Training held on 3rd November 2011, from 09.00hrs o hrs at the Agency for National and Regional Roads. Lecturers at the training are: Robin Zoet Johannes Zwart, experts from the Netherlands. The training was attended by: Trajko Spasovski, Head of Public Internal Financial Control in the Ministry of Finance, ad co-trainers Mira Chanovikj Petrovska from municipality Center and Ljupka Georgieva from the City of Skopje and 37 participants from municipalities. Trajko Spasovski: Good afternoon. I welcome you on behalf of the Ministry of Finance and the Public Internal Financial Control. Today, you are invited to the training on "Financial management and control practices and risk management." This training takes place within the Twinning project "Support to the process of fiscal decentralization by strengthening the capacity for sound financial management and internal control at central and local level" and is in cooperation with the Dutch Ministry of Finance. This training is attended by participants from 40 municipalities in Macedonia and it aims to accelerate the implementation of the system of public internal financial control in municipalities. Now I will ask the Dutch experts to presenters themselves. Johannes: We have prepared for you a presentation that relates to financial management and control within the municipalities in the Netherlands. We reviewed the manual for financial management and control of the Republic of Macedonia and would like to show you today how financial management and control (FMC) is applied in the Netherlands. One of the more important elements that we will focus on today is the budget management and control and risk management. First of all, this morning we will talk about budget management, and in the afternoon we will talk about risk management. For today we prepared 35 slides. If you have any questions about the material, please ask a question. 1

2 First, I would like to present myself. My name is Johannes Zvart. I am the controller in the municipality of Nepal. It is a municipality with 30,000 inhabitants. I am responsible for implementing financial management and control. Robin: I am Robin Zut, I come from the municipality of Leiden. I am responsible for advising on management and financial control matters. I am Head of Department for Internal Audit and Financial Advice. Now I ll ask the co-trainers to present themselves. Mira: Good afternoon. I am Mira from the municipality Center. Head of financial affairs department. Ljupka: Ljupka Georgieva, Assistant Head of Finance in the City of Skopje. Johannes: The twinning project has for its aim the implementation of the Law on public internal financial control. There are three important elements in this law: leadership accountability, independent internal audit and development of methodologies and standards for these two elements by the Central Harmonization Unit (CHU). Today we will mostly concentrate on managerial accountability, and we will shortly talk about the internal audit. Then we will tell you something about the structure of the municipalities in the Netherlands, about the political and managerial controls, risk management, we will see several examples of controls that you can use in managing the risks in your municipalities, and eventually we will talk about internal audit. As you can see the two most important elements are displayed on the slide, it is budget management and risk management. Budget management is regulated by the Law on public internal financial control. First we will start with a practical example of the manner in which invoices are paid in the municipalities in Netherlands. But before I do that I will ask Ljupka to explain the process of paying the ninvoices in municipalities in Macedonia. Ljupka: I will explain the payment process in the City of Skopje, and this process is generally observed in all municipalities. Financial documents are first received in the archives of the municipality and are recorded by number. According to the content of the invoice that is sent to the relevant department which conducted the procurement. The department checks the invoice and if it is correct it confirms it for payment. Thereby we check out the contractor / supplier, the contract, the amount of the invoice / situation, the item of the budget from which the invoice will be paid. The controller signs the invoice for payment and the Head of the Finance Department confirms it. From here the invoice is sent to the procurement department, where the price is controlled. After that the invoice is entered in the internal book in the Department for Finances, it is stamped and financially controlled (whether is according to the program / budget item and whether there are enough resources for that purpose). The completed documentation shall be recorded in the Department for planning and executing the budget. The date of invoice and payment deadline are checked, after which the payment order is prepared. Signatories to the order are two persons authorized by the mayor. Due liabilities are reported to the Treasury of the Ministry of Finance which will perform the payment of the invoice. This procedure, with some minor differences, is followed in all the other municipalities. Johannes: This was an example of handling invoices in your country. Now I will tell you how this process is carried out in the municipality of Nepal. We try to perform the complete checking 2

