FINANCIAL MANAGEMENT IN WORLD BANK OPERATIONS: ANNUAL REPORT FOR FY05. Operations Policy and Country Services

Transcription

1 FINANCIAL MANAGEMENT IN WORLD BANK OPERATIONS: ANNUAL REPORT FOR FY05 Operations Policy and Country Services APRIL 25, 2006

2 ABBREVIATIONS AND ACRONYMS AFR CFAA CPAR DGF DPL EAP ECA ESW FM FMS FMR GFS HR IASB IDA IDF IFAC-IPSASB INTOSAI IPSAS ISR K&L LCR MDB MDB-FMWG MNA OECD-DAC JV PFM PEFA PEFA-PMF PER PFM PREM QAG QEA QSA ROSC A&A SAI SAR SFAA SWAp UN Africa Region Country Financial Accountability Assessment Country Procurement Assessment Report Development Grant Facility Development policy lending East Asia and the Pacific Region Europe and Central Asia Region Economic and sector work Financial management Financial management specialist Financial Monitoring Report Government Finance Statistics Human resources International Accounting Standards Board International Development Association International Development Fund International Federation of Accountants-International Public Sector Accounting Standards Board International Organization of Supreme Audit Institutions International Public Sector Accounting Standard Implementation Status and Results report Knowledge and learning Latin America and Caribbean Region Multilateral development bank MDB Financial Management Working Group Middle East and North Africa Region Organisation for Economic Co-operation and Development Development Assistance Committee OECD-DAC Joint Venture on Public Financial Management Public Expenditure and Financial Accountability program PEFA Performance Measurement Framework Public Expenditure Review Public financial management Poverty Reduction and Economic Management Network Quality Assurance Group Quality-at-Entry Assessment Quality of Supervision Assessment Report on the Observance of Standards and Codes - Accounting and Auditing Supreme audit institution South Asia Region State Financial Accountability Assessment Sectorwide approach United Nations

3 FINANCIAL MANAGEMENT IN WORLD BANK OPERATIONS: ANNUAL REPORT FOR FY05 CONTENTS Page I. Introduction... 1 II. Strategy Work... 1 III. Operational FM Activities in FY A. Global Activities... 4 B. Country-Level Activities... 5 C. Operation-Specific Activities... 6 IV. Human Resources and Learning... 8 V. Conclusion... 9 Annex: Examples of Country-Level FM Activities Tables Table 1. Financial Management Performance in QAG Reviews... 7 Table 2. FMR Compliance in FY Table 3. Timeliness of Audit Reports Due in FY Table 4. Financial Management Staffing... 9

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5 FINANCIAL MANAGEMENT IN WORLD BANK OPERATIONS: ANNUAL REPORT FOR FY05 I. INTRODUCTION 1. As FY05 opened, the Bank had its financial management (FM) policy framework fully in place; thus it turned its focus to implementing and mainstreaming the corporate priorities of harmonization, capacity development, results measurement, and use of country FM systems, and to the Network priority of convergence of FM practices across the Regions. This progress report describes the Bank s FM activities in FY05 and provides an update to the FY04 Annual Report. Following this introduction, Section II discusses activities in the area of strategy, Section III summarizes operational FM activities, Section IV describes human resources and learning activities, and Section V sets out conclusions. The Annex provides examples of operational FM work in a range of areas. II. STRATEGY WORK 2. In FY05 the Bank continued to support implementation of its policy and strategy framework for FM activities. 3. Public Expenditure and Financial Accountability (PEFA) Performance Measurement Framework. During FY05, indicators for the proposed PEFA 1 Performance Measurement Framework (PMF) were extensively tested including in AFR, LCR, and SAR, and with the leadership of FM Network staff. PEFA-PMF was launched in June 2005 to support country-led public financial management (PFM) reforms and donor harmonization and alignment, and to facilitate monitoring results. During 2005, FM Network staff actively promoted the adoption of the framework among non-pefa partners through its work within the multilateral development banks (MDBs ) Financial Management Harmonization Working Group (FMWG) and the Joint Venture on Public Financial Management (JV-PFM) of the Organisation for Economic Co-operation and Development Development Assistance Committee (OECD-DAC). Internally, the FM Network strengthened its working relationships with the Poverty Reduction and Economic Management (PREM) and Procurement families to help ensure that all three groups can work collaboratively in country teams to provide integrated PFM advice to countries. 4. Supporting Supreme Audit Institutions. In January 2003, Management committed to prepare a strategy for supporting and strengthening supreme audit institutions (SAIs) and making greater use of SAI work wherever possible. 2 Fulfilling that commitment, it issued an SAI 1 2 The Public Expenditure and Financial Accountability program (PEFA) is a partnership of the World Bank, IMF, European Commission, United Kingdom Department for International Development, French Ministry of Foreign Affairs, Royal Norwegian Ministry of Foreign Affairs, Swiss State Secretariat for Economic Affairs, and Strategic Partnership for Africa. See Audit Policy and Practices for World Bank-Financed Activities (R ), January 27, 2003.

