3.1 The Constitutional Foundation

Article 201: Principles of Public Finance

Establishes that public finance shall be guided by:

• Openness and accountability with public participation
• Promotion of equitable development
• Responsible financial management
• Clear fiscal reporting
• Burden of taxation shared fairly

Article 226: Accounting for Public Funds

(2) “The accounting officer of a national public entity is accountable to the National Assembly for its financial management, and the accounting officer of a county public entity is accountable to the county assembly for its financial management.”

What this means:

• Every ministry has a Principal Secretary as accounting officer
• Every county department has a Chief Officer as accounting officer
• These officers are personally responsible for financial management
• They must answer to Parliament/County Assembly about financial statements

Example: The Principal Secretary for the Ministry of Transport must appear before the Public Accounts Committee of Parliament to explain:

• Why certain projects exceeded budget
• How pending bills accumulated
• Whether procurement was done properly
• Any audit queries raised by the Auditor-General

Article 228: The Controller of Budget

Oversees budget execution and confirms withdrawals from public funds are lawful.

Article 229: The Auditor-General

Mandated to audit and report on accounts of all public entities, providing external verification of financial reports.

3.2 The Public Finance Management Act, 2012

The PFM Act is the primary statute that translates constitutional principles into detailed procedures.

Key Provisions Related to Accounting:

Part VI: The Public Sector Accounting Standards Board (PSASB)

Sections 192-194 establish the PSASB with the mandate to:

1. Set accounting standards for all state organs and public entities
2. Prescribe formats for financial statements
3. Prescribe minimum standards for maintaining proper books of account
4. Consider international best practices (particularly IPSAS)
5. Promote transparency and constitutional values

Legal Requirement (Section 194(1)):

“The Board shall set accounting and financial reporting standards, prescribe the formats for financial statements for all public entities, and prescribe the minimum maintenance of proper books of account at all levels of government.”

Annual Financial Statements – Mandatory Requirements

Section 81 (National Government):

• Accounting officers must prepare annual financial statements
• Must submit within 3 months after year-end
• Must be in format prescribed by PSASB

Section 163 (County Government):

• Same requirements apply to county governments

Example of Timeline:

• Financial Year ends: June 30, 2025
• Deadline for submission: September 30, 2025
• Entity must submit to: Auditor-General, Controller of Budget, National Treasury

Legal Consequence: Failure to prepare or submit accounts is an offense under the Act and can result in:

• Disciplinary action
• Prosecution
• Surcharge (personal liability for losses)

Content of Financial Statements

Public sector entities must prepare:

1. Statement of Financial Position (Balance Sheet)
   • Shows assets, liabilities, net assets/equity
2. Statement of Financial Performance
   • Shows revenues and expenditures
3. Cash Flow Statement
   • Shows cash receipts and payments
4. Statement of Changes in Net Assets/Equity
   • Shows movements in government’s equity
5. Comparison of Budget to Actual
   • Shows whether entity stayed within budget
6. Notes to Financial Statements
   • Detailed explanations and disclosures

Transparency and Publication

• Audited financial statements must be tabled in Parliament/County Assembly
• Must be published publicly (websites, gazettes)
• Promotes accountability to citizens

3.3 Practical Example of Legal Framework in Action

Case Study: Nairobi City County Annual Financial Statements 2023/24

1. Legal Obligation:
   • Constitution Article 226 makes County Chief Officers accountable
   • PFM Act Section 163 requires financial statements within 3 months
2. PSASB Standards: R
   • County must use PSASB-prescribed templates
   • Previously based on Cash Basis IPSAS (now transitioning to accrual)
3. Submission Process:
   • Prepared by County Accountant
   • Approved by County Chief Officer (Accounting Officer)
   • Submitted to Auditor-General by September 30, 2024
   • Auditor-General audits and issues opinion
4. Oversight:
   • Controller of Budget reviews quarterly budget implementation
   • County Assembly’s Public Accounts Committee examines statements
   • Citizens can access via county website
5. Accountability:
   • If audit finds irregular expenditure, Chief Officer must explain
   • Parliament may recommend disciplinary action
   • EACC may investigate suspected corruption