Afghanistan Public Sector Accounting and Auditing

Transcription

1 Report No AF Afghanistan Public Sector Accounting and Auditing A Comparison to International Standards October 2007 Financial Management Unit South Asia Region Document of the World Bank Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized

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3 ABBREVIATIONS AND ACRONYMS ACCA ARTF ASOSAI CAO CGA CFO CIPFA IAASB IAS IASB IES IFAC IFRS INTOSAI IPSAS ISA PEFA PFEM PFM SA1 SOE SY UNDP Association of Chartered Certified Accountants, United Kingdom Afghanistan Reconstruction Trust Fund Asian Organization of Supreme Audit Institutions Control and Audit Office Controller General of Accounts Chief Financial Officer Chartered Institute of Public Finance and Accountancy, United Kingdom International Auditing and Assurance Standards Board International Accounting Standard International Accounting Standards Board International Education Standards for Professional Accountants International Federation of Accountants International Financial Reporting Standard International Organization of Supreme Audit Institution International Public Sector Accounting Standard (of IFAC) International Standard on Auditing Public Expenditure and Financial Accountability Public Finance and Expenditure Management Public Financial Management Supreme Audit Institution State-Owned Enterprise Solar Year United Nations Development Program

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5 Ac kn owledg men t s This assessment of accounting and auditing standards and practices in a public sector review was carried out in active collaboration with the Government of Afghanistan and various stakeholders, particularly the offices of the Auditor General and the Ministry of Finance, and their advising consultants, Deloittes and Bearing Point. The review was conducted through a participatory process that involved these stakeholders, and an assessment report was provided to the Government. The responses to issues raised by the diagnostic questionnaires were especially usehl, as were the reports and information available from the advising consultants and recent World Bank assessments of public financial management. The team of advisors and development partners also contributed greatly to the early stages of the concept note and framework development, as well as the drafting of earlier reports, for this study which covers the countries of the South Asia Region: Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka. The Afghanistan report also benefited from the comments of its peer reviewers, Marius Koen, and Irene Ponniah, Senior Financial Management Specialists. Valuable comments were received also from Paul Sisk, Donna Thompson, and Stephane Guimbert. The Task Team was responsible for writing this report with general guidance from the advisors and the development partners who collaborated on this review program. The draft report after a consultative workshop in Kabul on September 13, 2006 was provided to the Government for comment, and the comments have been considered in this country report. Task Team P. K. Subramanian, Lead Financial Management Specialist Paul E. Sisk, Sr. Financial Management Specialist Kenneth 0. Okpara, Sr. Financial Management Specialist Manoj Agrawal, Sr. Financial Management Consultant Ronald Points, Lead Consultant, Accounting Michael Jacobs, Lead Consultant, Auditing Review Program Advisors Simon Bradbury, Loans Department, World Bank David Goldsworthy, International Technical Cooperation Program, UK National Audit Office Noel Hepworth, Chartered Institute of Public Finance and Accountancy, London Abdul Mudabbir Khan, Fiscal Affairs Department, International Monetary Fund Ian Mackintosh, Chairman, UK Accounting Standards Board Paul Sutcliffe, International Public Sector Accounting Standards Board, International Federation of Accountants iv

6 Development Partner Collaborators David Biggs, UK Department for International Development Kathleen Moktan, Asian Development Bank V

7 Contents Executive Summary... 1 I. Introduction... 1 I1. Public Sector Accounting... 3 A. Institutional Framework for Public Sector Accounting Accounting Laws and Regulations Education and Training Code of Ethics Public Sector Accountant Arrangements... 6 B. Accounting Standards as Practiced... 6 C. Assessment of Accounting and Auditing in State-Owned Enterprises... 7 I11. Public Sector Auditing... 8 A. Statutory Framework for Public Sector Auditing... 8 I. Statutory Framework Setting Auditing Standards Ensuring Independence Qualijkations and Skills for the Auditors Training Auditor Competence Quality Assurance B. Auditing Standards as Practiced Audit Planning Audit Supervision Reviewing Internal Management Control Procedures Analyzing Financial Statements Reporting on Financial Statements Reporting on Fraud Reporting on Compliance IV. Action Plans Annex A. Methodology of the Assessment Annex B. Accounting and Auditing Standards International Public Sector Accounting Standards International Education Standards International Financial Reporting and International Accounting Standards INTOSAI Code of Ethics and Auditing Standards International Standards on Auditing Annex C. Afghanistan Auditing and Accounting Legislation Annex D. Benefits of Accrual Accounting Annex E. PFM Reform Agenda Supplementary Table of Standards and Gaps...; vi

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9 Executive Summary 1. This assessment of public sector accounting and auditing is generally meant to help implement more effective Public Financial Management (PFM) through better quality accounting, reporting and public audit processes in Afghanistan, and to provide greater stimulus for more cost-effective outcomes of government spending. Annex A explains the methodology used for the assessment. Reporting is a major outcome of the public accounting process that provides an important basis for PFM accountability. More specific objectives are (a) to provide the country s accounting and audit authorities and other interested stakeholders with a common strongly founded knowledge as to where local practices stand against the internationally developed norms of accounting, financial reporting and auditing; (b) to assess the prevailing variances; (c) to chart paths for improving the accordance with international standards; and (d) to provide a continuing basis for measuring improvements. The adoption of a firmly based accounting, reporting, and auditing framework is a solid value proposition; the alternative is a gross wastage of public and donor funds. One of the foremost challenges facing the adoption of a clear-cut accounting, reporting, and auditing framework, is the lack of a program for ensuring sustainable national capacity development in Afghanistan. Unless this happens, Afghanistan will remain excessively dependent on foreign expertise indefinitely, and be highly vulnerable to reductions in aid flows and external technical assistance. Capacity development will also require wider public administration reforms (recruitment, pay, human resources); organizational restructuring and improvements; and training; these are not the specific topics of this assessment. Better management of the massive amounts of external technical assistance currently being injected into Afghanistan, is also needed to ensure that the technical assistance supports longer-term national capacity development. Adequate implementation of accounting and auditing, based on international standards is crucial to underpin these PFM systems. Response by the Treasury on the draft country report found that the accounting aspects of the Gap Analysis Report are accurate and useful, the options expressed are for the most part practical and can be implemented, and that in some cases the timing of implementation depends on further development of the environment in the country. The Auditor General responded that the audit aspects provided a valuable guide for setting the way forward and providing guidance on upgrading the operations of the CAO to comply appropriately with international practice. 2. The World Bank has developed a general PFM reform agenda; insofar as this covers accounting and audit, it is summarized in Annex E. This gap analysis report has taken note of the action plan agreed by the Government of Afghanistan. This is especially noted in the continuing severe capacity constraints in the field of accounting and auditing and the reliance placed on support from foreign consultants and advisors to sustain the existing PFM framework. The report also notes the urgent need for these consultants and advisors to work with Afghan counterparts, to build up their indigenous capacity to take over these functions eventually. 3. Adoption of international standards for accounting and auditing provides the basis for competent financial reporting and transparency. The International Public Sector 1