6 2 strategy paper in October The strategy was developed in consultation with an SAI advisory panel, so its approach was fully aligned with the approach in the strategic plan adopted by the International Organization of Supreme Audit Institutions (INTOSAI) in the same month. In addition, recognizing the importance of engaging donor partners, particularly MDBs, in implementation, the strategy provides for the Bank s Regions to work with the MDBs and in alignment with the strategic directions of the various INTOSAI regional groupings to develop region-specific strategies. When the SAI strategy paper was discussed at the October 2004 meeting of the MDB FMWG, all of the MDBs agreed to work with the Bank in developing region-specific strategies. The Africa Region is accordingly working with the African Development Bank to prepare an SAI capacity-strengthening strategy; and EAP has adopted an approach of developing country-specific strategies in, for example, China, Indonesia, Mongolia, and Philippines and following them up with specific Institutional Development Fund (IDF)-backed programs of support. 5. Reports on the Observance of Standards and Codes Accounting and Auditing. In February 2005, a Roundtable on the Reports on the Observance of Standards and Codes Accounting and Auditing (ROSC A&A) brought together Network staff and representatives of international standards-setting institutions, financial regulatory institutions, and country governments in Washington. The objective of the Roundtable was to generate ideas to better assist countries in developing and implementing country action plans for improving the institutional frameworks that underpin corporate financial reporting. 6. Harmonization. During the year Network staff were involved in three important efforts related to harmonization. 7. They participated in formulating the two PFM-specific harmonization indicators for use in monitoring the implementation of the Paris Declaration on Aid Effectiveness, 4 and, through their participation in the OECD-DAC, they have continued to work on developing targets to be met by They participated in a joint OECD-IMF task force the Task Force for the Harmonization of Public Accounting Standards set up to foster harmonization and integration of (a) Government Finance Statistics (GFS); (b) EUROSTAT, the European System of Accounts; (c) UN System of National Accounts; and (d) the International Public Sector Accounting Standards (IPSAS). The task force report issued in January 2005 incorporated recommendations for convergence of public sector accounting standards that were published by the International Public Sector Accounting Standards Board of the International Federation of Accountants (IFAC-IPSASB). 9. Finally, a key issue in the Bank s relationship with UN organizations has been the Bank requirement that grant funds be used in compliance with Bank FM policies and procedures, and 3 4 See Supporting and Strengthening Supreme Audit Institutions: A World Bank Strategy, FM Sector Board, October 7, Indicator 2, Number of partner countries that have public financial management systems that either (a) adhere to broadly accepted good practices or (b) have a reform programme in place to achieve these ; and Indicator 5b, Percent of donors and of aid flows that use public financial management systems in partner countries which either (a) adhere to broadly accepted good practices or (b) have a reform programme in place to achieve these.

7 3 that the auditor of Bank-financed operations be acceptable to the Bank. This requirement conflicts with UN regulations that preclude the use of any auditor other than the UN External Auditor in the audit of UN programs. In FY05, Network staff helped develop a UN/Bank FM Framework Agreement that will facilitate the adoption of harmonized approaches in operations that both institutions support; this Agreement was signed in March Use of Country PFM Systems. The Board paper Expanding the Use of Country Systems in Bank-Supported Operations: Issues and Proposals noted that Bank policy does not preclude the use of country PFM systems, where they are adequate, and that in fact the Bank already relies on country PFM systems in several countries. 5 Consistent with Management commitments in that paper, the FM Network began holding structured learning events, which build on past practices and lessons learned, to educate both FM and non-fm staff about the Bank s requirements and practices with respect to utilizing country systems in FM work. Management continuously communicates to staff that (a) it is appropriate to adopt differentiated approaches in response to country-specific circumstances; (b) use of country PFM systems which adequately address Bank requirements continues to be acceptable; and (c) it also remains acceptable for any of a variety of reasons, including not meeting Bank adequacy tests to utilize project specific PFM systems. 11. OP/BP 10.02, Financial Management. Since 1998, the Bank has made significant investments to strengthen its FM capacity, first by establishing a professional network, and then by recruiting a cadre of appropriately qualified financial management specialists (FMSs). In addition, in FY02 the Bank embarked on a program to update its investment lending framework to address borrowers concerns about the cost of doing business with the Bank. Many of the improved practices and approaches 6 had consequential effects on the Bank s FM policies and procedures; and to address these effects (as detailed in each paper presented to the Board or Board Committee), Management simultaneously updated the policies and procedures. The umbrella policy documents Operational Policy (OP) and Bank Procedures (BP) 10.02, Financial Management, have now been updated and rationalized to reflect all these changes. A technical briefing on the proposed new OP/BP was held in FY05 and, although no specific issues were raised, participants requested a fuller background briefing. Accordingly, a briefing for the Audit Committee is being finalized. 12. Financial Management Practices Manual. Over the past few years, as the Bank s investment lending framework changed, Management issued a number of guidelines to assist staff in implementing the changes. As would be expected, the body of guidelines lost coherence over time, and became less useful to staff, particularly new staff. At the same time, as staff began adopting a risk-based FM approach to ensure that attention is directed at critical areas, they tended to rely more and more on Region-specific approaches, procedures, and quality assurance arrangements. Thus, while updating OP/BP 10.02, Management also consolidated and codified staff guidance into a Financial Management Practices Manual that, among other things, 5 6 See Expanding the Use of Country Systems in Bank-Supported Operations: Issues and Proposals (SecM /2), March 8, For example, harmonization, sectorwide approaches, audit policy changes, eligibility reforms, and use of country systems.