3 with a minimum number of controls. I think the process described by Ljupka has too many controls and steps to follow, and therefore that is not the most efficient way to work. I'll show you something that you might agree with..but if something is not clear enough to you, later in the day, we will again go back to it and explain it in more details. The process begins when the invoice is received in the Department of Finance. The invoice is scanned and entered into the computer and then sent by to the Head of Department or budget manager i.e. person who is responsible for the budget from which the invoice will be paid. The Finance Department act only as a mailbox. Employees in this department only check the number that is later recorded in the archive. So, the invoice is sent only by mail to the head, and physically it remains in the finance department. Question from participant training: Who is a budget manager? Johannes: Budget Manager is the person responsible for the budget, that person is a person to whom budget was assigned. This person is also assigned tasks to perform within the given budget. Later we will talk more about this person. Now I will continue explaining the process of flow of invoice. The Head of Department in charge of the budget receives the invoice via . He just opens the , check the invoice and should do only two things: to determine the budget from which the invoice should be paid and to record that, and the second thing to do is to approve the invoice (checked / signed). Such checked and approved invoice is send by mail to the second signatory, financial officer, according to the principle of four eyes. The financial officer who received the from the manager also needs to do two things: to check the code of the invoice and if it is correct to approve the invoice. If this is not the case the invoice is sent back to the head of the department. The approved invoice by the principle of four eyes is sent to Finance Department where it is entered into an electronic archive. Once a week they make a list of invoices that need to be paid. The system automatically calculates 30 days for payment from the date of reception of invoice. It is a standard term of payment. So the system itself makes a list of invoices to be paid on a certain date. Once the list is complete the Finance Department is preparing for payment. Payment is made with the approval of two people from the Department of Finance, for whom the bank in which the municipality has its account is previously notified. You may notice that the mayor is not involved in this process. Neither the secretary has anything to approve. The entire approval process of payment has been delegated to the manager who is approved with a certain budget, and payment is made by two persons who are employed in the finance sector. Thus the mayor and the secretary can only deal with policy, not financial transactions. The Budget Manager is responsible for financial transactions; he has the authority to perform the assigned task and has a budget for this task. The most important thing in this process is effective segregation / separation of functions, there is always at least two persons responsible for approval and payment of the invoice. Do you have any questions? 3

4 Participant in the training: Who confirms the invoice and the service performed? The fact that anyone can submit an invoice to the municipality does not necessarily mean that the service was performed. Johanes: that is a responsibility of the budget manager i.e the person in charge of the budget, which in most cases is the head of the department. Ok, I will now tell you how the municipalities in Netherlands are organized and how they function. Each municipality has a Council, a mayor, who has several associates, and a secretary responsible for the municipal state servants. Within the organization there are also a managerial board, heads of departments (3-6 depending on the size of the municipality), as well as budget directors who are persons authorized for managing the budget in order to fulfill a certain goal within the allocated budget. The secretary, the managerial board and the heads of departments are those who may be authorized for the budget, whereas the mayor is only responsible for the political decisions and cannot interfere in the budget. Our organization looks like a send clock the upper part refers to the politics, the lower part is organizational and the connection between is the secretary who coordinates the political and the organizational structure. The Council is elected each four years; the mayor and the associates are appointed by the Council, and the remaining part are the employees. If we look at the objectives and the tasks of the municipalities we will realize that the central government has delegated a significant part of its responsibilities to the municipalities, for example, education, security, sport, infrastructure, public areas, libraries. The municipalities will reach these objectives by using the policy of governance and regulations. Thereby the following costs arise: investment costs, costs for direct maintenance policy and organizational costs. The income sources in the municipalities are: central government, local taxes, selling of lend. However, financial problems may occur at any time, since we tend to spend more then what we can afford. This deficit can be covered by bank loans. in the Netherlands all municipalities cooperate with one bank which is named the Municipal Bank of Netherlands, which has a high AAA credit ranking. This enables offering favorable conditions for credit taking. All municipalities conclude a contract with this bank, in which way they can, in an easy way, by just making a phone call, provide the necessary financial means. 4