10 Accounting Standards Board (IPSASB) of the International Federation of Accountants (IFAC) has developed a core set of accrual-based International Public Sector Accounting Standards (IPSAS) and also a comprehensive IPSAS on the cash basis of accounting. These IPSAS establish an authoritative set of independent international financial reporting standards for governments and others in public sector organizations. The study has taken the international standards as axiomatic with any acceptable options incorporated in the standards. The study has not assessed whether the country should adopt a limited version of the standards, as the processes of developing the standards have already considered any acceptable options that can be incorporated into the text of the standards, but they do not override authoritative national standards issued by governments, regulatory or professional accounting bodies. Application of IPSAS by national authorities will support developments in public sector financial reporting directed at improving decision making, financial management, and accountability and it will be an integral element of reforms directed at promoting social and economic development. The IPSASB has also developed guidance on the transition from cash- to accrual-based reporting. The traditional emphasis on cash accounting has been found inadequate through failure to recognize true costs, and all assets and liabilities. Cash accounting can too easily neglect asset management, accumulating arrears, future liabilities (e.g., pensions), and contingent liabilities (e.g., guarantees). 4. The desired actions indicated by the gap analysis assessment are summarized below. 5. Adopt International Public Sector Accounting Standards starting with the Cash Basis IPSAS as the basis for building in-country public sector financial management capacity expertise. With the adoption of International Public Sector Accounting Standards (IPSAS), the Cash Basis IPSAS should be applied first with a longer-term program for subsequent implementation of Accrual Basis IPSAS. The International Federation of Accountants (IFAC) issues IPSAS. Annex B gives a general description of IFAC and a listing of the IPSAS. At the present time, Afghanistan does not comply with the Cash Basis IPSAS, Part 1, in its annual accounts. The Government of Afghanistan should reformat the present cash basis of reporting to conform to the Cash Basis IPSAS. Annex C gives current Afghanistan auditing and accounting legislations. Benefits from eventually adopting accrual reporting are set out in Annex D. In its response to the draft country paper, the Treasury noted that that the PFEM law specifically requires the application of international accepted standards and principles but does not specify which standards are to be followed. The intentions of the Treasury as the organization given the responsibility for information and reporting, is to report Solar Year (SY)1385 (2006) and SY 1386 (2007) on a cash basis according to Cash Basis IPSAS with the required supplemental schedules as well as other schedules as needed. The PFEML also requires the Ministry to provide a full accounting (auditable) of all assets held by the State at the end of the fiscal year. At this stage, an accounting of identifiable assets with supportable values will be provided as a supplementary schedule. Considering the environment in Afghanistan, it will be several years before reliable information about State assets will be available. 2

11 6. Take steps to more effectively, involve local staff in the accounting and reporting processes, modernize reporting, and strengthen legislation. Computerization is proceeding under the broad Public Administration and Capacity Building Program. The accounting advising consultant, Bearing Point, is preparing most of the financial reports and annual financial statements, but localization is needed for sustainability. The Public Finance and Expenditure Management (PFEM) Law needs strong accountability arrangements, including the implementation of a chief financial officer function. There is a severe human resource constraint in accounting in Afghanistan. The Government needs to lead in developing a government accounting cadre from a critical mass of professional accountants in Afghanistan. 7. Increase efforts for bringing in professional accounting and auditing training to Afghanistan. As part of the Public Administration and Capacity-Building Program, a training facility is being created for accountants and auditors from the Ministry of Finance and the Control and Audit Office under the Auditor General. These accountants and auditors are expected to undergo dedicated full-time basic accounting and auditing training followed by examination and certification. The Ministry of Finance and the Auditor General should establish staff qualification requirements and make use of these facilities by developing separate professionally qualified accountancy and auditing cadres. In response to the draft report, the Treasury advised that it is planning to put into place in SY1386 (2007) an extensive staff and hiring program with educational and training standards for government accountants, and that the UK Association of Chartered Certified Accountants program will be a valuable asset in training accountants who would be able to serve in the government as well as in private industry. The Treasury also advised that it is essential that a professional accounting organization be formed by members of the profession and supported by the Ministry of Finance. This is a longer term responsibility that should be coordinated with academic, professional and governmental individuals and supported by professional dues, governments and private enterprises. 8. Monitor more adequately the reporting for state-owned enterprises. Only a few state-owned enterprises produce annual accounts for audit. Regulation arrangements are needed for reporting for all firms with some public ownership. 9. The Supplementary Table of Standards and Gaps at the end of this report provides a matrix detailing the accounting standards, the present position, and options for improvement. A summary of the key accounting standards issues is shown in Table ES 1. Standard 1. Does the Public Sector Accounting Law adopt IPSAS? 2. Does accounting education and training accord with IES? 3. Does the Code of Ethics match Current starus Yes. No. No. Action needed to move towards international standards The assistance from a professional distance-learning institution may be taken to build local training Relevant parts of the IFAC Code 3

12 Standard international standards? 4. Is there a body to prescribe public sector accounting standards? 5. Are the financial statements in accord with the IPSAS standard? 6. Is the statement of cash receipts and payments in IPSAS form? 7. Are accounting policies and explanatory notes required? 8. Are other disclosures in accord with IPSAS? 9. Does the government issue a consolidated financial statement which consolidates all controlled entities? Current status Law specifies international standards. No. No. No. No. No. Action needed to move towards international standards should be adopted. Use the IPSAS reporting format. Use the IPSAS reporting format. Use the IPSAS reporting format. Use the IPSAS reporting format. Not feasible in the short term. 10. Adopt the IFAC-issued International Standards on Auditing (ISA) and the International Organization of Supreme Audit Institutions (INTOSAI) Auditing Standards. The Control and Audit Office (CAO) of Afghanistan has planned to adopt auditing standards that are developed on the basis of the INTOSAI Auditing Standards. Implementation of the CAO standards needs improvement. The application of international standards on auditing would be improved by the preparation of a more modem audit manual. This manual, which will be based on INTOSAI Auditing Standards, is in the CAO development program. The application of these standards requires adequate professional competence, organizational independence, and adequate resources and systems. The weak areas need the investment of financial and human resources if staff skills are to meet the required standards. (See Annex B for a general description of INTOSAI and IFAC and a listing of their respective auditing standards). 11. Institute a new National Audit Act. A new National Audit Act supported by the Constitution is needed to support an independent audit office. A new National Audit Act is needed to provide greater discretion to the Control and Audit Office in the areas of financing and personnel policies. There is a need to improve audit impact. Audit recommendations and observations go unheeded in too many instances. The application of audit findings needs to be greatly improved through a mix of strategies. Greater transparency through more interaction with the media, along with more focused and effective report writing and report follow-up processes would increase the incentives for auditees to take action on audit findings. The long-standing Control and Audit Law provides for an Audit and Control Department (more generally called the Control and Audit Office) to organize the audit and control affairs of public properties. An adequate audit law should remove the control elements of the current laws as they are inconsistent with the role of a modern audit office. This would mean properly establishing the position of Auditor General and its office thus allowing it to carry out a full range of audits, including the audit of the performance of the budget and the annual accounts of all 4

13 levels of government and state-owned enterprises. A change to the Constitution should include establishing the Auditor General as a constitutional office. 12. Implement the Strategic Development Plan. The Strategic Development Plan provides an effective development path and an in-house method of monitoring progress. The Auditor General has been allocated an advisor who should be entrusted with developing an appropriate program for implementing the Auditor General's Strategic Development Plan and fulfill further development needs. For example, the Control and Audit Office should contract with private sector auditors who could concentrate on conducting the audits of World Bank projects and funds, which would improve government audits. 13. The Supplementary Table of Standards and Gaps at the end of this report shows the present position for each component of the standards, and the options for improvements that would bring Afghanistan into closer conformance with the international standards. A summary of auditing standards issues is shown in Table ES2 below. 14. Monitor accounting and audit impact under current programs. The use of PFMindicators surveys, suitably extended in detail, would provide a comprehensive basis for monitoring progress in adopting and applying international standards in accounting and auditing. In the absence of, or the delay in preparing, such a survey, improvements in accounting and audit impact should be measured over the next few years by monitoring the progress of strengthening current programs for the Ministry of Finance and the Office of the Auditor General. Table ES2. standards been adopted? ' Guidance is provided by two model laws: (1) a general prescription of a Model Law developed by the UNDP Program for Accountability and Transparency (PACT) and (2) A Model National Audit Ofice Act, The Association of Chartered Certified Accountants, UK,