8 4 sets out the Bankwide FM risk model and FM quality assurance arrangements. 7 The Manual was issued on November 3, III. OPERATIONAL FM ACTIVITIES IN FY The Bank engages in operational FM work at the global, country, and operationspecific levels. A. Global Activities 14. At the global level, the Network seeks to contribute to improved financial accountability by ensuring that the activities of leading international standard setting and oversight organizations address development issues. It also seeks to contribute to the development of standards, codes, and practices that can be used in Bank operations. 15. FM Harmonization. Throughout FY05 Network staff continued to chair the MDB FMWG and the OECD-DAC JV-PFM and to support the PEFA program partnerships that are focusing on impact on the ground. There are two principal challenges to deepening harmonization: (a) capacity constraints keep partner agencies from assigning FMSs or equivalent staff to country offices, so that Bank FM Network staff have no counterparts to work with; and (b) partner agencies policy frameworks are not yet fully aligned with recent changes in Bank FM policy that facilitate harmonization. In addition, while the PEFA-PMF, launched in June 2005, can facilitate harmonization in the pursuit of country PFM capacity development, it is important to ensure that donors work jointly in undertaking a single assessment in individual countries; that assessments are undertaken at sensible intervals that reflect country circumstances and not donor priorities; and that within the Bank, the FM, procurement, and PREM families work as a single Bank team in collaborating with other donors in applying the tool. Management issued a note to relevant staff and posted a Kiosk announcement 8 to address the expected behaviors of staff in this area. Management also designated Anchor staff from each of the three families to work closely with the PEFA Secretariat to collect and disseminate information on the application of the tool in specific countries. 16. Global Partnerships. The Bank continued to engage with key international accounting and auditing organizations in both the public and private sectors. The Bank provides funding from its Development Grant Facility (DGF) through a single facility (Global FM Partnerships) to IFAC-IPSASB for its work on international public sector accounting standards (IPSAS) and to INTOSAI for its work on developing public sector auditing standards that are harmonized, as far as possible, with those of the private sector. In the private sector, it provides funding to the 7 8 The Manual consolidates and replaces the following guidelines: Financial Management for Learning and Innovation Loans (LILs), April 2001; Assessments of Financial Management Arrangements in World Bank- Financed Projects, June 2001 and October 2003; Financial Monitoring Reports, November 2002; and Annual Financial Reporting and Auditing for World Bank-Financed Activities, June See Kiosk announcement, Strengthening the Bank s Public Financial Management Work, Danny Leipziger and Jim Adams, July 25, 2005.

9 5 International Accounting and Auditing Standards Board (IAASB) and to the Public Interest Oversight Board of IFAC. The Bank is one of the cosponsors of IFAC-IPSASB s effort to enhance the consistency and quality of financial reporting by recipients of external assistance. Comments on an exposure draft standard, issued in February 2005, pointed out the benefits of less complexity; Network staff continue to work with IFAC-IPSASB on fine-tuning the proposed standard. B. Country-Level Activities 17. Network activity at the country level is focused on harmonization, results measurement, PFM capacity development, use of country systems, and anticorruption, as well as in a range of country-specific areas: FM in post-conflict countries, in European Union accession countries, and in post-tsunami recovery. Examples of specific country activities are highlighted in the Annex and illustrate how FM staff have translated both policy modernization and strategic orientations into their work. 18. PFM Analytic Work. Analytic work is now determined by business needs and outlined in the Country Assistance Strategy (CAS) on the basis of the type and level of Bank engagement planned in the CAS period, client priorities, and the availability of other relevant information from other development partners and the country itself. 9 As such, the analytic pieces are designed to be needs-responsive. So, for example, responding to an intention to focus on the education and water sectors, FM staff working on the Egypt portfolio undertook PFM assessments of the institutions involved in both of these sectors. In India, reports were prepared on PFM issues in the Panchayat Raj (local government) institutions in six states, on Centrally Sponsored Schemes 10 and on financial accountability issues in the power sector. In a move to more systematically focus on improvements in PFM performance over time and reflecting the impending release of the PEFA-PMF, a significant number of analytic worked performed in FY05 including in Afghanistan, El Salvador, Guatemala, India, Mexico, Papua New Guinea, Serbia, and Tanzania incorporated indicators from the framework. Integrated PFM analytic work is also increasingly the norm CFAAs are routinely conducted in conjunction with other Bank diagnostic products, such as Public Expenditure Reviews (PERs) and Country Procurement Assessment Reports (CPARs); of particular note is EAP where CFAAs, CPARs, and PERs are always integrated. In addition, and responding to the Bank s harmonization commitments, PFM diagnostics are routinely undertaken jointly with others donors in LCR these are always jointly undertaken with the Inter-American Development Bank while other partners have included the African Development Bank, Asian Development Bank, European Commission, and Department for International Development and other bilateral donors. In FY05, 14 CFAAs and State Financial Accountability Assessments (SFAAs) were delivered ROSC A&A Program. The ROSC program s Accounting and Auditing module reviews the observance of accounting and auditing standards in the corporate sector in countries, See Improving the Bank s Analytic and Advisory Services, Progress Report (OM /1), August 12, Centrally sponsored schemes are programs financed by the federal government but implemented throughout the country at all levels of government. Details on CFAAs/SFAAs completed and underway, including donor partners and integrated reports can be found on the FM website, at CFAAs Completed and In Process.

