FINANCIAL MANAGEMENT IN WORLD BANK OPERATIONS: ANNUAL REPORT FOR FY09. Financial Management Sector Board Operations Policy and Country Services

Transcription

1 FINANCIAL MANAGEMENT IN WORLD BANK OPERATIONS: ANNUAL REPORT FOR FY09 Financial Management Sector Board Operations Policy and Country Services March 31, 2010

2 ABBREVIATIONS AND ACRONYMS AFR ARCS CAS CFAA COSO CPAR CSR DPO/DPL EAP ECA FM FMSB FY GAC IASB IBRD IDA IDF IFAC IFRS IMF INT INTOSAI JET LCR LOA MDB MNA MoU MTEF NGO OCCEFS OECD DAC OP/BP OPCFM OPCS PEFA PER PFM PFM-SCDI PREM PRIMA ROSC A&A SAI SAR SWAp Africa Region Audit Reports Compliance System Country Assistance Strategy Country Financial Accountability Assessment Committee of Sponsoring Organizations of the Treadway Commission Country Procurement Assessment Report Controller s Strategy and Resource Management Development Policy Operation/Loan East Asia and the Pacific Region Europe and Central Asia Region Financial Management Financial Management Sector Board Fiscal Year Governance and Anticorruption International Accounting Standards Board International Bank for Reconstruction and Development International Development Association Institutional Development Fund International Federation of Accountants International Financial Reporting Standard International Monetary Fund Department of Institutional Integrity International Organisation of Supreme Audit Institutions Joint Evaluation Team Latin America and Caribbean Region Loan Department Multilateral Development Bank Middle East and North Africa Region Memorandum of Understanding Medium-term Expenditure Framework Nongovernmental Organization Organization for the Superior Audit Institutions of Central America Organisation for Economic Co-operation and Development Development Assistance Committee Operational Policy/Bank Procedures (statements) Financial Management Unit, OPCS Operations Policy and Country Services Public Expenditure and Financial Accountability Program Public Expenditure Review Public Financial Management Public Financial Management Staff Capacity Building Initiative Poverty Reduction and Economic Management Network Portfolio Risk Management System Report on the Observance of Standards and Codes Accounting and Auditing Supreme Audit Institution South Asia Region Sectorwide approach

3 FINANCIAL MANAGEMENT IN WORLD BANK OPERATIONS: ANNUAL REPORT FOR FY09 CONTENTS Executive Summary... iii I. Introduction...1 II. The FM Sector: At Work in Partner Countries...2 A. Regional FM Efforts...3 B. Audit Oversight...11 C. Helping Partner Countries Improve Their Financial Management...12 III. The Sector Board and Anchor: FY09 in Review...14 A. Supporting and Guiding Regional Efforts...15 B. Global Partnerships and Activities...17 IV. The FM Sector: FY09 Institutional Agenda...19 A. Financial Management Strategy...19 B. Staff Development...20 V. Looking Forward: FY10 Priorities and Challenges...21 Boxes Box 1. Supporting Skills Upgrading Africa s PFM Staff Capacity Development Initiative... 3 Box 2. Building Country FM Systems: Mozambique... 4 Box 3. Internal Audit Capacity Building in East Asia and the Pacific... 5 Box 4. Strengthening Armenia s PFM... 6 Box 5. First Programmatic Technical Assistance in Turkey... 7 Box 6. PFM Capacity-Building Efforts in the LCR Region... 7 Box 7. Audit Firms Capacity in the MNA Region... 8 Box 8. Capacity-Building in the MNA Region... 9 Box 9. Supporting Quality of FM work in Investment Lending in India Box 10. Building Country FM Systems: Afghanistan Box 11. Supporting PFM Reform Box 12. Regional Experiences with Professional Capacity Development Box F1. Mainstreaming GAC: ECAFM Team Trains Task Team Leaders Tables Table 1: Timeliness of Audit Reports due in FY09 and FY Table 2: FM Sector Staffing Table 3: FM Sector Formal Learning Activities, FY Annexes Annex A. FM Economic and Sector Work, FY Annex B. FM Institutional Development Fund Grants, FY

4 Annex C. FIRST Initiative Grants, FY Annex D. ROSC Accounting and Auditing Status Report, FY Annex E. FM Sector Board Committees and Working Groups Annex F. Promoting Information Sharing: Internal and External Learning Activities... 33