14 Standard auditors conform to INTOSAI and IES? 8. Is the SA1 equipped with the audit methods and technologies to meet the INTOSAI standards? 9. Does the SA1 have the quality Current status No. No. No. Action needed to move towards international standards distance-learning institution may be taken to build local training. The Strategic Development Plan will be of assistance, but additional resources will be needed. The Strategic Development Plan will introduce the process: A new manual of audit procedures and Yes. - complied with? 12 Does the auditor prepare an audit opinion on the financial statements in a form that matches international standards? 13. Does the consideration of fi-aud and error in an audit of financial statements accord with international standards? 14. Are the Auditor General s reports made public? 15. Is the process for taking action on audit recommendations sufficiently effective to meet international standards? Yes. Yes. No. Follow up is inadequate. The Audit Law should arrange for reports to be tabled and made public when tabled. Stronger scrutiny processes are needed. 6

15 1. Introduction 1. This assessment of public sector accounting and auditing is generally meant to help implement more effective public financial management (PFM) through better quality accounting and public audit processes in Afghanistan and to provide greater stimulus for more cost-effective outcomes of government spending. More specific objectives are (a) to provide the country s accounting and audit authorities and other interested stakeholders with a common firmly based knowledge as to where local practices stand in accordance with international standards of financial reporting and auditing; (b) to assess the prevailing variances; (c) to chart paths for improving the accordance with international standards; and (d) to provide a continuing basis for measuring improvements. 2. As part of the general support program in South Asia for assessment and improvement of public sector accounting and auditing, the World Bank, with the cooperation of member governments, is conducting a Review of Public Sector Accounting and Auditing Practices in member countries. In conducting this assessment, a set of diagnostic questionnaires [developed to be consistent with the context of the PFM Performance Measurement Framework used by the Public Expenditure and Financial Accountability (PEFA) Program3] was used to gather substantial insight into country performance with regard to the PFM indicators relating to external auditing and financial statement reporting. Annex A discusses the methodology used for conducting the assessment in this report. 3. The diagnostic questionnaires were used to gather information on the prevalent national standards and practices for accounting, financial reporting, and auditing in the general government sector and in the state-owned enterprise (SOE) sector. Conducted in cooperation with country authorities, the diagnostic questionnaires incorporate the principles contained in the public sector accounting and auditing standards promulgated by International Organization of Supreme Audit Institutions (INTOSAI) and International Federation of Accountants (IFAC). Annex B summarizes the international frameworks that were used in this assessment. The responses to these questionnaires stimulated further discussions among the World Bank team and country authorities. These discussions examined accounts, financial statements, audit reports, and working papers as a means to explore the quality of processes and products. The PFM Performance Measurement Framework has been developed as a contribution to the collective efforts of many stakeholders to assess and develop essential PFM systems, by providing a common pool of information for measurement and monitoring of PFM performance progress, and a common platform for dialogue. The PEFA Program is a partnership among the World Bank, the European Commission, the UK Department for International Development, the Swiss State Secretariat for Economic Affairs, the French Ministry of Foreign Affairs, the Royal Norwegian Ministry of Foreign Affairs, the International Monetary Fund, and the Strategic Partnership with Africa. A Steering Committee, comprising members of these agencies, manages the Program. A Secretariat is located at the World Bank in Washington, DC. 1

16 4. The Emergency Public Administration Project, established in 2002 with the World Bank, provided support to Afghanistan while degraded financial management institutions were reconstructed. An advising consultant assisted the Control and Audit Office to audit the budgets from Solar Year (SY) 1381 (2002) and the donor funds. Another advising consultant helped to set up and operate the accounting and reporting system in cooperation with the Ministry of Finance. 5. With redeveloped capacities and reformed institutions, attention should turn to more focused capacity building and localization of core government functions. The basic needs for supplies, equipment, and salaries require continued attention in the accounting and auditing institutions. Added to the list is the provision of expert technical assistance for training and support in adopting modern accounting and auditing methods. With the assistance of long-term consultancies and in association with donor agencies, Afghanistan continues to address reforms in the accounting and auditing fields. 6. The World Bank has been assisting Afghanistan in adopting IFAC-issued International Public Sector Accounting Standards (IPSAS) and INTOSAI Auditing Standards in the following ways: Financial management reporting capacity is being strengthened in line ministries and the Ministry of Finance, but currently with very extensive support from consulting firms. A computerized accounting system has been implemented to assist with financial reporting in conformity with international standards and is being progressively extended. Audit work has been re-ordered around evidence-based opinions in line with INTOSAI Auditing Standards but with extensive support from advising consulting firms for the audit of the Afghanistan Reconstruction Trust Fund (ARTF) and various World Bank projects. The Auditor General has been auditing ministries as entities and expressing an audit disclaimer opinion on the annual State accounts because of major reconciliation and records deficiencies. Further development is needed for this to be conducted as required by the INTOSAI Auditing Standards. A systems and risk-based audit manual needs to be developed that will enable the Control and Audit Office to audit more effectively. 7. There needs to be a more comprehensive plan for Afghanistan to adopt the Cash Basis IPSAS in the short- to medium-term as part of a long-term program to adopt accrual-based IPSAS reporting for each government entity. There needs to be a plan for the Control and Audit Office to adopt the IFAC-issued International Standards on Auditing (ISA), as well as the higher-level INTOSAI Auditing Standards in its day-today auditing work. 2

17 II. Public Sector Accounting A. Institutional Framework for Public Sector Accounting 8. The institutional framework should include adherence to international accounting standards and use of qualified accounting staff to provide timely, relevant, and reliable financial information that is needed to support all fiscal and budget management, decision-making, and reporting processes. The diagnostic questionnaires that were used in this assessment have collected information on the current arrangements and the apparent gaps in Afghanistan for accounting laws and regulations; education and training of public sector accountants; application of a code of conduct; and numbers and characteristics of public sector accountants. 1. Accounting Laws and Regulations 9. Afghanistan accounting laws and regulations should endorse the specific use of international accounting standards. Satisfactory legislative arrangements are in place with respect to accounting and the use of international accounting standards. Implementation of a new finance law is underway. The 2005 Public Finance and Expenditure Management (PFEM) Law is based on Article 75, paragraph 4, of the Constitution. The PFEM Law covers the management of financial affairs; protection of public assets; preparation of budget; and the management of, and reporting on, public expenditure of the state administrations inside and outside Afghanistan. Under the Law, transactions are to be recorded according to budget classification and accounting rules compliant with internationally accepted standards and principles. The regulations should do more to identify the specific standards. 10. The integrated financial management system should be run by the Ministry of Finance with the assistance of consultancies. Computerization is proceeding under the broad Public Administration and Capacity Building Program; the advising consulting firm is doing most of the reporting work within the Treasury located in the Ministry of Finance. The accounting package and systems in place are to be enhanced to provide the functionality and geographic spread required to meet the needs of the PFEM Law. There needs to be a concurrent program to strengthen the capacity of the Ministry of Finance staff to run the system and prepare the accounts and reports. 11. Afghanistan should adopt the Cash Basis IPSAS. The IFAC Public Sector Committee recognizes the right of governments and national standard-setters to establish guidelines and accounting standards for financial reporting. The Public Sector Committee considers the Cash Basis IPSAS to be an important step forward in improving the consistency and comparability of financial reporting and encourages its adoption. The PFEM Law is not explicit about the application of IPSAS but is explicit about the use of international accounting standards. Various articles of the 3