10 6 and then serves as the basis for developing and implementing a country action plan for improving the institutional framework that underpins corporate financial reporting. The Network completed 7 ROSC A&A assessments during the year, bringing to 46 the total number delivered, of which 40 have been published. To date, most ROSC A&A assessments have been conducted in middle-income countries. However, as low-income countries realize the importance of private sector-led economic development and of strengthened corporate accounting and auditing practices, the Network expects to undertake more ROSC A&As in these countries. 20. Capacity-Strengthening Activities. Backed by an extensive databank of analytic work, the Bank s PFM work increasingly focuses on helping countries implement their capacitystrengthening action plans in such ways as the following: Nonlending technical assistance, as in Mexico. Grants under the IDF program; in FY05 PFM-related IDF grants amounted to some 34 percent of total IDF funding (or over $7 million). Investment operations or components for example, the Bangladesh Economic Management Technical Assistance Project, the Nigeria Economic Reform and Governance Project, and the Ceara (Brazil) Multi-Sector Social Inclusion Development Project. PFM policy reform conditionality in development policy lending (DPL), as in the Honduras poverty reduction support credit. Organizing, and participating as resource persons in, PFM-related seminars and workshops for partner country staff on such diverse topics as integrated financial management systems, risk-based auditing, comprehensive and reliable budgeting, and accounting. C. Operation-Specific Activities 21. In connection with investment operations, FM staff assess implementing agencies FM systems at entry and then monitor them to ensure that they remain adequate throughout project implementation. In connection with DPL operations, FMSs seek to ensure that the arrangements for the custody of loan funds are robust and responsive to identified risks, and also contribute to developing any PFM conditions in the policy matrix. 22. Financial Management Performance. The Network monitors two indicators of FM performance: the ratings of the FM performance of individual operations under implementation, reported in the Implementation Status and Results (ISR) report, and the ratings of the quality of Bank FM inputs to individual operations as measured through the Quality Assurance Group s Quality at Entry (QEA) and Quality of Supervision (QSA) assessments. In FY05, the percentage of operations with ISR FM ratings of moderately satisfactory or higher increased to 92 percent, from 83 percent in FY One factor contributing to this improvement was the improved 12 The ISR ratings changed from a four- to a six-point rating scale in FY05.

11 7 quality of Bank FM inputs, with 99 percent of operations reviewed rated moderately satisfactory or better under QEA7 and 91 percent under QSA6 (see Table 1). Management attributes these results at least in part to the introduction of staff guidelines on the conduct of FM in Bank operations and its extensive multiyear program of training and outreach. Management will continue to focus on quality performance by issuing the consolidated FM Practices Manual, described above, and by continuing its training programs. In addition, given the renewed institutional concern with issues of corruption, Management is exploring ways to focus more explicitly on corruption in Bank-financed operations: closer collaboration with the Department of Institutional Integrity (INT) to better use the lessons learned in the FM aspects of project design, and the possibility of instituting a Network-wide continuous evaluation process, to be jointly undertaken with Controller s. Table 1. Financial Management Performance in QAG Reviews (percent moderately satisfactory or better) Quality at entry Quality of supervision Unit QEA4 (1/00-6/01) QEA5 (FY02) QEA6 (FY03) QEA7 (FY04) QSA4 (FY00) QSA5 (FY01) QSA6 (FY03 and 04) AFR n.a. 86 EAP n.a. 80 ECA n.a. 97 LCR n.a. 100 MNA n.a. 90 SAR n.a. 93 Bankwide Note: QEA=QAG Quality-at-Entry Assessment; QSA=QAG Quality-of-Supervision Assessment. QSA5 results not disaggregated by Region as sample size was statistically insignificant. 23. Financial Monitoring Reports. Borrowers are required to submit to the Bank periodic interim unaudited financial reports, typically known as Financial Monitoring Reports, for all investment operations under implementation. In the periods between on-site supervision visits, FMRs are a key tool for monitoring implementation progress. Following a period of low compliance, the Network reviewed the factors affecting compliance and modified the requirements in early FY04. In FY05, compliance rates showed progressive improvement, with an on-time submission rate of 74 percent, up from about 70 percent in FY04 and 50 percent in FY03 (see Table 2). When FMRs are used as the basis of disbursements, borrowers do not need to produce separate disbursement-related documentation (such as statements of expenditure) in addition to the FMR. During FY05, 20 percent of new investment operations took advantage of this facility. Table 2. FMR Compliance in FY05 AFR EAP ECA LCR MNA SAR Total No. of Projects w/fmrs required and due in FY Projects submitting FMRs on timely basis (%) 61 a 72 b Source: Data provided by the Regions on projects appraised after January 1, 2002, and effective no later than 12/31/04. a Information on FMRs was not submitted for 20 projects. b Excluding reports due from China which does not provide FMRs as agreed with the Bank 24. Audit Compliance. Audit compliance is measured in three dimensions: that (a) the reports are received by their due dates, (b) the findings are acceptable, and (c) the auditors are