5 FINANCIAL MANAGEMENT IN WORLD BANK OPERATIONS: ANNUAL REPORT FOR FY09 EXECUTIVE SUMMARY 1. The objective of the World Bank s work in the Financial Management (FM) Sector is to support the achievement of development results by providing reasonable assurance on borrowers use of Bank funds and by helping partner countries improve their financial management. FY09, a year marked by the global financial crisis, underscored the importance of FM and its oversight role, as development efforts cannot be effective in reducing poverty without sound country financial management systems and the fiduciary assurance that funds are used for their intended purposes. 2. Delivering Quality Services. FM Sector Staff are fully integrated into Bank project teams supporting over 1,600 active investment operations representing a total commitment of about US$136 billion. In response to the financial crisis, the World Bank more than doubled its FY08 lending commitments to nearly $50 billion. FM staff rose to the challenge and provided increased levels of implementation support. During the year, to strengthen portfolio quality, the FM Sector made progress towards updating the FM Manual 1 --a principles-based manual aligned to the key directions of IL Reform, continued implementing IDA14 Internal Controls Review recommendations, and started to upgrade the FM management information systems. The Sector also supported Senior Management by providing corporate reviews of selected programs and operations as well as input to the investment lending reform effort. 3. Building Partner Countries FM Capacity. Working collaboratively with other sectors, the FM Sector continued to help partner countries implement public financial management (PFM) reform initiatives through analytic work, stand-alone technical assistance, components of investment projects and sectorwide approaches, and development policy lending. It promoted accountancy reform, supported the greater use of country FM systems and, with the International Organization of Supreme Audit Institutions (INTOSAI) and other donors, signed a Memorandum of Understanding that provides for a coordinated effort in supporting the capacity-building initiatives of supreme audit institutions Global Partnerships. The Bank continued to lead and participate in several international groups: the OECD-DAC Task Force on PFM, the MDB FM Harmonization Working Group, and the PEFA Program. The Sector continued its participation in strategic partnerships with the International Federation of Accountants (IFAC), INTOSAI and the International Accounting Standards Board; raised awareness of FM development issues in their activities; and facilitated partner countries adoption of internationally recognized standards, codes and practices. Also, although the FM Sector worked with IFAC and other donors in supporting the establishment and development of the accountancy profession in partner countries, considerably more needs to be done going forward. 1 2 The Financial Management Manual for World Bank-Financed Investment Operations was issued by the Financial Management Sector Board in February 2010 and became effective from March 1, The Memorandum of Understanding (MOU) which was signed in Brussels in October 2009 culminated a consultative process that began in Mexico in November 2007.

6 iv 5. Institutional Agenda. To maintain a structure and activities that support carrying out the Sector s mandate, the Sector sponsored a range of development and learning activities on topics of interest to the FM community: PFM, governance and anticorruption (GAC), corporate finance, trust funds and Bank operations. 6. Priorities and Challenges. During FY10 and well into the future the Sector expects to give particular attention to the following areas. FM Sector Strategy. The strategy, which will provide a cohesive implementation platform for FY11-13, will focus on three priorities: (a) delivering quality services, including support for IL Reform and fragile states; (b) building partner countries FM capacity; and (c) promoting global public goods. Quality and internal controls. Following finalization and issuance of the FM Manual, the Sector will continue to implement the recommendations of the IDA14 Internal Controls Review; implement Phase II of the Joint CSR/OPCS Evaluation of Quality Arrangements; and strengthen its management information systems, ARCS and PRIMA which is being developed as an institutional system. FM guidelines. The FM Manual will be rolled out in FY10, along with a range of guidance notes and supplementary reference material. Guidance on the treatment of FM in Country Assistance Strategies will also be updated. Use of country systems. The Sector will continue its work to deepen and accelerate the use of country FM systems; will continue collaborating with other Bank groups in providing follow-up support for PFM reforms; and will monitor the use of country systems. Private Sector Accounting and Auditing. The FM Sector will continue to work with partner country institutions to assess and implement accountancy reforms based on recommendations in Reports on the Observance of Standards and Codes Accounting and Auditing (ROSC A&A). A review of lessons learned from these assessments will identify good practices and inform the future conduct of the program. Governance and anticorruption. The FM Sector will continue its GAC work by contributing to building country FM capacity, developing and disseminating guidance on GAC issues in project preparation and supervision. Global partnerships. The FM Sector will continue to engage and take leadership in global partnerships with bilateral and multilateral donors, helping ensure that policy and operational issues affecting FM are coordinated and that agreements related to FM under the global aid effectiveness initiative move forward. Learning and career development. The 2010 Fiduciary Forum, a broad-scale joint Financial Management and Procurement learning event that brings together staff from the Bank, borrowers, and development partners to learn and share experiences, was hosted during March 1 5, 2010, attended by over 600 participants. The Sector will

7 v continue to provide knowledge sharing and learning opportunities for its highly decentralized staff, identify skills gaps, match staff to demand, and develop practices and procedures to attract and retain staff with the appropriate skills. Moreover, the Sector will continue to foster rotations, development assignments, and regional crosssupport.