18 PFEM Law refer to revenue and expenditure, and assets and liabilities items that should be accounted. The Treasury staff and consulting advisors, Bearing Point, consider that presentation of accounts in accordance with Cash Basis IPSAS could be achieved with current systems. It is recommended that this be done. To enhance this, notes should be used for those accrual requirements of the PFEM Law where accounting information is available. As the functionality of the accounting system is rolled out, elements of accrual basis of reporting can be considered. 12. Table 1 identifies the current position and the steps required if the Cash Basis IPSAS are to be adopted. Requirements Financial statements presented in the IPSAS Statement of cash receipts and payments Accounting policies and explanatory notes General considerations Reporting period Adequacy of information about the entity Correction of errors disclosed Current position No Yes No No l l No Activity required to adopt Cash Basis IPSAS Format can be followed Can be supplied Can be supplied I Presentation of comparative information I I I 0 Nature of error 0 Amount of correction I Comparative information restated Consolidated financial statements Treatment of foreign currency cash receipts, payments, and balances in compliance with IPSAS I No No Can be supplied Not practical in the short-term Not practical in the short-term 13. To enhance the reliability of annual accounts within the government, accounting, reporting systems, and staffing need to be improved. For the last two years, the Control and Audit Office conducted audits of annual government accounts. The audit opinions have been disclaimed because the auditors were dissatisfied with the degree of consistency of the annual accounts with other records. Ministries do not have the capacity to accept responsibility and enforce accountability on accounting matters. This capacity is important for budget execution and for general accountability arrangements. The accountability chain must be clear; designated individuals must hold positions of responsibility for the internal control system. The PFEM Law provides for this action to become effective if enforced by Ministry of Finance. 4

19 14. In the longer term, the Government of Afghanistan can be assisted in the transition from Cash Basis IPSAS to the Accrual-based IPSAS by utilizing IFAC g~idance.~ The guide has four main parts: 0 Introduction. Chapters 1-3 address general planning and project management issues. General Financial Reporting Issues. Chapters 4 and 5 deal with the selection, development, and approval of accounting policies and issues associated with the definition and identification of reporting entities. 0 Financial Elements. Chapters 6-8 outline the broad steps required for the identification, recognition, measurement, and disclosure of assets, liabilities, revenues, and expenses. The broad approaches discussed could be adapted and applied to particular items. 0 Specific Topics. Chapters 9-15 highlight implementation issues associated with four specific accrual IPSAS, and provide guidance in relation to a selection of topics not addressed, or only partially addressed, by existing IPSAS. 2. Education and Training 15. Current recruitment and training of government accountants does not provide satisfactory skills and the necessary professional accounting cadre. There is an urgent need to develop a critical mass of professional accountants in Afghanistan. The Government of Afghanistan must take the lead with its own accounting service. It is important that accounting staff be adequately skilled at their work. The recruitment and training arrangements should provide for this in the most efficient and effective manner. Accounting and audit specialist recruitment should require more relevant academic training and practical experience. The Auditor General recognizes that training needs to be better coordinated to meet the needs of government accountants. As part of the Public Administration and Capacity Building Program, a training facility is being created for accountants and auditors from the Ministry of Finance and the Control and Audit Office. These accountants and auditors are expected to undergo dedicated full-time basic accounting and auditing training followed by examination and certification. This is a realistic initiative and the Ministry of Finance should establish educational and training standards for government accountants; similarly the Auditor General should do this for auditors. 16. A phased and progressive education and training program combined with practical experience is needed. A sustainable and effective system of public financial management and public audit can only be brought about by developing and promoting an accounting culture, which can receive impetus by the creation and promotion of a critical mass of accounting professionals in Afghanistan. As part of the curricula for the training facility planned under the Transition to the Accrual Basis of Accounting: Guidance for Governments and Government Entities, International Federation of Accountants, Public Sector Committee Study 14, December

20 Public Administration and Capacity Building Program, the Ministry of Finance and the Auditor General should establish training requirements and training programs for their respective accounting and auditing staff. The training facility also provides a recognized institution where existing accounting and auditing staff can come together for networking and continued professional development. New graduates can be inducted and provided formal accountancy education at both technical and professional levels. In due course, a body of continuously welltrained professionals will provide service to various government agencies in all facets of accounting and auditing. For longer-term, high-level support for the proposed government accounting training, distance-learning programs could be used. Two distance-learning programs from the United Kingdom are offered by the Association of Chartered Certified Accountants (ACCA) and the Chartered Institute of Public Finance and Accountancy (CIPFA). 3. Code of Ethics 17. A code of ethics based on the IFAC Code of Ethics for Professional Accountants is needed. A code of ethics for accountants based on the fundamental principles of the IFAC-issued Code of Ethics for Professional Accounts should be implemented and observed. There should be arrangements to ensure that accountants confirm on a regular basis that they are operating in accordance with the code. The Control and Audit Office has already adopted such a code. The Treasury indicated that the requirement of adherence to a professional code of ethnics for public and private sector accountants should primarily be promulgated by a professional accounting and auditing organization whose principles are adopted or agreed to by the Ministry of Finance. 4. Public Sector Accountant Arrangements 18. The Chief Financial Officer (CFO) function needs development. For each public sector body that prepares annual accounts, there should be a responsible CFO function for maintaining systems of internal financial controls that manage risks and for preparing the accounts for signature by the chief accounting officer. Article 7 of the PFEM Law gives the Treasury of the Ministry of Finance broad treasury and accounting responsibilities and authority, but it does not provide for a CFO function.the Ministry of Finance should establish regulations for CFO functions in the executive government departments. It is important that proper segregation of duties is incorporated in the design and evolution of the PFM systems. The Treasury agreed with the proposals in this report noting that implementation of this program will be a longer term objective given the present environment in Afghanistan. B. Accounting Standards as Practiced 19. The diagnostic questionnaires collected information on the current arrangements and the apparent gaps in Afghanistan for setting public sector 6

21 accounting standards and for presenting financial reports. Out of this exercise came recommended activities that will help to bring local current standarddpractices in line with international standards. 20. Adequate implementation arrangements are needed for setting accounting standards for the public sector. The PFEM Law requires the use of international standards and gives responsibility to the Ministry of Finance. Under PFEM Law, Article 7, the Treasury of the Ministry of Finance maintains its general-ledger by recording transactions according to budget classifications and accounting rules which are compliant with internationally accepted standards and principles. The Ministry also publishes a final budget reconciliation report and a set of audited financial statements covering revenue, expenditure, assets, and liabilities in accordance with international standards. There is a need to create a regulatory body for dealing with interpretation and monitoring of the application of accounting and auditing standards for the public and private sectors. This is a longer-term prospect in Afghanistan, but the Ministry of Finance should be the body responsible for making the arrangements when conditions allow and in the interim should undertake the function itself. c. Assessment of Accounting and Auditing in State-Owned Enterprises 21. The State-Owned Enterprises (SOE) Law provides for audit by the Ministry of Finance and for annual balance reports. There are about 100 state-owned enterprises in existence in Afghanistan, but many are not functioning at all, or not functioning in the way intended. The Control and Audit Office carries out transaction checks on the budget expenditures of the state-owned enterprises and also audits the annual accounts. Only a few stateowned enterprises produce annual income and expenditure accounts and balance sheets accounts for audit. A more rigorous review of the desirable reporting and monitoring processes for the state-owned enterprises and an updating of the SOE Law is needed so that state-owned enterprises report according to international reporting standards. 22. A Financial Reporting Council should be established to regulate commercial government authorities. Action is needed to require stateowned enterprises to amend their accounts in accordance with audit findings, so that true and fair accounts may be issued for general public scrutiny within a stipulated period, consistent with that of listed enterprises. One approach would be to establish a Financial Reporting Council that would be responsible for adoption, monitoring, and enforcement of international accounting and auditing standards with respect to financial reporting by the public interest entities. 7