5 I can show you some figures from the municipality of Leiden. The eight column presents the long-term debt, or the credit for which we have previously discussed, which in this case is 140 million euros. As you can see these credits may be used for financing some investments. The fixed assets may be the buildings or some ongoing works, such as construction of roads. the second table is an illustration of the expenses and benefits of municipality of Leiden in the amount of 500 million euros. Now I am going to talk about the responsibility, i.e the accountability within the municipality. I will address more the political part of it. The Council is a very important subject. It is the body with the largest authorizations in the municipality. It is a body that approves all the activities in the municipality, and a body that provides a framework for the work f the mayor and his associates. At the same time this body performs controls on the work of the mayor. There should be a political consensus within the Council. The Mayor and his associates just perform the daily tasks. For our municipalities it is very important that the Council approves the annual plan for the work of the municipality, designed by the mayor and his associates. The plan describes the objectives and the necessary financial means to achieve them. The annual plan is divided into political programmes and is a result oriented plan. At the end of the year we prepare the balance sheet, which should also be approved by the Council, but it cannot be included in the annual plan, since it cannot be predicted one year in advance. Therefore new proposals continuously arrive from the mayor and his associates, and go to the Council for approval. Within the political part there is a planning and control cycle. I say it is a cycle because the process goes in a circle. At the beginning of this process which can be names a budget process, we plan the activities for the next 4 years. It is a document prepared on a high level, bu a document which is not detailed and large, about 50 pages overall. Then we have the annual plan for the first year, which is more precise and detailed plan containing the expected results and the budget needed for that purpose. This plan also should be approved by the Council, so to allow the mayor and the associates to act upon it. Throughout the year the mayor and his associates prepare a report on the activities, the achieved results and their compliance with the budget. At the end of the year the balance sheet is prepared which states all achievements. This, generally, is the political process of planning and control. The first two elements concern the planning, whereas the two reports represent the control. I talked about the political cicle and control, but there is also a managerial cycle and control, for which Robin will tell us something more. 5

6 Robin: As already mentioned there are two different cycles -political cycle and management cycle. And here we come to the crucial thing about the system we use in the Netherlands, which also is an important part of the Manual for Financial Management and Control, and which refers to the segregation or separation of responsibilities. On top, the Council and Mayor prepare a plan and set the priorities of one program over another, while the organization is responsible for carrying out those plans. This contributes to democracy and transparency in conducting the processes. Here in Macedonia, in your organization, you have the mayor. Some municipalities have a secretary, heads of departments and sometimes units within those departments. I would like to know in how many municipalities in Macedonia the mayor is the one who approves all expenditures? Participants: In all municipalities. Robin: This is a very important aspect. It relates to providing authorization for spending the budget. Once the political cycle is completed, and the mayor and the council have agreed on the budget concerning the annual plan, in the Netherlands the entire budget given to the Secretary because it is the person with the highest authorities, after the Council. You can make the budget based on the agreements for the objectives, and therefore, the task of the organization is to perform all activities to achieve those objectives. This is a great asset to the Mayor and Council, because they only need to focus on achieving the goals and monitoring the stage of achievement and the results, while the organization can focus on activities to reach the result..to be able to carry this out you should first look at the programs and split them into activities within each department. Have in mind that in the Netherlands there are both large and small municipalities, the later consisting of only three departments, where consequently, the heads of the departments are also the budget managers. However, there are also large municipalities with 10 or more departments, where within each department there are multiple units and the heads of these departments can be budget managers. Budget managers can sometimes be the people under the heads of units. When we talk about budget managers we refer to a person responsible for certain activity and a person who has the authority to spend the budget allocated for the activity for which he is responsible. Now let's see how the budget is allocated. As in Macedonia, in the Netherlands too, the Council makes an annual plan, which consists of several programs, such as sports, culture, libraries, youth, education, infrastructure, etc.. Then the mayor and his associates decide how to divide the program. This is only a way through which you obtain specific activities. The parts of which the program is composed contain more detailed information. The program may consist of several parts (products). Note that the program and the product is what we want to achieve, while the activities are the way to achieve that. We may have a case where three activities will be linked and will apply to one program. It is possible that one department will be responsible for only one program, but if there is a department of urban planning, this can be responsible for carrying out activities that are part of different programs. If urban planning department is responsible for activities concerning the construction of sports facilities, it may be associated with program 1. If you do reconstruction and renovation of a school, it might be associated with a program of education, which means a different program. Third activity of this sector can be the construction of roads, bridges. Hence, the urban planning department should develop a good plan on how to carry out all these different activities. Because of this they should make separate, or various cycles for control of the budget. 6