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9 FINANCIAL MANAGEMENT IN WORLD BANK OPERATIONS: ANNUAL REPORT FOR FY09 I. INTRODUCTION 1. The objective of the Bank s work in the Financial Management (FM) Sector is to support the achievement of development results by providing reasonable assurance on borrowers use of Bank funds and by helping partner countries improve their financial management, capacity, and performance. In carrying out this mandate in FY09, the FM Sector continued its focus on quality, and on supporting partner countries to implement measures to enhance their financial management capacity and performance, while also positioning itself to address the challenges of the coming years. 2. Expectations for the Year. The Annual Report for FY08 3 described a wide range of activities through which the FM Sector had carried out its mandate. For FY09, the Sector identified the need to enhance the quality of its work by focusing on several key areas. FM and PR strategy. The joint strategy, to be finalized during FY09, was expected to focus on optimizing the two Sectors joint contribution to the efficient and effective use of public resources. Quality and internal controls. A particularly strong focus on quality and internal controls was expected to support the finalization and dissemination of the FM Manual; implementation of the Joint Evaluation of Quality Arrangements being carried out by Controller s Strategy and Resource Management (CSR) and Operations Policy and Country Services (OPCS); and oversight of FM information systems, including ARCS and PRIMA which is being developed as a corporate system. Use of country systems. To deepen and accelerate the use of country FM systems, the FM Sector planned to finalize and disseminate detailed guidance to help FM staff in assessing the adequacy of country FM systems for use in Bank-supported operations. The Sector would also continue collaborating with other Bank groups in providing follow-up support for public financial management (PFM) reforms. Private Sector Accounting and Auditing. The FM Sector would continue to work with partner country institutions to implement accountancy reforms based on recommendations in Reports on the Observance of Standards and Codes Accounting and Auditing (ROSC A&A), including promoting compliance with international standards. Learning and career development. Building on the positive results from field staff on the 2007 Staff Survey, the Sector would continue to foster rotations, developmental assignments, and Regional cross-support. The Sector would also continue to provide 3 See Financial Management in World Bank Operations, Annual Report for FY08 (SecM ), January 30, 2009.

10 2 innovative learning opportunities for its highly decentralized staff, identify skills gaps, match staff to demand, and develop practices and procedures to attract and retain staff with the appropriate skills. Governance and anticorruption. The FM Sector planned to continue intensifying its governance and anticorruption (GAC) work by developing guidance for identifying and handling GAC red flags, guidance on project design and supervision, and enhanced audit and assurance techniques to address corruption risks in projects. The Sector would work with the Department of Institutional Integrity (INT) to extract lessons from INT s experience of dealing with corruption cases and to conduct joint training sessions. CAS guidelines. Work on updating guidance on FM participation and contribution to Country Assistance Strategies (CASs) was expected to be completed in FY09. Global partnerships. The FM Sector would continue to engage with and take leadership in partnerships with bilateral and multilateral donors to help ensure that policy and operational issues affecting FM were coordinated and that agreements related to FM under the global aid effectiveness initiative moved forward. The Sector successfully carried out activities in all these areas 4, establishing a strong basis for growing and adapting to meet the future needs of the Bank and of client countries. 3. Purpose and Structure of Paper. This paper reports on the FM Sector s FY09 activities to enhance the quality of its work and promote development effectiveness. Section II summarizes the work done by FM staff in and with partner countries; Section III describes the activities of the FM Sector Board and Anchor; Section IV discusses some of the knowledge-sharing activities the Sector conducted or sponsored; Section V describes the Sector s institutional agenda; and Section VI sets out the FM priorities and challenges for FY10. II. THE FM SECTOR: AT WORK IN PARTNER COUNTRIES 4. FM Sector staff are fully integrated into Bank project teams, providing preparation support to approximately 300 new investment IBRD/IDA operations (with a commitment value of close to $50 billion) and implementation support to a portfolio of over 1,600 active operations representing net commitments of about $136 billion. 5 In FY09, as in every year, these staff worked to provide assurance that the funds provided by the Bank were being used as intended. In addition, in collaboration with other Bank staff and with other development partners, they helped partner countries build their financial management systems and capacity. This section summarizes the work of FM staff in the Regions. 4 5 Due to work program commitments and constraints, it was not possible to proceed with the Joint FM and Procurement Sectors Strategy at this particular juncture. However, an FM Sector Strategy is under preparation and is expected to be finalized by the end of FY10. See World Bank Annual Report 2009.