22 ~~ 111. Public Sector Auditing A. Statutory Framework for Public Sector Auditing 23. Effective scrutiny by the legislature to ensure efficient implementation of fiscal and expenditure policies should comprise comprehensive, competent, external audits that are underpinned by international standards on a~diting.~ The environment for an effective Supreme Audit Institution (SAI) requires a comprehensive approach to public financial management (PFM). Supreme audit institutions are not stand-alone institutions. They are part of a PFM architecture that includes budgeting, accounting, internal control, audit and legislative oversight, and government response. Improving the way the supreme audit institution functions is integral to providing information for improving the overall PFM system. But the action must be within the executive branch, yet under the watchful eyes of the legislature and the public. A strong demand for good public sector external auditing is necessary, for the supreme audit institution to be able to make an impact. This requires willingness on the part of the executive branch, to accept and respond to external scrutiny over its management of funds, and to ensure that corrective action is taken. It also requires public presentation of the audit reports to secure public support for effective action. All of these requirements are covered by the INTOSAI and IFAC standards. These international auditing standards should be adopted by the Auditor General. 24. The diagnostic questionnaires facilitated the collection of information describing current arrangements and the apparent gaps in the country in the following areas: Institutional framework for the supreme audit institution, Process for setting auditing standards, Use of code of ethics or conduct, Arrangements to ensure accountability in the supreme audit institution, Arrangements to ensure independence, Arrangements to ensure adequate skills and qualifications of the auditors, Arrangement for providing training, Arrangements to ensure auditor competence, Arrangements for quality assurance. Those areas with significant scope for improvement are discussed below. 1. Statutory Framework 25. The draft National Audit Act should be finalized and legislated. A draft National Audit Act has been under preparation in the Control and Audit Office for some time. The new National Audit Act will in effect include the following actions: removing the control Scope, qualify, andfollow-up of external audit is performance indicator No. 26 in the PFM performance measurement framework supported by the Bank and other development agencies. 8

23 elements of the current laws; properly establishing the Auditor General and hisher office; and requiring the audit office to carry out a full range of audits, including the audit of the performance of the budget and the annual accounts of all levels of government and the state-owned enterprises. The Auditor General advised in July 2007 that after consultation, final changes to the draft had been provided to the legislation directorate of the Ministry of Justice for further process. 26. The new National Audit Act, which provides for a modern audit function, should be supported by the Constitution. Simultaneously with the enactment of the new National Audit Act, a Constitutional amendment should be made to ensure the statutory independence of the Auditor General. The Constitution should include clauses establishing an Auditor General. The long-standing Control and Audit Law (Annex C) provides for the General Department of Audit and Control to organize the audit and control affairs of public properties. This Department has been administratively converted into the Control and Audit Office headed by the Auditor General. The Auditor General is appointed by Presidential Decree. The PFEM Law governs certification audit of the annual government accounts but does not specifically name the Auditor General as the auditor. The Auditor General noted that he is not able to sponsor a change to the constitution at this stage. The Action Plan in Part IV notes that it is important that this be done when practicable. 27. The Control and Audit Office should contract the audits of World Bank projects and funds to private sector auditors and disengage from control work. Current audit agent arrangements should be refined so that agents conduct non-governmental audits and the Auditor General conducts a full range of government audits. The control work should be the responsibility of internal audit. The current CAO role in managing domestic auditors should be transferred to the internal audit regime. The Auditor General has been allocated an advisor who should be given the task of developing an appropriate program to implement the Auditor General s Strategic Development Plan. The CAO noted the training value provided by the World Bank audits and that some policy analysis is required in conjunction with other agencies to realign or affirm roles in respect of control work. In respect of the loss of training opportunities afforded by the World Bank projects, the Strategic Development Plan for the Control and Audit Office at paragraph 38 is to include a proposed training program, which would take into consideration any necessary alternatives. 2. Setting Auditing Standards 28. The new National Audit Act should adopt International Standards on Auditing. The Control and Audit Office has adopted INTOSAI Auditing Standards. However, these standards are too general for adequate guidance. The IFAC-issued International Standards on Auditing are needed for providing effective guidance to improve the audit work by the staff. The International Audit and Assurance Standards Board (IAASB), part of IFAC, is progressively rolling out International Standards on Auditing. The INTOSAI is moving from maintaining its own auditing standards toward supporting IAASB in the development of its auditing standards, in particular, so that the IFAC/IAASB International Standards on Auditing appropriately reflect the interests of the international 9

24 public sector audit community. The CAO noted that the revision to the audit act will affirm the adoption of International Standards for Auditing. It is already affirmed in the Strategic Development Plan for the CAO. 29. The IFAUIAASB International Standards on Auditing represent best international practices for the auditing profession, particularly in areas of fundamental auditing practice such as: audit evidence, documentation, audit materiality, fraud, audit errors, audit opinions, audit planning, control environment assessments, and supervising the work of audit staff. 30. Afghanistan will benefit from the adoption of the more comprehensive International Standards on Auditing issued by the IAASB to supplement the INTOSAI Auditing Standards. With this in mind, it is generally recognized that INTOSAI Auditing Standards need the underpinning support of the more detailed IFACAAASB International Standards on Auditing. With the decision by INTOSAI to adopt IFAC/IAASB standards and to prepare public sector practice notes, where necessary, to support each of these standards, the way is open for Afghanistan to use the more comprehensive IFAUIAASB International Standards on Auditing to guide its work. This move is quite appropriate as Afghanistan is a member of INTOSAI and its regional group, the Asian Organization of Supreme Audit Institutions (ASOSAI). 3. Ensuring Independence 3 1. The new National Audit Act is needed to provide effective independence. All of the core principles of SA1 independence that were set out by INTOSAI are only partially, if at all, met by the current legislative and administrative framework. These principles include: the existence and de facto application of an appropriate and effective constitutional and legal framework; the independence of the SA1 Head, including security of tenure and legal immunity in the normal discharge of duties; a sufficiently broad mandate and full discretion in the discharge of SA1 functions; unrestricted access to information; the obligation to report to the legislature on their work; 10

25 0 financial and managerial autonomy and the availability of appropriate human, material, and monetary resources; 0 the freedom to decide on the content and timing of their reports and to publish and disseminate them; and 0 existence of effective follow-up mechanisms on SA1 recommendations. 32. More statutorily independent arrangements for staffing and for establishing the budget should be legislated. The CAO officers and staff are under the administrative control of the Finance Division of the Ministry of Finance, which controls the appointment, promotion, and disciplinary action for CAO employees.the CAO independence, as upheld in the Constitution, has been jeopardized by this administrative practice. The Control and Audit Office should be separated from the executive branch of the Government and connected with the Parliament. The Auditor General should be vested with more financial powers. Also, as practiced in other ministries, the annual budget of the Control and Audit Office needs to be considered and approved by the Ministry of Finance. The more preferable arrangements would be for a Parliamentary Committee to consider the CAO budget and audit plans prior to approval by the Parliament. In response to the draft report the Auditor General advised that CAO is now an independent budgetary unit and is responsible for its own staffing arrangements. This will be reinforced by the proposed legislative changes. 33. Implementation of the new National Audit Act should give the Control and Audit Office the independence, mandate, powers, protections, scrutiny, support, and organizational arrangements of a modern supreme audit institution. To achieve this institutional quality, there is a need to ensure: (a) the supply of equipment and facilities for operating in accordance with a modern audit manual; (b) the continued development of CAO auditing capacities of financial statements; (c) the re-design of audit approaches for CAO regularity auditing of the implementation of the budget; (d) the introduction of performance auditing to improve the efficiency and client service of government programs; (e) training of CAO staff in audit techniques; (f) modification of CAO management procedures to ensure accountable performance by its staff and its managers; and (g) the re-development of the audit review processes by ministries and by committees of the new Assembly. 34. Legislation should provide an environment in which the quantity and quality of resources, including staff salaries, are adequate for the usual SA1 regularity and performance audit mandate. The Control and Audit Office is included in the Priority Reform and Restructuring Program within the framework of salary restructuring already granted by the President to the Control and Audit Office. The Control and Audit Office should have its own budget separate from the Department of Administrative Affairs. The budget has to be adequate for the Control and Audit Office to do the job that it has been given. Currently the scope of the CAO audit is narrowly focused. Supreme audit institutions normally conduct performance audits on overall financial management performance issues of state bodies; this is an important type of audit for the development of Afghanistan and it is not being serviced. 11