7 The political cycle refers only to the top management, to the programs and the products, whereas, the management cycle refers to activities and sectors. Certainly, the management cycle resembles the political cycle. We meet the heads of departments and discuss the political part. We have the budget plan and discuss what activities should be conducted within the municipality overall and how we can accomplish all the goals of the municipality. Also, another important thing is to decide which department will be responsible for a particular activity. All this is contained in the plan of the management board. The plan also contains the method of division of the budget among departments. Each Head of Department strives to get as much money and talks about it within the Board and ultimately the Secretary makes the decision. When the discussions will have finished, the Department already knows which activities should be performed and is responsible for and what budget for carrying out those activities is on its disposal. By granting a budget they have the authority to spend that budget. Then, according to its internal plan, the Department should consider whether they have enough capacity to carry out the activities or should consider hiring / employing more people. It is all consisted in the plan of the department. During the year assessments for the achievement stage of the activities is made, along with a report which the Head of the Department prepares and submits to the Board. Most important problems in the implementation of planned will be communicated to the Mayor. Depending on the policy of the municipality plans are prepared every 3, 4 or 6 months. Certainly at the end of the year the Head of Department must prepare an annual plan. It is the same cycle of planning and control as before, based on what we call a vicious circle, a continuous process of planning, executing, checking and reporting. Before continuing if there are questions regarding the concept that I have described; for the difference between the political cycle and the management cycle. Participant: I want to know who participates in the Board? Robin: It consists of the secretary and heads of departments. Trajko: Here's called colleague meeting. Robin: In the Netherlands when we talk about the Colleague meeting we mean of Mayor and his associates. The term is not important. In the Netherlands, the Mayor does not attend meetings of the Board. Due to the allocation of duties, the Secretary communicates with the Mayor and the heads of departments. He is the relationship between them. Many of you present today work within the Departments for Financial Affairs. I want to present you the Department for Financial Affairs in the Netherlands, or in the municipality of Leiden specifically. First I will present you the financial department and then I'll show you what instruments and assistance it provides to the Head of the Department in its activities. We have three units within this department, among which is the Department for accounting and payment. It is responsible for registering the debtors (for outgoing invoices) and suppliers (for incoming invoices). It is responsible for everything in connection with the bank and internal payment of bills (Treasury). 7

8 The second department is the Department of budgetary coordination which has 3 important tasks. First is the coordination of the budget cycle. What you should know is that they do not make a book of documents / plan. They only make coordination or make only certain forms and ensure that each department will fill in these forms with the corresponding activities. They also are responsible for submitting information to managers. It is a system through which each manager authorized for budget, can have insight into information. Lastly we have the Department of Budget Control. It has a financial advisor who helps all heads of departments. They discuss with the heads of departments and persons authorized for budget (budget managers). Thus it helps to solve problems in the budget cycle (planning, execution and reporting), but also in terms of some economic and financial problems in that department. When I looked through your manual, I noticed that you have the same diagram, the same organizational structure as in Leiden and I think this organizational structure of financial department is good to apply. Much of the responsibilities now go to the person authorized for budget (or budget manager). I want to introduce several important instruments that the Financial Affairs Department may offer to the heads of departments. An instrument of the Department for accounting and payment is workflow or sending invoices electronically. I will later tell you something more about this software. With the help of this software it is easier to follow all the liabilities, which shortens the period of processing the invoice, within an organization, ie the whole process of managing the invoice is reduced. The second instrument which I will introduce later is the dashboard. It is similar to the dashboard in the car. While driving all the information is before you (how fast you drive and other information) and thus you know when to break or when to accelerate. And finally the financial advisor as a tool. As I said earlier, which is a personal approach, or a direct contact. He can assist the Head of Department to plan its budget because he really knows what a budget is and how it should be running. This is a workflow that we have. Johannes has already presented the system of electronic delivery of invoices. This is just an example how that looks like. In Leiden we have established the following rule. If we have an obligation greater than 5000 euros, it is entered in the registry or system workflow. In fact, when the bill arrives, the system immediately connects it with the obligation and the invoice is automatically sent to the Head of Department. He does not have to re-fill all the information (data) specified in the invoice, but should only agree and approve the price which is in the invoice and check the executed delivery of the same invoice. It is very easy for him because he can immediately see the electronic copy of the invoice and can approve it by clicking (check) on it. Before we introduced this software in the system in Leiden, many invoices used to get lost. For invoices to arrive in the Financial Affairs Department about 5 signatures were needed and somewhere between the second and third signature the invoice used to get lost and no one knew where it was. Using this software we always know 8