11 3 A. Regional FM Efforts 5. In FY09 the global financial crisis dominated the news and required significant attention by many Bank staff and others who work in development. Responding to the crisis, the World Bank more than doubled its FY08 lending commitments to nearly $50 billion. For many FM staff this meant considerably increased workloads and the need to work innovatively to meet borrowers greater demand for Bank-support. Alongside these efforts, the Sector carried out economic and sector work, undertook country systems capacity building efforts and led operational components and grant-financed operations in support of capacity building. Annex A lists the FM Economic and Sector work the Regions carried out in FY09, while Annexes B and C respectively list institutional development funds (IDFs) and FIRST Initiative 6 grants managed by FM. 1. Africa Region 6. The Africa Region s FM team actively supported several partner countries in improving their PFM systems, 7 using analytic work, investment operations, technical assistance, training, policy dialogue, and development policy operations (DPOs). To scale up the use of country FM systems, the team integrated capacity-building measures into project design. In Kenya, for example, the team supported the Internal Audit Department, National Audit Office, and other institutions, and actively involved them in Bank-financed projects. The team completed the development of an initiative to build the capacity of PFM staff in partner countries, i.e. the PFM Staff Capacity Development Initiative (PFM SCDI). Box 1 highlights a particular aspect of the Region s capacity building work. Box 1. Supporting Skills Upgrading Africa s PFM Staff Capacity Development Initiative A major factor constraining the development of PFM systems in Africa is the very low number of qualified personnel. The PFM Staff Capacity Development Initiative, developed in collaboration with partner countries and regional professional associations, aims to help improve the human resource skill base in PFM, accounting, and auditing. The program is designed to: a. Enable access for individuals, through employers and/or professional institutes and training institutions, to accredited PFM professional qualification and training programs; b. Assist capacity development of professional institutes and training institutions delivering accredited PFM and private sector accounting and auditing professional qualification and training programs; and c. Disseminate good PFM practice, targeted on gaps identified through PFM diagnostic work. 7. Use of Country Systems. The FM Sector held structured dialogues in various countries 8 with the aim of integrating the use of country FM systems into operations. Under this approach, The Financial Sector Reform and Strengthening (FIRST) Initiative is a multi-donor grant facility providing technical assistance (TA) to promote financial sector strengthening. Further information available at PFM support is being provided to Benin, Burkina Faso, Burundi, Cameroon, Central African Republic, Chad, Congo Brazzaville, Côte d Ivoire, the Democratic Republic of Congo (DRC), Ethiopia, Gambia, Ghana, Guinea-Bissau, Kenya, Lesotho, Liberia, Malawi, Mozambique, Madagascar, Mali, Nigeria, Niger, Rwanda, Swaziland, Sierra Leone, Senegal, Sudan, Tanzania, Uganda, Zambia, and through regional institutions like the West African Economic and Monetary Union (WAFMU). The structured approach to advancing the use of country systems is being applied to seven countries: Benin, Burkina Faso, Ghana, Mali, Malawi, Mozambique, and Uganda.

12 4 staff assess the FM-related risks and integrate appropriate mitigating measures; identify the system elements that are adequate and those that need improvement; and discuss relevant actions to improve systems with the government and other development partners. The team engaged with partner countries and relevant stakeholders in several countries to continue strengthening private sector accounting and auditing. Box 2 describes the experience in Mozambique. Box 2. Building Country FM Systems: Mozambique To scale up the use of recipient countries FM systems while ensuring adequate fiduciary assurance, the AFR FM team developed a methodology to systematically assess the fiduciary risks of using country systems, to identify both the areas in which the country systems could be used and the capacity-building and performance-improvement measures that would be needed. This approach was pioneered in Mozambique in July The conclusion was that the Bank would use the country s FM system for investment projects, provided the authorities implemented some cross-cutting measures: roll over unused project funds at year-end, improve the timeliness of issuance of audited project financial statements, and develop satisfactory modalities of collaboration between private sector auditors and the supreme audit institution. Bank projects approved in Mozambique since the review are using the country FM system, with interim supplemental measures in specific areas where there are weaknesses five projects in sectors as diverse as private sector development, health, telecommunication, decentralized finance, and rural development. The Bank is actively supporting the development of PFM capacity, particularly in the area of internal and external oversight, to facilitate the full transition to use of country systems. The Government has welcomed the Bank s proactive stance. It perceives clear benefits in terms of increased cash flow (IDA funds flow into the Treasury instead of commercial banks), comprehensiveness and timeliness of budget execution data, and reduction of transaction costs. In Mozambique, the Bank is now clearly in the lead among development partners in using country FM systems, and the initiative has attracted extensive interest from bilateral and multilateral partners. 8. Quality Assurance. The Region updated its quality assurance arrangements to factor in lessons from implementation of the previous ones. It paid rigorous attention to improving audit and interim financial reporting compliance. FM staff intensified country-level efforts to strengthen controls and implementation, invoking remedies as appropriate. The Region decentralized the entry of data into ARCS to the field offices, and trained additional country office ACS staff to support these functions. Moreover, FM staff were held accountable through the regular monitoring of results-oriented operational FM performance indicators. The outcome has been a robust quality framework, as some of the monitored indicators highlight. A notable achievement during the year was completion of updating audit reporting information in the ARCS system. Information is now kept up to date and regularly monitored. 2. East Asia and Pacific Region 9. EAPFM focused on enhancing quality assurance arrangements, including improving audit and interim financial reporting compliance. FM staff collaborated with colleagues from the Poverty Reduction and Economic Management Network (PREM) to support countries implementation of a number of PFM reform initiatives, including enactment of PFM legislation, roll-out of integrated financial management information systems, and capacity building for the adoption of international financial reporting standards.