12 8 acceptable. In FY05, the proportion of audits received on time continued to improve for loans, credits and recipient-executed trust funds, with overall receipt compliance also improving for trust funds while slightly declining for loans and credits (see Table 3). In FY06, quarterly reporting on audit compliance, particularly actions taken with respect to non-compliance, will be enhanced. Of all the reports received in FY05, 77 percent contained unqualified opinions, 22 percent contained except for opinions, and 1 percent carried a disclaimer of opinion. During FY05, agreement was reached with the trust fund community on a phased program to ensure that all recipient-executed trust funds are disbursed through the Bank s loan administration system, a move that will facilitate more comprehensive monitoring of audit compliance. Table 3. Timeliness of Audit Reports Due in FY05 (percentage) Received on time Received during FY FY05 FY04 FY05 FY04 Regions IBRD/ Trust IBRD/ Trust IBRD/ Trust IBRD/ Trust IDA funds IDA funds IDA funds IDA funds AFR EAP ECA LCR MNA SAR Bankwide Source: Business Warehouse ARCS. 25. Audit Exemptions. During FY05, the Financial Management Operations Review Committee reviewed three requests for exemption from the requirement to submit audited financial statements; and the Regions and the Director, Financial Management, reviewed eight further requests. Because in each case the implementing agency had in place acceptable financial management arrangements that could provide equivalent assurance that Bank funds would be used appropriately, the exemptions were granted (although, in accordance with Bank policy, the Bank retained the right to request an audit). The 11 exemptions covered programs and operations totaling $5.3 million, of which $1.5 million related to grants under the DGF program, $1.8 to grants to UN organizations, and $2 million to funds granted to other global programs. Taking into account the exemptions provided in FY04 30 exemptions covering operations with a total value of around $46.5 million and the fact that to date the Bank has had no reason to request an audit in any of these cases, Management is satisfied that this facility continues to represent a prudent and cost-effective approach to the low level of assessed risks in the operations covered. IV. HUMAN RESOURCES AND LEARNING 26. Human resources and learning activities respond to the evolving needs of Network and other Bank staff, and of partner country staff, for information to help them better achieve results. In FY05, the focus remained on recruiting staff with needed skills and on (a) ensuring that the skills of existing staff were kept up to date; (b) reinforcing the behaviors needed to enhance donor collaboration; and (c) emphasizing the adoption of a risk-based approach as part of the modernization/simplification agenda.

13 9 27. Staffing. Network Management periodically undertakes a strategic staffing review to identify skills changes and recruitment needs, people with technical and managerial potential, and country office FM staffing issues. During FY05, 10 FMSs were recruited (3 in Washington and 7 in country offices), and there were 11 departures (6 resignations, 4 retirements including 2 managers, and 1 nonconfirmation). In addition, there were two strategic reassignments, two changes of duty station, and three developmental assignments; and two new managers were appointed in the EAP and SAR. (Table 4 shows total FM staffing levels.) Table 4. Financial Management Staffing (as of June 30, 2005) AFR EAP ECA LCR MNA SAR OPCS LOA Total Washington Country offices Total Source: PeopleSoft. 28. Knowledge and Learning Activities. Knowledge and learning (K&L) activities are planned and delivered in the Regions in response to Region-specific needs. In addition, Management ensures the central provision of a core curriculum of activities that responds to Network strategic objectives. K&L activities are delivered through a variety of modalities formal courses, brown bag lunches, workshops, roundtables, and e-learning. In dealing with the practical application of new policies or procedures, for example, a brown bag lunch format is generally more conducive to the exchange of ideas, while e-learning and videotaped presentations are used to meet the needs of country office staff. The Network K&L program reaches to non-network staff: Network staff routinely provide FM training as part of events arranged by, and for, staff in other sectors and Networks. Additionally, to foster a common understanding on principles of sound PFM systems, the Network continues to increase the number of joint Bank-borrower staff learning events it sponsors. During FY05, the Network provided training in a range of core areas: FM in Bank operations; community-driven development, sectorwide approaches, PFM capacity development, IPSAS, and budget execution. In response to recent developments in the Bank, the core curriculum was expanded to include such new areas of focus as the fiduciary aspects of development policy loans and poverty reduction support credits, and SAI capacity strengthening. Fuller details of specific Network K&L activities are included in the Network K&L Annual Report. V. CONCLUSION 29. During FY06, the Network expects to emphasize increasingly integrated approaches to country PFM issues, anchored in the PEFA-PMF and featuring better collaboration between Network staff and staff from the Procurement and PREM families, and deepened countryspecific relationships with donor partners that are also involved in applying the framework. The Network will also be examining whether, to allow working more collaboratively with donor partners, it will be feasible to retire reporting in a CFAA format and instead use a format that is more consistent with the use of the PEFA-PMF. On the harmonization front, work will continue toward finalizing the IFAC-IPSASB standard on financial reporting by recipients of external assistance and completing the signing of the UN/Bank Financial Management Framework