9 where the invoice is. Because the invoice never physically leaves the Financial Department and the system knows whether the first or the second authorized signatory have signed the invoice. This is just one example of how the software can help in the process of sending invoices. Now I want to present the dashboard. Whenever the Head of Department will sit before a computer the dashboard appears. The purpose of this dashboard is that it always displays the needed information for performing a particular activity (insight in the current budget and remaining budget). For example, if you click the link you receive information about the whole year, and if clicked on another link you receive information about the budget plan for the next 4 years. But you can also receive information from non-financial nature. For example, if you click on another report, and if this is a matter for the Department of Urban Planning, you can receive a report or find out information on how many houses, or households there are in that municipality, how many new houses are built in that year and how many houses should be built. Also, another important information that the head of the department must have is the information about its employees. (Insight into vacation leave, the percentage of absence, sick leave, etc.). One of the reports in the dashboard is the financial information. This is similar to Excel tables that you provide to your heads of departments. Here it is automatically associated with the workflow and the system of bookkeeping and information is always current in real time. It is also very important that information is always available online. Whenever the head of department wants to look at the budget, he does so only by logging in. There are several columns in this table. Each of them has a different function and refers to a different thing. For example, the first column, it is the budget preliminary agreed by the council and the mayor in the annual plan. I do not know how it is in Macedonia, in the Netherlands however, it is always done up until mid- November. It is at this time decided on the budget for next year. And of course, during the year, some changes in the budget may occur. There are three types of changes in the budget. For example there may be changes in the budget within the department itself. If these changes are within the budget given to the department and within the program, the Budget Manager or Head of Department has the authority to change the budget. He can move the amount owed from one activity to another. Yet, If this concerns several products, the mayor has to be consulted about because the mayor decides which products will be delivered / performed and if the budget changes are related to more than one program, then the council must approve it. And therefore, I can say that the Head of Department may propose a change, but also the council may propose certain changes based on annual or six month report. So the third column 9

10 of this table is the current budget. Every day the Head of Department has insight on the real state of the budget. Since we also register the liabilities, this table may contain information about the liabilities. These are orders (contracts) concluded with the suppliers. When the supplier has completed his obligation he sends an invoice. Once the invoice is received, the liability turns into an expense and the balance situation changes. The last column refers to the head of the department in order for him to have an insight into the budget from which payments can still be made. (i.e the difference between the previous two columns, the budget decreased by the due liabilities). Therefore, this is a great asset to the heads of departments, but is also an advantage for the Financial Affairs Department, because in this case the heads of departments do not have to go every day to the Financial Affairs Department to receive information on the state of their budget. Finally, the Financial Advisor, or the personal / direct contact. He explains and knows all the financial rules and regulations. This is all for budget management and decentralization of the budget. What we have presented is included in the Law on public internal financial control, as well as in the regulations which came into force as of 1 September this year, and in the Manual for financial management and control. Most of the municipalities are still at the beginning of implementation of this. Now I would like you to think about the problems you expect in the future with the implementation of decentralization of the budget. Respectively for your own municipality. We will discuss this in 4 groups, and later one person of the group will present about the problems you expect in the future. You have 20 minutes for group discussion. Risk management Johannes: I'll move to risk management. Risk is an event that could have a negative impact on achieving objectives. Risks may relate to the time frame, in case of falling behind the schedule, and scope of the budget i.e exceeding the limit. Risk management is a reactive decision making and preventive action to prevent or alleviate the risks. This process of risk management entails thinking about how to prevent a particular situation or adverse event. For this purpose the person managing the risks in addition to using common sense can use the appropriate literature in this area and numerous available manuals for risk management. There are several types of risks. Depending on the size they can be classified as large and small, depending on what they refer may be political, financial and risk of reputation damage. 10