26 35. Legislation should provide an environment in which the Auditor General is free to arrange for appropriate involvement with the media on audit reports. The audit reports should be discussed with the media to ensure that audit findings are not misunderstood. The CAO noted that it will have the authority to brief the media on the results of audits once they have been appropriately referred to a parliamentary commission for consideration. 36. Improved Public Accounts Committees and departmental administrative processes are needed for following up audit reports.6 Article 60 of the PFEM Law provides that the Government shall report to the National Assembly on decisions taken pursuant to the audit and control report. The Control and Audit Office noted in the report on the SY1383 (2004) accounts that there were substantial pending issues from the previous SY1382 (2003) and SY1381 (2002) audit reports. Follow up has been inadequate, and the Public Accounts Committee (or Commission) needs to give close attention to ensuring that the issues raised by audit reports are dealt with properly. The CAO advised in response to the draft report that the National Assembly has appointed a commission under the name of financial and budget commission. Presentations have been made through the Parliamentary Affairs Ministry to the Parliament and to members of the Finance and Budget Commission. Material has been prepared on training the members of the Commission and its support staff. The PFEM Law provides for the Auditor General to recommend fines. To some degree, improved audit methodology and report writing skills will help, but the fundamental processes for scrutiny need reform. In the longer term, Audit Committees and corporate governance arrangements for departments and agencies need to be reformed along with improvements to the audit processes. Better protocols may be useful between the Auditor General and departments to ensure access, and minimize disruption in the functioning of the departments. In addition, better protocols would help ensure that draft audit reports are reviewed quickly by departments for accuracy and fairness. The protocols also would ensure that the Control and Audit Office and departments, as far as possible, reach an agreement on reports before they are made public. Similar protocols are needed between Parliament and the Control and Audit Office covering, for example, how audit reports will be handled. 4. Qualifications and Skills for the Auditors 37. When being recruited for the Control and Audit Office, qualified candidates should preferably (and where practicable) have an accounting degree. The current recruitment criteria for CAO financial auditors give attention to accounting qualifications. Graduates with modern accounting educational backgrounds are generally unavailable in the Control and Audit Office. Many new recruits have law or political science degrees and require additional professional training if expected to undertake certification audits, an unnecessary step if accounting graduates with proper training could have been hired from the start. The current CAO staff members are not Legislative scrutiny of external audit reports is performance indicator No. 28 in the PFM performance measurement framework supported by the World Bank and other development agencies 12

27 well-qualified in accounting and need to be provided with audit, legal, book-keeping, and accounting training. The Control and Audit Office should be able to set up a modern audit methodology with associated audit manuals, rules, regulations, working practices, and procedures. This list should be included in the assistance over the next few years as part of the overall CAO Strategic Development Plan. In response to the draft report the CAO agreed with the recommendations, but accounting and auditing training needs to be carried out in-house until USAID and other initiatives produce a range of suitable candidates. 5. Training 38. The Control and Audit Office should operate a continuing professional development program for accounting and audit staff. The Strategic Development Plan for the Control and Audit Office includes a proposed training program which needs to be well-implemented. 6. Auditor Competence 39. It is necessary to strengthen the technical and professional competence of the Control and Audit Office and improve its operational capacity to produce and disseminate quality audit reports that meet international standards and serve the needs of the stakeholders. The Control and Audit Office has historically concentrated on the compliance audits needed to support proper execution of the budget. It now needs to improve resources and training to build in-house capacity for financial, performance, forensic, environmental, and information technology audits. It is not sensible to offer the excuse that Afghanistan is short of expertise and deny the Control and Audit Office the opportunity to build these needed skills and functions. The Control and Audit Office needs to create a core group of professional accountants for the certification of public accounts. Substantially enhanced technology support is needed, both in hardware and software. Additional computers will be useful for improved audit working papers, audit analysis, and reporting as computer-technology training develops staff competence. Resources for field-work are limited and a development program needs to consider the needs. The Strategic Development Plan includes major elements that will strengthen competence but not increase the resources available. 7. Quality Assurance 40. Improved structures and indexing of more comprehensive audit working papers would help audit supervisors to ensure that audits meet specified standards of quality. A robust quality assurance regime needs to be in place and operating effectively. Such a process should ensure that audit reports are systematically reviewed for quality by line managers before being released. There should be a subsequent internal independent review process-operating on a sample basis-to ensure that the work of all auditors is reviewed regularly. Such a system can be further enhanced through the use of external reviewers. The Strategic Development Plan provides for developing a more formal process of quality assurance within the structure of revised audit methodologies. 13

28 B. Auditing Standards as Practiced 41. The diagnostic questionnaires facilitated the collection of information about the current arrangements for the audit methodology and the apparent gaps in the country in the following areas: audit planning, audit supervision, reviewing internal controls, reviewing compliance with laws, ensuring adequate audit evidence is collected, analyzing whether the financial statements accord with accounting standards, preparing audit opinions, reporting on fraud, and reporting on compliance. Out of this exercise came recommended activities that will help bring local standards in line with international standards. 7. Audit Planning 42. The new audit methodology should introduce more comprehensive planning requirements. The Strategic Development Plan includes a technical assistance project which needs to be staged in accordance with absorptive capacity and priorities for feasible audit programs. An overall audit work program needs to be developed in accordance with the control risks and weak capacities. The Strategic Development Plan states the following: We aim to provide Parliament, Government, Afghan society, and, where necessary, the international community, with good quality information and assurance on the financial control of State resources and the activities of public administration. This will build confidence in the controls over public money, financial accountability, and safeguarding public assets by making the management of public money more transparent for citizens and, ultimately, the Parliament of Afghanistan. The overall audit work program must be directed to achieving these aims. 2. Audit Supervision 43. A more comprehensively structured working paper system is needed to attain the normal audit objectives regarding the validity of transactions. Current supervision is hampered by inadequate working paper systems and an outdated audit methodology. A training course for 50 staff members over the period April to August 2003, covering INTOSAI Auditing Standards, was intended to lead to the designing of new audit methodologies and practices, based on the Audit Implementing Guidelines prepared by INTOSAI. The new audit methodologies and practices, including 14

29 . appropriate supervision arrangements, should be included in a new modern audit methodology manual. 3. Reviewing Internal Management Control Procedures 44. Introduce a modern audit methodology manual that includes an audit risk model. Current control audits are strongly linked to examine accordance with regulations. Few certification audits are undertaken. For the audit of the annual accounts required by the PFEM Law, certification audit procedures should be included in a new manual of audit methodology. In addition, the audit methodology manual should clearly outline the following points: audit confidence level; requirements for audit planning, audit work papers, and audit reporting; how audit materiality is determined and what is an acceptable level of audit risk and confidence; and how to develop an appropriate mix of audit work to address the audit risks. The audit should be completed by a process which covers how audit errors are summarized and evaluated against audit materiality. 4. Analyzing Financial Statements 45. Auditors need to be able to rely on better accounting data and systems so as to be able to form a reliable audit opinion. The accounting data for the annual government accounts is inadequate for producing a valid audit. There are too many scope limitations because of inadequate records and security barriers to access by auditors (most provinces cannot be visited). Similarly there have been limitations on the testing that the advising consulting firm, Deloittes, has done for the donor funds. 5. Reporting on Financial Statements 46. Auditors need to improve reporting by using opinions expressed in terms of international standards on auditing. The infrastructure for financial reporting on the budget and review of audit reports has not yet been fully established. Government accounts for SY1383 (2004) were audited by the Control and Audit Office. The advising consulting firm to the Control and Audit Office did not assist with this audit, apparently because the accounting records were in the local language. The Control and Audit Office was concerned that there were large discrepancies between the accounts and other records, and thus provided a disclaimer on the audit opinion. The audits of the ARTF and the World Bank projects for SY1383 (2004) were assisted substantially by the advising consulting firm. For all intents and purposes the audit was conducted by the Advising Consulting firm with the assistance of CAO staff for some testing purposes. The audits however tended to check accounting aggregations rather than a complete test of the accounting assertions normally carried in an audit opinion. So these audit opinions have 15