13 5 10. Use of Country Systems. The extent to which the Bank relies on country systems in the Region is varied: countries such as China and the Philippines have used their national supreme audit institutions (SAIs) to audit Bank- and other foreign-financed projects for many years, while others, such as Mongolia, depend largely on private audit firms because of the low capacity of their SAIs. To help build capacity in the Mongolian National Audit Office, the EAP FM team facilitated a South-South exchange in which China s National Audit Office staff trained 10 Mongolian staff on foreign funds auditing, management systems, and audit quality assurance. In addition, two education projects in Vietnam have been designed to strengthen reliance on country systems, with funding channeled through the Treasury and budget and allocation aligned to the Government s cycle. 11. Portfolio Reviews. Country and sector-level reviews of the FM performance of projects were carried out often jointly with Procurement and the Loan Department (LOA) in four countries: Cambodia, Indonesia, Lao, and Philippines. In each case, proposed remedies for identified issues were closely aligned with efforts to strengthen the country s systems. 12. Internal Audit Capacity Building. Dialogue with our client countries has been ongoing for the last few years, culminating in various interventions to support Internal Audit. Our vision is that the region will, in the medium-term, have a well functioning and effective public internal audit; and an efficient value added control framework in the public sector. Box 3 provides some examples. Box 3. Internal Audit Capacity Building in East Asia and the Pacific Vietnam. The Internal Audit Capacity Building IDF Grant supports the Inspectorate of the Ministry of Finance in Vietnam in improving its effectiveness through enhanced capacity, mainstreaming modernized audit methodology, greater use of technology and strengthening of the audit profession. This initiative is well aligned with the Country Partnership Strategy and Vietnam s 10 th Socio-Economic Development Plan that aims to improve the business environment in the country, strengthen social inclusion, enhance management of the environment & natural resources and improve governance systems. Philippines. The Strengthening Capacity of Public Sector Internal Audit IDF Grant in the Philippines is directed mainly to support two areas: (i) the establishment of systems and mechanisms for the internal audit framework, and (ii) capacity building work that ensures the internal audit operations run effectively. This support will contribute to ensuring continuity to the challenging reforms in the critical Public Financial Management area and assist the government to implement its strategy on reforming the internal audit. This operation fits squarely in the 2009 Country Assistance Strategy broad objective of strengthening the Public Financial Management to a level that the business community and other stakeholders will begin to perceive the positive change in the control environment, leading to greater efficiency in use of public resources and delivery of services to the public. Indonesia. The IDF Grant to support the State Development Audit Agency (BKP) on the pilot implementation of the COSO (Committee for Sponsoring Organizations) Framework in Indonesia has facilitated the roll-out of the COSO framework adopted by the government. The process also attempts to determine suitable approaches to implementing the framework. 13. Strengthening Supreme Audit Institutions. The EAPFM team aims to address some of the challenges in the downstream PFM reforms such as helping to strengthen Supreme Audit Institutions in the region. An Institutional Development Fund (IDF) grant under implementation supports the Pacific Regional Audit Initiative (PRAI) with the objective of strengthening capacity of Supreme Audit Institutions (SAIs). It also aims to raise public auditing practices to uniformly-higher standards across the Pacific sub-region, which in turn is expected to improve

14 6 transparency and accountability in management and use of public resources. The backlog of public audit will be reduced significantly if not eliminated by year 2013 and the less developed SAIs will begin to produce high quality audit reports. The impact of this outcome will enhance skills acquisition by members through mutual knowledge sharing; as well as leading to high quality and timely services to citizens. 3. Eastern Europe and Central Asia Region 14. The global financial crisis severely affected many countries in ECA including recently graduated IBRD countries such as Hungary and Latvia, which returned to the Bank requesting crisis-response financing in the form of DPOs. Since the Bank had very little lending and nonlending activity in these graduated countries, there was no stock of current analytic work on PFM to support the new requests for DPOs. Therefore, the FM team had to obtain information on the adequacy of the country s PFM systems by reviewing all previous Bank and IMF analytic work and analyses completed by external organizations such as the Organisation for Economic Cooperation and Development (OECD), European Union, nongovernmental organizations (NGOs), and local think tank institutions, complementing their findings with recent information on such discrete PFM aspects as medium-term expenditure frameworks, implementation of performancebased budgeting, budget classification, and IT systems. The crisis provided an opportunity for the Bank to re-engage with several graduated member countries; but it also made clear the need for countries to continue to fully implement PFM reforms, many of which had been deferred, not considered as critical issues during the recent decade of economic prosperity. 15. Capacity Building. The ECA FM team increased its capacity-building efforts by leading or contributing to diagnostic studies for guiding PFM development, helping countries develop PFM improvement programs, and supporting implementation with advice, capacity-building assistance, and knowledge sharing on PFM (Box 4 describes an example). Box 4. Strengthening Armenia s PFM The Public Financial Management and Corporate Accounting and Auditing Project, currently under preparation, covers many elements of Armenia s PFM system that were initially supported through IDF grants, analytical work and technical assistance. The project aims at coordinating the development of the interrelated elements of the PFM system into a new level of improved accountability, operational efficiency, and fiscal discipline; and to help establish modern corporate accounting and auditing framework at the national level. It will support (a) public sector accounting; (b) internal controls and internal audit; (c) non-commercial enterprise accounting, reporting, and monitoring; (d) implementation of the GFMIS; (e) update corporate sector accounting standards; (f) corporate sector auditing; (g) public sector external auditing; and (h) e-procurement. 16. The ECA FM team also supported governments in strengthening their own institutional arrangements for preventing and detecting corruption, specifically supporting key government agencies responsible for the management and control of corruption risks Ministries of Finance, SAIs, and legislative oversight bodies. In this context, ECA FM was responsible for the task management of 18 trust funds. FY09 was a year of firsts for the team: it managed its first-ever investment loan in Azerbaijan; led its first-ever Public Expenditure and Financial Accountability (PEFA) assessment in Montenegro, with the support of other development partners and the Government; and provided the first programmatic technical assistance in Turkey (see Box 5).