14 10 Agreement (which was accomplished on March 10, 2006). Given the key role that sound PFM systems can play in the fight against corruption, the Network plans to develop closer relationships with INT and incorporate lessons learned from proven cases of corruption into its work at the operation and country levels. To the extent feasible, it will continue to expand the use of country PFM systems. Other priorities will be issuing the updated OP/BP 10.02, Financial Management, and the Financial Management Practices Manual (the latter was issued November 3, 2005), and developing a framework for a Network-wide continuous evaluation process. On the K&L front, the biannual Fiduciary Forum will bring together staff from the FM, Procurement, and PREM families as well as donor partner and country participants (which was held in Washington, DC, November 28-30, 2005). Other K&L activities will include structured learning events on the use of country systems and on country audit institutions. Finally, work on mainstreaming ROSC A&A assessments into Bank operations will deepen, with the objective of better informing the Bank s program of support to private sector development activities and its investment climate work.

15 ANNEX: EXAMPLES OF COUNTRY-LEVEL FM ACTIVITIES 1. This annex provides examples of the activities Bank Financial Management (FM) staff are involved in at the country level in post-conflict countries, in European Union (EU) and EU accession countries, working against corruption, promoting harmonization and the use of country FM systems, and assisting in the tsunami recovery effort. A. FM in Post-Conflict Countries Democratic Republic of Congo (DRC) 2. The DRC s PFM framework was severely affected by the conflict in the country: the principles laid down by the budget law were widely disregarded or replaced by ad hoc procedures and tools; human resource capacity in public financial management (PFM) was weakened; and working conditions for government employees, including those in PFM functions, deteriorated markedly. The Bank s program of support involves identifying a role for civil society organizations to support the delivery of services and to help overcome the capacity constraints in the short term, and the development of government capacity for front-line service delivery in the longer term. 3. The Central Coordination Bureau (BCECO) was established in 2001 as an independent parastatal, with a mandate to manage small-scale rehabilitation projects financed by both the DRC Government and donors. BCECO reports to a Steering Committee, chaired by the Minister of Finance and comprising key ministers with economic and social portfolios, as well as a representative of the Presidency. Bank FM staff work closely with the financial department of BCECO to help strengthen its internal control and management accounting functions, and encourage the creation of an internal audit department. BCECO, staffed by qualified (national and international) professionals recruited though a transparent and competitive procedure, in turn provides support on FM issues to countrywide implementing agencies. Afghanistan 4. In Afghanistan, FM staff serve as task managers for a series of operations focusing on strengthening the public administration by improving the use of public resources. PFM components of these operations finance the strengthening of accounting, reporting, and audit practices, and also support capacity development at multiple levels of the Government. In a forthcoming project, these areas will be broadened to include internal audit and systems development and implementation capacity, and coverage will be extended to line ministries. Haiti 5. In recent years, as external assistance has been gradually withdrawn and donor resources increasingly channeled through the private sector, Haiti has experienced serious economic governance issues and its public sector has deteriorated significantly. The Bank is supporting the Government in addressing these issues through a multitiered approach: first, the preparation of an Interim Cooperation Framework (ICF); second, the development of a Transitional Support