30 substantial scope limitations on the adequacy of the testing. A true and fair opinion is not provided; rather the audit provides an assessment of the (a) adequacy of the accounting and internal control systems, (b) the ability to maintain adequate documentation of transactions, and (c) the eligibility of incurred expenses for IDA financing. 47. Future ARTF and World Bank project audits should be conducted in accordance with IFACAAASB International Standards on Auditing, and signed off by advising consulting firms selected by the Auditor General (subject to no objection by the World Bank). The terms of reference for the audit of ARTF and World Bank projects refer to INTOSAI Auditing Standards. The advising consulting firm advised that the audits on these projects were conducted according to these standards rather than the IAASB International Standards on Auditing. The report on the accounts states that both INTOSAI and IAASB auditing standards were applied. In contrast to the TORS, the usual international practice is for IAASB International Standards on Auditing to be applied as per the routine practices of international accounting firms. With its core role of reporting on the accounts of the Government of Afghanistan, the Control and Audit Office does not have sufficient capacity to provide an opinion according to international standards on the ARTF and the World Bank projects. Under the current contract, the advising consulting firm is obligated to assist with the audit of all these accounts. In practice the advising consulting firm provides little or no assistance with the Government of Afghanistan accounts; rather, it provides at least 80 percent of the effort on the ARTF and the World Bank projects. The CAO contribution, under the direction of the advising consulting firm, is at the lower levels of the audit. This is a poor and ineffective use of CAO resources, even for training and familiarization purposes. Following this current practice, the Auditor General signs the accounts, e.g. for the ARTF, although the advising consulting firm does all of the higher-level assessment work in the audit. This process does not properly place the responsibility for signing the opinion on the accounts. As a result, confidence in the audit opinion on these accounts is less than desirable. The audit process should be improved by having the advising consulting firm sign, and take responsibility for the accounts; and conduct the audit in accordance with international auditing standards. The Auditor General should continue to play a part in the review of the consulting firm s work. 48. The Auditor General should receive the reports of the auditors for his use in the audit of the annual accounts of the Government of Afghanistan. The Control and Audit Office should conduct the audit of the accounts of the Government of Afghanistan, as is the current practice. The work of the advising consulting audit firm on the ARTF and other donor expenditures that make up part of the Government of Afghanistan accounts can be relied upon as appropriate by the Control and Audit Office in its audit of these accounts. 6. Reporting on Fraud 49. The audit reporting and follow-up systems need to be reviewed. There could be a survey of ministries to establish the actions taken on findings reported since the establishment of the Afghanistan Interim Administration and develop options for improving reporting and response, based on international practice. In the longer term, 16

31 statutory deadlines for response to audit queries and management letters and the crucial role of a Public Accounts Committee might be effective in encouraging adequate response to audit findings. This is likely to take at least five years, since there is no previous experience of these processes in Afghanistan. 7. Reporting on Compliance 50. Improve the effectiveness of the audit report by more efficient review action through the Public Accounts Committee and agency audit committees. There are no institutional arrangements for review of reports by the Auditor General. 17

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36 Annex A. Methodology of the Assessment As part of the general support program in South Asia for assessment and improvement of public sector accounting and auditing against international standards, the World Bank, with the cooperation of member governments, is conducting the Review of Public Sector Accounting and Auditing Practices in member countries. The development of the Public Financial Management (PFM) Performance Measurement Framework' by the Public Expenditure and Financial Accountability (PEFA) Program' has opened the way for a diagnostic tool to be developed that is referenced to the accounting and auditing standards of International Federation of Accountants (WAC) and International Organization of Supreme Audit Institutions (INTOSAI), and other relevant international benchmarks. I The Performance Measurement Framework has an indicator on public access to key fiscal information that considers the following as essential: Year-end financial statements: The statements are made available to the public through appropriate means within six months of completed audit. External audit reports: All reports on central government consolidated operations are made available to the public through appropriate means within six months of completed audit. The Framework has an indicator on the quality and timeliness of annual financial statements, which are considered to be critical for transparency in the PFM system. To be complete in all respects, the financial statements must be based on details for all ministries, independent departments and other state-owned units. It has an indicator on the scope, nature and follow-up of external audit. For this indicator the Framework considers the key elements of the quality of actual external audit to comprise the scope/ coverage of the audit, adherence to appropriate auditing standards, including independence of the external audit institution (ref. INTOSAI and IFAC/IAASB), focus on significant and systemic PFM issues in its reports, and performance of the full range of financial audit such as reliability of financial statements, regularity of transactions and functioning of internal control and procurement systems. Inclusion of some aspects of performance audit (e.g. value for money in major infrastructure contracts) would also be expected of a high quality audit function. This exercise provides substantial insight into country performance with regard to the external auditing and financial statement reporting PFM indicators. A set of 6 questionnaires is used in the survey conducted by this study to collect relevant information on country practices: ' The PFM Performance Measurement Framework has been developed as a contribution to the collective efforts of many stakeholders to assess and develop essential PFM systems, by providing a common pool of information for measurement and monitoring of PFM performance progress, and a common platform for dialogue. 8 The PEFA Program is a partnership among the World Bank, the European Commission, the UKs Department for International Development, the Swiss State Secretariat for Economic Affairs, the French Ministry of Foreign Affairs, the Royal Norwegian Ministry of Foreign Affairs, the International Monetary Fund and the Strategic Partnership with Africa. A Steering Committee, comprising members of these agencies, manages the Program. A Secretariat is located in the World Bank in Washington, DC. 22

37 Annex A The public sector accounting environment-collecting basic information about financial laws and standards-setting arrangements, educational requirements for accountants compared with IFAC International Education Standards (IES), ethical requirements compared with the IFAC Code of Ethics for Professional Accountants. Public sector accounting practices for the general budget sector if using the cash basis of accounting - compared with the requirements of the Cash Basis International Public Sector Accounting Standards (IPSAS). Public sector accounting practices for the general budget sector if using the accrual basis of accounting-compared with the IPSAS requirements that govern accrual reporting for the public sector. Public sector auditing environment-compared Ethics and the INTOSAI general standards. with the provisions of the INTOSAI Code of Public sector auditing practices-compared to the requirements of the INTOSAI field standards and reporting standards, and the IFAC International Standards on Auditing (ISA). Accounting and auditing practices for state-owned enterprises-compared with the requirements of the International Financial Reporting Standards (IFRS) and International Standards on Auditing that govern commercial reporting. The responses to the diagnostic questionnaires, prepared by the relevant country authorities with the help of in-country experts retained by the World Bank, are supplemented by a due diligence review conducted by members of a World Bank task team. Various documents are examined as part of the review, including relevant laws, codes of conduct, national accounting and auditing standards, accountant selection and promotion processes, training needs assessments, accountancy training course outlines, curricula and accreditation methods, sample accounts and sample audit reports, and working paper sets. A country report on the assessment is prepared for each country and reviewed by a panel of expert advisors, before examination by the World Bank country team. The draft is then shared with the Government for response before finalization. Discussions are also held with the relevant stakeholders to devise an implementation plan to address the way forward with a view to minimizing deviations from international standards. 23