15 7 Box 5. First Programmatic Technical Assistance in Turkey The Programmatic Public Expenditure Review is designed to combine the Bank s traditional diagnostic work (PER report and PEFA assessment) with a diverse range of activities such as grants to support PFM report implementation, symposia, trainings, and workshops to support and complement the Turkish Government s efforts in implementing its PFM reform agenda. One of the main deliveries in the program s first year was the preparation of the first volume of a Public Financial Management Performance Assessment based on the PEFA methodology, a study that was made jointly with Government counterparts and Bank experts. The second volume will be a detailed assessment that will focus on the implementation status of PFM reform at the line-agency level. The country office team is also launching a website for PFM in Turkey ( to be managed by the Government. 17. Portfolio Quality. Consistently high ratings by the Quality Assurance Group confirmed that ECA continues to have a robust risk-based quality assurance framework and a solid portfolio and risk monitoring system. 4. Latin America and Caribbean Region 18. During FY09 the Bank introduced a strategic approach to FM work and enhanced portfolio monitoring and quality assurance by adopting integrated fiduciary reviews in high-risk environments. In capacity building, some of the highlights of FY09 s deliverables include the first two PEFA assessments in LCR middle-income countries Peru and Colombia as well as the completion and dissemination of three Brazil state-level assessments carried out with the District of Brasilia (Box 6 highlights other capacity-building work in the Region). To share the experience with global partners, the LCR FM team prepared a synthesis note on subnational PFM frameworks, pointing to strengths and weaknesses that are common across subnational entities in Brazil, and describing good practices. Box 6. PFM Capacity-Building Efforts in the LCR Region Supporting Regional SAIs. The IDF grant to the Central America Organization of Supreme Audit Institutions (OCCEFS), having met its objectives and achieved satisfactory results, has given way to a follow-up grant designed to respond to the organization s continued demand for Bank services related to the collection of best practices and recommendations on social audits and the SAIs work. To help improve the quality and timeliness of fiduciary oversight conducted by SAIs in the Caribbean, the LCR FM team continued to support CAROSAI through an IDF grant, with a view to creating large spill-over learning effects in small countries that have limited human and institutional capacity. Supporting the Implementation of PFM Reforms in Peru. The Bank delivered a Fiduciary Workshop for Peru s project implementing entities, which involved the active participation of officials from the Ministry of Finance Budget and Accounting Directorates as well as the SAI, enhancing participants understanding of recent government reforms in PFM (e.g., new budget classifications, new chart of accounts, and audit). In addition, the World Bank, IMF, and US Treasury joined in providing a Cash Forecasting Seminar, helping different public sector actors who are involved in the implementation of the Treasury Single Account to enhance their knowledge and understanding of the importance of inter-institutional information-sharing to support a modern and efficient cash management. 19. Governance. To enhance governance at the country level and pilot innovation in fiduciary work, the Bank made greater use of holistic approaches to address systemic portfolio issues and gave increased attention to country-level fiduciary matters. Among other things, the team (a) designed the Honduras Country Fiduciary Strategy, which covers policy, sectoral, and portfolio fiduciary actions and is integrated with the overall country governance strategy; (b) carried out portfolio sweep supervision (in Guyana, Haiti, Jamaica, the Organization of