16 12 Strategy (TSS); and third, the preparation of a development policy loan, the Economic Governance Reform Operation (EGRO). 6. Under the Bank s leadership, economic governance was identified as one of 10 themes under the ICF, laying the foundations for the PFM reforms that the Bank would support through the EGRO. Additionally, early recognition that post-conflict countries usually lack the human and financial resources to implement reforms led to the preparation of two technical assistance operations financed through grants. 7. Network staff work closely with Poverty Reduction and Economic Management (PREM) colleagues in key areas of the PFM reform agenda. As an example, FM staff are leading the dialogue in the area of public sector auditing, including in efforts to reform the law to incorporate international good practices into the role and mandate of the supreme audit institution (SAI), and in helping to develop a sequential capacity building plan to transform the SAI into an organization that can fulfill its new role and mandate. B. FM in EU and EU Accession Countries GDLN Program: The Advanced Program in Accounting and Auditing Regulation 8. The Bank has undertaken its largest distance knowledge-sharing program in partnership with the European Commission and the Austrian Development Cooperation: the Advanced Program in Accounting and Auditing Regulation. The program is designed to give senior civil servants, financial sector regulators, and accounting and auditing bodies in participating countries/entities an opportunity to share and acquire knowledge about the accounting and auditing regulations that should underpin a reform process in the context of harmonization with the European Union s (EU s) law acquis communautaire and financial and private sector development. The program is structured in 28 modules covering such subjects as EU enlargement, the accounting and auditing acquis communautaire, International Financial Reporting Standards (IFRS), financial sector supervision, and education, with linkages to the financial and private sectors. Each module is delivered to 14 separate sites in the participating countries/entities Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Kosovo (UNSCR 1244), former Yugoslav Republic of Macedonia, Moldova, Romania, Serbia and Montenegro, Turkey, and Ukraine with simultaneous interpretation into eight languages. The program began in May 2005, and the first six modules, attended by 490 participants, were delivered by June The Road to Europe: Program of Accounting Reform and Institutional Strengthening (REPARIS). 9. Following the conference in Brussels on June 30, 2005, that launched the REPARIS (a regional program of accounting reform and institutional strengthening for nine countries and entities in southeastern Europe), the Bank continues to work closely with these countries to create a transparent policy environment and effective institutional framework for corporate financial reporting. In FY05, the World Bank assisted several countries in finalizing Country Action Plans. The Bank is to provide technical assistance to the REPARIS program in

17 13 Macedonia, with financing to be provided by a number of donors. A follow-up REPARIS conference was held in March C. A More Explicit Focus on Corruption Indonesia 10. The Bank s Country Assistance Strategy (CAS) for Indonesia (FY04-07) described Indonesia s weak fiduciary control environment and noted that endemic corruption undermines progress on the country s development objectives, is a serious threat to the effectiveness of Bank-financed programs, and weakens the public credibility of development assistance overall. The CAS proposed an investment of considerable resources in mainstreaming anticorruption work according to four principles: Openness and consistency in surfacing corruption concerns and promoting appropriate responses. Strategic project selection to open multiple entry points in the fight against corruption. Incorporation of project design features that mitigate corruption through empowerment, participation, and transparency. Vigorous audits, investigation, and follow up of allegations of corruption in Bankfinanced projects, and public disclosure of results. 11. Working with other Bank staff, particularly those in procurement, Network staff translated these principles into a number of specific measures in FY 2005: Diagnostic and analytic studies. The Bank undertook a series of studies on, for example, the effectiveness of audits in reducing corruption in community development projects; development of performance indicators for anticorruption work; and the effectiveness of civil society oversight and enhanced public disclosure to better understand the risks of corruption and the effectiveness of mitigation measures. Modernizing the legal framework. Network staff continued to advise and support the Government in modernizing its PFM legal framework. Updated legislation covering the areas of State finance, State treasury, and State audit and incorporating international best practices has been issued, and related implementing decrees and regulations are being prepared. Improved project design. The design of all new projects now incorporates the following six measures: (a) enhanced disclosure, (b) civil society oversight, (c) mitigation of collusion risks through strengthened procurement, (d) mitigation of forgery and fraud risks through strengthened financial controls, (e)

18 14 complaints resolution mechanisms, and (e) sanctions regimes. In addition, Network staff are actively promoting beneficiary involvement in the design and implementation of Bank-financed projects. Addressing corruption collaboratively. Network staff have been collaborating with other stakeholders in addressing allegations of corruption. An in-house forensic auditor was hired to help conduct preliminary forensic audits with guidance from the Bank s Department of Institutional Integrity (INT); an alliance was forged with the Indonesian SAI to conduct forensic audits of the corruption complaints received by the Bank; and technical assistance is being provided to the SAI and the Indonesian Anti-Corruption Commission to enhance capacity. Enhancing surveillance of project fiduciary compliance. The Bank has expanded the scope of project audits to require specific feedback on suspected corruption; it has enhanced its monitoring of client compliance with Bank FM requirements; and it is examining audit reports and management letters systemically across the portfolio for evidence of control weaknesses that could facilitate corruption. D. FM Harmonization Ethiopia 12. For three years, the Bank and the European Community (EC) have been working closely together within a harmonized framework to support PFM in Ethiopia. The program involves joint financing support, analytic and advisory work, and capacity-building assistance in such areas as planning, budgeting, accounting, auditing, intergovernmental fiscal relations, and financial management automation. The following are among their efforts: Multiyear diagnostics to track improvements. The Bank and the EC have jointly supported all major fiduciary diagnostics in Ethiopia, including a multidonor Country Financial Accountability Assessment (CFAA) in and an update of that report in 2004 in the form of a fiduciary assessment or FA. The FA used the Public Expenditure and Financial Accountability program s Performance Measurement Framework (PEFA-PMF) and was incorporated into the Bank s Institutional Governance Review. Capacity building. The Bank and EC are jointly supporting the Public Sector Capacity Building Program Support Project (PSCAP) (Credit ET), a capacitybuilding sectorwide approach program, which supports the full range of the Government s expenditure and revenue management efforts, including the customization and roll-out of an integrated FM information system. The program also defines and enforces minimum mandatory capacity-building requirements for subnational governments.