11 The most important thing in managing risks, once they are detected, is their monitoring. This requires continuous review and monitoring of risks that occur during the execution of activities, not to be done only once a year. Anyone who adopts a decision has to foresee the risks arising from it, and also need to find a way to control them and protect from them. In this process management transparency plays a major role. This means that the mayor should consult with the council when making decisions, the Council has a better insight on everything and can react if they determine that this decision carries a high risk for the municipality. Robin: I'll show you practical examples of risk management and how the risks are more visable if divided into several groups. The first group of risks are at the bottom (slide 24). They are insignificant when they are unlikely to occur, and even if they arise the consequences from them are small. An example is the preparation of tax certificates. The copy machine may breakdown, and you may fail to prepare, for example, the last 3 certificates. This is unlikely to happen, but even if it does the consequences are small. The second group of risks include risks that have small effects but are likely to occur. For example, if taxes have to increase by 2%, and by an error in the system, an employee has inserted 1% tax increase instead of 2%. The effect is small because it is 1% only, but this may be happening continuously and will cause an organizational issue. The third group of risks are those that are rather unlikely to happen, but if they do the consequences are enormous. Example, the building where state officials work is set on fire. This fire can cause financial problems later. The fourth group of risks are those in which the likelihood and consequences are high. Example, infrastructure project in the municipality. Each group of risks requires different measures. The first group of risks does not require action. If you take action, this may be more expensive than the risk itself. In the second group the way the operation of internal control should change. When calculating the tax, the rate of tax and the procedure for the calculation should be checked twice to see if it is correct. For the third group of risks that may also cause financial problems, you should determine whether we have the opportunity or enough stocks of financial assets to cover the risk or we need an insurance company instead. For the most significant risks, i.e the fourth group, you need to have a different procedure or approach. Example: discuss with the Mayor, prepare monthly reports of high level etc. When talking about the second or organizational and the third or financial risks group, this is how we deal with: The goal is to see whether we have money to cover the risks. We ask all the departments to inform us about their own risks, what kind of measures they take, what is the impact from these 11

12 risks and at what point or time they expect to happen. The assessment of risks is exchanged within the departments so that each of them may reconsider if something was missed out and be added. We also have a national database of risks which includes risks of all municipalities in the Netherlands. This database helps us to see whether we have determined that covered all risks. Foe example, the municipalities in the Netherlands pay social benefits, but unemployment is a growing trend. Certainly this will in the future increase the social benefits to the municipalities for which we need money. It is difficult to predict the rate of unemployment in the future. We in the risk assessment decided, in fact assumed that the unemployment rate in the future will increase by 50%. Another example: we made an agreement with a neighboring municipality that part of the bypass would run through that municipality. Written agreement was not signed. But now, another party has come to power in that municipality and does not agree with our project, i.e the ring to pass through their municipality. When we think of financial risks, you should have insight into your reserves. There is a computerized statistical method of calculating the risks to see if you have sufficient funds to cover the risks. The computer makes two scenarios for the risk. When you have two risks you have four scenarios: + + Both risks occur - - Both risks do not occur + - First to occur, the second is not - + First risk does not occur, but the second does But if you have 50 risks, you have thousands of scenarios and diagram of the risks. What is important is the choice of the council as of how much in % of the risks will be covered. If we want to cover 90% of the risks, we need to have, under such scenarios on the computer, 4 million euros reserves. And we have 3 million. We are short of 1 million. We discuss this when preparing the annual plan. The choice is either to spare 1 million euros from our budget reserves or to give money to an insurance company. This is all for the second and the third group of risks or financial risks. Now I will tell you how we control risks which are of importance to us. Projects are dangerous category. In Europe, projects exceed budget by about 25%. We first start by identifying the risks and measures. Example: this video shows two children who like ice cream. The father gives the smaller ice cream to the younger child and the bigger one to the older child, but the little one cries. The father trying not to spoil his own vacation eats part of the larger ice cream and now both ice creams are the same size. He brings back the ice creams to the children and just as they we about to start eating the little child accidentally drops the ice ream and starts crying again. So even having the best risk management, if something unforeseen happens people will say that the whole system is not good. 12