16 8 Eastern Caribbean States, and St. Lucia), and intensified joint FM-Procurement supervision activities; (c) piloted the FM Red Flags for Fraud and Corruption Tool in the Argentina Health Sector and provided recommendations for strengthening the overall governance framework for the Sector. 20. Knowledge. The Bank prepared two publications: (i) Accounting for Growth in Latin America and the Caribbean: Improving Corporate Financial Reporting in Support of Regional Economic Development; and (ii) Accountability in Public Expenditures in Latin America and the Caribbean: Revitalizing Reforms in Financial Management and Procurement 9. Together with development partners, the Bank supported knowledge and capacity-building through the Global Distance Learning Network (GDLN) Series Europe meets LAC to take stock of and disseminate experiences in financial reporting and accounting. 21. Donor Coordination and Harmonization. The Bank deepened client engagement by advancing harmonization with development partners and the use of Country Systems at national and sub-national levels. The World Bank working jointly with the Inter-American Development Bank (IADB) supported Honduras adoption of the UEPEX financial reporting module for its entire portfolio, as well as in the Dominican Republic. Thus, allowing projects to report financial information directly from budgetary execution, enhancing the control framework and reliability of project reporting. In addition, other activities which have strengthened this agenda, include: use of provincial IFMIS in Argentina; use of the Single Treasury Account in Costa Rica resulting in the full adoption of a discrete element of country system for project flow of funds; and joint audit TOR s with the IADB for the audits carried out by the Office of the Controller General Federal Accounting Council in Brazil. 5. Middle East and North Africa Region 22. The MNA FM team continued to implement a risk-based approach that focused on results and regular progress monitoring. Country-level work included carrying out institutional FM capacity assessments and contributing to the GAC agenda by performing special-purpose reviews of selected high-risk projects in the Egypt portfolio. Partnership with key national and regional institutions, as well as inclusion of FM issues in countries economic development, continued to be high priorities. Box 7 describes a specific effort by the FM team. Box 7. Audit Firms Capacity in the MNA Region As the timeliness of audits for Bank-funded projects improves, the MNA FM team is directing its attention to the quality of audit reports received from borrowers, conducting special-purpose reviews to identify areas in which the Bank and development partners can help strengthen audit capacity in the Region. The team performed audit quality reviews of two audit firms that perform 95% of the Iraq and Lebanon portfolios audits. The objective of the quality review was to ascertain whether the audits comply with international standards, in terms of quality and scope and whether the Bank can rely on the auditor s opinion when assessing portfolio riskiness. The assessment findings recommended actions to enhance the quality process at both firms. 9 Accountability in Public Expenditures in Latin America and the Caribbean: Revitalizing Reforms in Financial Management and Procurement was published jointly with the Brookings Institution Transparence and Accountability Project. For further details visit:

17 9 23. Differentiated Approach Towards Sustainable FM Systems. The team tailored diagnostic tools and advisory contributions to meet country expectations, differentiating and adapting to the needs of middle-income, fragile, post-conflict and oil-rich economies including assessing diagnostic fiduciary risks in West Bank and Gaza; furthering the use of country systems in Egypt and Morocco; and using dialogue and capacity strengthening to support Iraq s SAI. The region also continued its support to client countries through building sustainable systems supported by grants. Within the ROSC reform plan, MNAFM, through an IDF, supported Egypt s Capital Market Authority to enhance it capacity to enforce implementation of International Standards. In Lebanon, IDF-support financed the establishment of sustainable training tools on modern PFM topics. Through supplementary PCF-support, managed by MNAFM, the Ministry of Finance in Lebanon was able to develop a monitoring and reporting system to follow on the extra-budgetary allocations and donor-financing made available to rebuild the country. 24. Portfolio Monitoring. Continuous efforts to monitor portfolio performance and FM project risk through the Project Status Report (PSR) has yielded positive results. The MNA FM team has been communicating the progress met on the PSR on a quarterly basis to the region; and has facilitated the follow-up process with the sectors, regarding compliance addressing the disconnect between the FMS ISR FM ratings and the PSR rating. In addition, the region conducted Special Purpose Reviews on selected high risk projects within the Egypt portfolio. This comprehensive review is not limited to transaction verification, but also assessed areas of risks and internal control weaknesses, covering 17% of the disbursements made using Statement of Expenses (SOE) method. The review identified some weaknesses in the control framework under two projects resulting in the disbursement of ineligible expenditures. Under one of the two projects, such ineligible expenditures were reimbursed to the Bank, and follow-up actions have been underway under the second. The outcome of this robust process has resulted in strengthened FM quality for the MNA portfolio. Box 8 outlines capacity building efforts in support of portfolio implementation issues. Box 8. Capacity-Building in the MNA Region The MNA FM team jointly with Disbursement colleagues, scaled-up capacity-building efforts and conducted 13 training workshops targeting auditors and project financial management staff, providing guidance on portfolio implementation issues. These training workshops covered all of the active partner countries in the Region: Djibouti, Egypt, Iraq, Iran, Jordan, Lebanon, Morocco, Tunisia, West Bank and Gaza, and Yemen. 25. Growth. Responding to the large growth in the portfolio as the global financial crisis increased the demand for Bank services, the MNA FM team re-energized their practice by recruiting six new talented and skilled professionals. 6. South Asia Region SARFM introduced fiduciary reviews to enhance the focus on fiduciary risks, quality, and results (see Box 9).