19 15 Guatemala 13. The Bank and the Inter-American Development Bank carried out a joint CFAA/Country Procurement Assessment Report (CPAR) in Guatemala. The decision to consider both FM and procurement in the same exercise followed from the synergies between the two functions since (a) procurement planning (or lack of it) influences budget formulation, and vice versa; (b) procurement management performance affects the efficiency of budget execution; (c) missing links from the PFM and procurement management systems affect timely recording of commitments and accruals; (d) internal audits and external oversight functions have limited impact if they do not include a review of procurement actions; and (e) anticorruption strategies are incomplete if they do not encompass both procurement and PFM functions. Findings from the diagnostic significantly influenced the design of a Bank development policy loan and will also inform the forthcoming Inter-American Development Bank policy-based loan. In addition, information gathered during preparation of the diagnostic was used as a baseline for the PEFA- PMF indicators that will, in turn, facilitate structured measurement of progress over time. E. Use of Country PFM Systems Brazil 14. Building on the conclusions from the 2002 CFAA and other information on Brazil s PFM systems, the country systems agenda in Brazil is at the center of the Bank s program of support at the federal level. It focuses on the following main areas: Budget execution systems. The Government s budget and treasury management system (known by its abbreviation: SIAFI) is widely recognized as a highly satisfactory. Accordingly, the Bank is increasingly relying on it for all projects at the federal level and, in the process, is supporting enhancements of SIAFI s embedded control mechanisms. Supreme audit institution. The Secretaria Federal de Controle the federal-level supreme audit institution is recognized as a competent and independent body that properly discharges its oversight responsibility. The SAI has for many years audited all Bank-financed operations. Chart of accounts and treasury systems. Following changes under the Bank s eligibility of expenditures reforms, the Government s chart of accounts will now be used in place of traditional Bank disbursement categories for project accounting. Similarly, financial monitoring reports will be based on the Government s chart/structure of accounts and will be produced directly from the Government s systems, and the Bank will rely fully on the Government s treasury management reports as the basis for disbursements. 15. The increasing use of Brazil s country systems has expedited project preparation at the federal level. Because no more full scope FM assessments are undertaken, project preparation

20 16 is faster and more integrated, and attention can more readily be focused on strengthening PFM capacity. India, Tamil Nadu State 16. Network staff drew on the findings of the State Financial Accountability Assessment in seeking to use state PFM systems for the state Health Systems Project, building on the system s strengths its treasury accounting system and its expandable chart of accounts and addressing its constraints. There were, however, two significant challenges: Convincing the Health Department that funds flow issues could be satisfactorily addressed and that the proposed approach would foster the development of internal capacities in the area of management reporting as an aid to decisionmaking. Persuading the Finance Department and the Accountant General to incorporate in the state s main chart of accounts additional account codes to reflect the project s activities (as opposed to the existing practice of budgeting for projects under a single line item), to facilitate more effective monitoring of the expenditures within mainstream Government accounting systems. Network staff addressed these challenges by establishing good working relationships with the various stakeholders and encouraging counterpart commitment to the exercise. In the end the Government acknowledged that mainstreamed FM arrangements maintain the integrity of the state treasury and of accounting and reporting systems, and saved the time and money it would have taken to develop project-specific accounting systems. F. FM and the Asia Tsunami Indonesia 17. A significant amount of resources flowed into Indonesia to support the recovery from the December 2004 tsunami and earthquake that hit Aceh and Nias. To manage these funds, the Government proposed some general principles: (a) preference for all support to be on-budget, and (b) the development of an effective governance framework for tsunami-related funds. To improve the coordination of aid flows, the Government and donors asked the Bank to establish a multidonor trust fund. FM staff worked closely with other Bank staff in ensuring that the design of the trust fund was responsive to the Government s principles and incorporated features that responded to the specific nature of the Indonesian disaster: (a) integration with the national budget, (b) the preparation of timely monitoring reports on actual disbursements (to the extent possible derived from existing accounting systems), and (c) governance and fiduciary arrangements to ensure integrity in the use of donor funds. Maldives 18. Donor harmonization is especially important in emergency situations, when effort needs to targeted toward relief and reconstruction, and not wasted on setting up a multiplicity of donor

21 17 project administrative arrangements. This was clearly evident in the aftermath of the tsunami in Maldives as the Bank worked with the Government to establish a tsunami relief operation. 19. The Government had expressed its intention to set up a fund (the Tsunami Relief and Reconstruction Fund) that would be included in its budget and serve as the single vehicle for all tsunami-related assistance. Donors, however, were expecting to set up separate administrative arrangements, as they had done in previous projects supporting reconstruction efforts. Bank Network staff took leadership by assisting the Government in designing a transparent and accountable unified structure and publicizing the Bank s commitment to working through it. A key partner in this exercise was the Asian Development Bank, which agreed to surrender its traditional ring-fenced approach to investment operations and paved the way for even more donors to follow suit. In addition, in a precedent-setting move, the Asian Development Bank included the World Bank s FM assessment report in the project documents submitted to the Asian Development Bank Board for approval.