13 Methods for Risk Management For unforeseen conditions some standard measures should be taken into consideration. For each project, documents have to be prepared. First thing is orientation and scope. Determination of the participants (all participants who make decisions, mayors, private companies, stakeholders, citizens, the project objectives, for example: whether the project will allow faster transportation of people and will it bring more profit). The second thing is the identification of risks. Should they be considered from multiple viewpoints such as: legal, organizational (if there are enough people or should more be provided), technical (to hire experts to solve technical problems), urban (can not build a bypass if there needs to be built a sport facility, or if the owner of that land wants to sell it), financial (interest rates), social, political (elections in neighboring municipality in which the bypass should be constructed; to conclude a written contract). The more risks are predicted, the better the possibility to cover them. Third step is risk analysis and determination of priorities. Categorization of risks (rankings based on categories), measuring probability / impact. Fourth step is taking measures and actions that can be corrective or preventive. The last step is monitoring of risks. That is to check whether the risks still exist and to perform testing of the measures. If the risk is overcome should no longer be wasting time with. Example: If you build your pool and the supplier submits invoices, but you lose them the contractor will not receive money for the work done. He will stop building the pool and you have a half way finished pool. In this case you will need to find a new, more expensive contractor. Here the process owner is the head of the department for urban planning. You should consider how much money or what the effect employing another supplier will be, then that action should be taken to avoid the loss of invoices and to secure a timely payment of invoices. The person responsible is the head of financial affairs department. This control will be carried out on a particular date and the next control / review could be at the end of the construction of that pool. 13

14 What follows is a brief exercise in relation to risk management, to see the similarity between the Netherlands and Macedonia. You should select a process in which you would identify a few risks, i.e you should fill in the field of risk management. You should yourselves group the risks, taking into account the measures stated in the manual. I find it difficult to list individual risks. For example, building a bridge is not a risk, the risk is if during the construction the bridge he collapses. A delay in the construction is a consequence, but what may be the reason? If you believe that contractor is not experienced, you should stop hiring him. What would be the measure? To make a contract with a contractor who has already built over 10 bridges. Internal control and its elements Johannes: Now we will look into the internal control and its elements. In each municipality there should be control of the budget on the political and managerial level ie requires control of both cycles previously described. Any task that entails adequate budget should be subject to control. Basic requirements to perform a control are: competence of the heads of departments; legal regulation for persons who are responsible for spending the budget; delegated powers for decision making, using the principle of four eyes which is a reliable system to prevent a person to spend funds unjustifiably; regular system checks and sending invoices electronically. To operate this system of internal control it is necessary to appoint a person to be responsible for financial management and control. That person can be the head of financial affairs department or an expert for control. In small municipalities there is a problem in the implementation of internal control, due to the small number of employees. It can be overcome if a person is entitled to be responsible for multiple projects, but the principle of four eyes should be observed in order for that person to be limited from a complete freedom to spend the funds. For example, by delegating tasks for a certain project the mayor can be responsible in terms of policy enforcement and another person, for example the head of a sector may be given the responsibility to control the spending of the budget. This means to delegate tasks within the municipality according to its capacities. Sending invoices electronically is an effective way of implementing internal control. This is done so that the invoices first arrives at the central level, and once scanned in the finance department they go for approval at the head of the department who is responsible for the project to which the invoice refers. Once the control by the principle of four eyes is performed, the invoice is approved by two persons it goes back to Finance Department. When the invoice is due for payment, two authorized signatories of the Finance Department approve the payment and the bank pays the creditor. This payment method is good because there is segregation (separation) of functions, i.e. minimum of two persons are liable for any approval. Second good feature of this system is that neither the mayor nor the council are involved in making financial, which means there is a simplified payment procedure and saving time. This payment method is simple and efficient and contains high levels of control. Robin: I'll talk about the relationship between risk management and controls, and for the connection between the control and the internal audit. 14

15 In all processes (payment of invoices, payroll, etc.) there are controls that primarily focus on the changes. For example, when calculating the tax, if we have 1000 houses, and during the year 10 new are built, we need 10 new calculations. Each process has a process owner or a responsible for the process. Internal audit is an important part of the manual. Internal audit is independent from the business processes, and therefore internal auditors should be able to have an independent opinion on the audited processes. They test all measures; prepare reports and recommendations to the owners of the processes. Auditors can check whether the recommendations are met. Auditors submit reports to the heads of the entities in organizations. In this regard the Republic of Macedonia has an advantage because you have copied the best way to work, for which we spend 10 years to establish. Thank you for your attention, I was glad I was in your country. 15