18 10 Box 9. Supporting Quality of FM work in Investment Lending in India Maintaining Quality of Supervision. In a large country like India, it would be prohibitively expensive for the Bank to supervise the funding of decentralized expenditures across all states and districts. It is also not cost-effective for the Government to maintain separate records for the Bank-provided funds or get a separate external audit for these expenditures and provide the audit reports. However, the decentralized activities (staff, mobility cost, and training), accounting for about 15% of overall project costs, were critical to achieving project objectives. It was agreed that selected decentralized activities would be funded through predetermined standard costs (the standard costs were derived from a list of planned expenditures by districts and states, reviewed by Bank for reasonableness, and agreed during negotiations). Instead of requiring audit reports for such expenditures, the Bank agreed that the fiduciary assurance for such decentralized expenses would be obtained through integrated implementation-cum-fiduciary reviews to be conducted by an independent consultant, who would determine if the activities are being executed, if they are delivering planned outputs, and if the actual expenditure is broadly comparable with the standard costs. Fiduciary Review of the National Highway Authority. During FY09 the SAR FM team carried out a drill-down fiduciary review of two projects implemented by the National Highways Authority of India. The objectives were to (a) achieve last-mile fiduciary assurance on the recently closed loans and ensure that the total Bank disbursement had been audited, and (b) uncover the critical corruption and leakage risk areas for Bank operations through a simultaneous review of historical internal audit reports, transactions, and historical statutory audit reports. The results of the exercise led the team to suggest (a) restructuring of internal audit for Bank project implementation units to address corruption risks and elicit lucid and articulate comments from internal auditors about the likelihood of such risks; (b) historical financial statements audit for ongoing projects to replace the audit based on statements of expenditure, to distance Bank-funded operations from the multitude of repeated qualifications on the entity audit report; (c) restructuring of the terms of reference for the statutory audit to incorporate critical elements of financial statements audit to achieve complete linkage between statements of expenditure and books of account; and (d) enhancement of systems capability and transparency through the use of ERP type systems. The Highways Authority has agreed to all Bank suggestions. The likely outcomes of the suggested interventions include (a) stronger assurance on use of Bank funds through restructured financial statements audit with auditor reporting in prescribed formats, (b) establishment of early warning signals through crisper and unambiguous internal audit, and (c) transparency in National Highway operations through the use of better software that will provide for hard controls on transactions and ready availability of back-up documents. 26. Pakistan s Use of Country Systems. In Pakistan, besides using country systems in a number of projects being managed under the auspices of autonomous and state-owned enterprises, during FY09 the Bank agreed to the full use of government systems in two performance-based sector investment loans the Punjab and Sindh Education Projects. The Bank is also taking actions to mitigate the risks of the challenges Pakistan faces: (a) the lack of an internal auditing function in government; (b) delayed legislative scrutiny and oversight on public expenditures; and (c) the fact that the country s IT-based PFM system has yet to be fully rolled out in one of the country s four provinces, limiting the capacity to support the full integration and mainstreaming of projects within government. 27. Bhutan s Use of Country Systems. Bhutan s small size and good governance make it a good candidate for increasing the use of country systems, and a good potential beneficiary of the Bank s simplification agenda. Accordingly, the default position in designing the FM arrangements for Bank-financed projects in Bhutan has increasingly been to use the country s own accounting and financial reporting systems to meet the Bank s requirements. 28. In supporting the use of country systems, SAR, like other Regions, is approaching clients through a differentiated approach that reflects their level of readiness (see Box 10).

19 11 Box 10. Building Country FM Systems: Afghanistan At the outset of the Bank s reengagement in Afghanistan, FM arrangements for project investments were fully mainstreamed in the Treasury and the Auditor General. This meant that implementing agencies throughout the Government could work without project implementing units at least to the extent that FM was concerned. The benefits were clear and undisputed: accurate and timely disbursements, and reliable year-end reporting with audits meeting international standards. This was no small feat, given the capacity constraints of a post-conflict country with a weak accounting profession and PFM system, as well as limited banking facilities. Ancillary benefits included the capacity of the Government to control investment operations and report through the national budget on them an important benefit, given the significant share of public finances supported by the World Bank. The challenges initially came in two forms: (a) risk to the entire portfolio if the centralized systems failed; and (b) poor management reporting to the implementing units, including difficulty in preparing reliable, robust in-year unaudited financial reports. The first risk was dealt with through training and guidance to help develop capacity in the Treasury Department. The second took more time and was resolved by intensive involvement by the FMS in Kabul who supported the investment projects. The effort continues to face constraints. Dependence on Treasury for advisory services to maintain, develop, and operate the centralized systems is expensive and undermines the development of local capacity; it has been agreed that this support will continue while capacity is developed. In addition, the service projects are only as well served as the line ministries and thus they suffer from all the shortcomings of the national budget process; however, they are improving, and Afghanistan disbursement ratios are better than Regional and Bankwide averages. 29. Legislative Oversight Committees. The Region has created the SAR Legislative Oversight Community of Practice to allow members of legislative oversight committees to share information and good practices. 30. Partnering Cross-Sectorally to Address Operational Issues. To address commonly faced fiduciary and operational issues in SAR s growing portfolio, SARFM in partnership with the South Asia Urban Unit, organized a joint Round Table and produced a guidance note in support of providing greater clarity to the design and supervision of decentralized operations. This has been followed by SARFM taking the lead in preparing an Operations Guide for Local Governance projects in partnership with the Procurement and Safeguards Units in SAR. B. Audit Oversight 31. The FM Sector uses three measures of project audit oversight: Compliance. The FM Sector monitors compliance with legal covenants pertaining to the submission of audited financial statements and audit reports. Table 1 shows the proportion of audits of loans, credits, and recipient-executed trust funds received during the year. Since FY08, EAP, MNA and LCR have made substantial improvements in project audits received on time for IBRD/IDA operations. Audit delays remain a challenge and the FM Sector is focused on improving this area, as outlined in paragraph 32.