38 Annex B Annex B. Accounting and Auditing Standards This annex contains a summary of the frameworks that have been used for the public sector accounting and auditing assessment The International Accounting Standards Board (IASB),the International Federation of Accountants (IFAC) and the International Organization of Supreme Audit Institutions (INTOSAI) are cooperating in setting international standards for accounting and auditing. The IASB is an independent, privately funded accounting standard-setter based in London, UK. The IASB members come from nine countries and have a variety of functional backgrounds. In the public interest, IASB is committed to developing a set of high-quality, understandable, and enforceable global accounting standards that require transparent and comparable information in general purpose financial statements. In addition, the IASB cooperates with national accounting standard-setters to achieve convergence in accounting standards around the world. The IASB-issued International Accounting Standards (IAS) from 1973 to Since 2000, they have issued International Financial Reporting Standards (IFRS). The IFAC has its headquarters in New York, USA, and comprises 163 member bodies, mainly the national professional accountancy bodies of most countries around the world. The IFAC Board established the International Public Sector Accounting Standards Board (IPSASB) to develop high-quality accounting standards for use by public sector entities around the world in the preparation of general purpose financial statements. These are the International Public Sector Accounting Standards (IPSAS). The full text of Standards and Exposure Drafts currently on issue is available at The first 20 IPSAS are based on IASB-issued International Accounting Standards to the extent appropriate for the public sector. IFAC also has established the International Auditing and Assurance Standards Board (IAASB) to prepare and promulgate International Standards on Auditing (ISA) and is now working in cooperation with INTOSAI on preparing public sector guidance on the use of ISA. The INTOSAI includes the Auditors General from almost all national government audit departments around the world and has its Secretariat in the Vienna offices of the Auditor General of Austria. Its Auditing Standards Committee, chaired by the Auditor General of Sweden, produces the INTOSAI Code of Ethics and Auditing Standards, a set of standards at a higher and more generic level than the IFAC-issued International Standards on Auditing. The Auditing Standards Committee is working with the IAASB to prepare practice notes explaining the application of each ISA in the public sector. The various standards are listed on the following pages. 9 Working Group on Financial Audit Guidelines, INTOSAI Auditing Standards Committee, Swedish National Audit Office,

39 ANNEX B International Public Sector Accounting Standards IPSAS 1, Presentation of Financial Statements IPSAS 2, Cash Flow Statements IPSAS 3,Net Surplus or Dejcit for the Period, Fundamental Errors and Changes in Accounting Policies IPSAS 4, The Effects of Changes in Foreign Exchange Rates IPSAS 5, Borrowing Costs IPSAS 6, Consolidated Financial Statements and Accounting for Controlled Entities IPSAS 7, Accounting for Investments in Associates IPSAS 8, Financial Reporting of Interests in Joint Ventures IPSAS 9, RevenueJi.om Exchange Transactions IPSAS 10, Financial Reporting in Hyperinflationary Economies IPSAS 1 1, Construction Contracts IPSAS 12, Inventories IPSAS 13, Leases IPSAS 14, Events after the Reporting Date IPSAS 15, Financial Instruments: Disclosure and Presentation IPSAS 16, Investment Property IPSAS 17, Property, Plant and Equipment IPSAS 18, Segment Reporting IPSAS 19, Provisions, Contingent Liabilities and Assets IPSAS 20, Related Party Disclosures IPSAS 2 1, Impairment of Non-cash Generating Assets Cash Basis IPSAS, Financial Reporting under the Cash Basis of Accounting International Education Standards IES 1, Entry Requirements to a Program of Professional Accounting Education IES 2, Content of Professional Accounting Education Programs IES 3, Professional Skills IES 4, Professional Values, Ethics and Attitudes IES 5, Practical Experience Requirements IES 6, Assessment of Professional Capabilities and Competence IES 7, Continuing Professional Development IES 8, Competence Requirements for Audit Professionals 25

40 ANNEX B International Financial Reporting and International Accounting Standards IFRS 1, First-time Adoption of International Financial Reporting Standards IFRS 2, Share-based Payment IFRS 3, Business Combinations IFRS 4, Insurance Contracts IFRS 5, Non-current Assets Held for Sale and Discontinued Operations IAS 1, Presentation of Financial Statements IAS 2, Inventories IAS 7, Cash Flow Statements IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors IAS 10, Events after the Balance Sheet Date IAS 1 1, Construction Contracts IAS 12, Income Taxes IAS 14, Segment Reporting IAS 16, Property, Plant and Equipment IAS 17, Leases IAS 18, Revenue IAS 19, Employee Benefits IAS 20, Accounting for Government Grants and Disclosure of Government Assistance IAS 2 1, The Effects of Changes in Foreign Exchange Rates IAS 23, Borrowing Costs IAS 24, Related Party Disclosures IAS 26, Accounting and Reporting by Retirement Benefit Plans IAS 27, Consolidated and Separate Financial Statements IAS 28, Investments in Associates IAS 29, Financial Reporting in Hyperinflationary Economies IAS 30, Disclosures in the Financial Statements of Banks and Similar Financial Institutions IAS 3 1, Interests in Joint Ventures IAS 32, Financial Instruments: Disclosure and Presentation IAS 3 3, Earnings per Share IAS 34, Interim Financial Reporting IAS 36, Impairment of Assets IAS 37, Provisions, Contingent Liabilities and Contingent Assets IAS 38, Intangible Assets IAS 39, Financial Instruments: Recognition and Measurement IAS 40, Investment Property IAS 41, Agriculture 26

41 ANNEX B INTOSAI Code of Ethics and Auditing Standards Code of ethics Integrity. Auditors have a duty to adhere to high standards of behavior (e.g. honesty and candidness) in the course of their work and in their relationships with the staff of audited entities. Independence, objectivity and impartiality. The independence of auditors should not be impaired by personal or external interests. There is a need for objectivity and impartiality in the work and the reports, which should be accurate and objective. Conclusions in opinions and reports should be based exclusively on evidence obtained and assembled in accordance with the SAI's auditing standards. Professional secrecy. Auditors should not disclose information obtained in the auditing process to third parties except for the purposes of meeting the SAI's statutory responsibilities. Competence. Auditors must not undertake work which they are not competent to perform. Basic postulates for the auditing standards (a) The SA1 should consider compliance with the INTOSAI auditing standards in all matters that are deemed material. Certain standards may not be applicable to some of the work done by SAIs, including those organized as Courts of Account, nor to the non-audit work conducted by the SAL The SA1 should determine the applicable standards for such work to ensure that it is of consistently high quality. (b) The SA1 should apply its own judgment to the diverse situations that arise in the course of government auditing. (c) With increased public consciousness, the demand for public accountability of persons or entities managing public resources has become increasingly evident so that there is a need for the accountability process to be in place and operating effectively. (d) Development of adequate information, control, evaluation and reporting systems within the government will facilitate the accountability process. Management is responsible for correctness and sufficiency of the form and content of the financial reports and other information. (e) Appropriate authorities should ensure the promulgation of acceptable accounting standards for fmancial reporting and disclosure relevant to the needs of the government, and audited entities should develop specific and measurable objectives and performance targets. (f) Consistent application of acceptable accounting standards should result in the fair presentation of the financial position and the results of operations. (g) The existence of an adequate system of internal control minimizes the risk of errors and irregularities. It is the responsibility of the audited entity to develop adequate internal control systems to protect its resources. It is also the obligation of the audited entity to ensure that controls are in place and functioning to help ensure that applicable statutes and regulations are complied with, and that probity and propriety are observed in decision making. The auditor should submit proposals and recommendations where controls are found to be inadequate or missing. (h) Legislative enactments would facilitate the co-operation of audited entities in maintaining and providing access to all relevant data necessary for a comprehensive assessment of the activities under audit. (i) All audit activities should be within the SAI's audit mandate." u) Legislative enactments would facilitate the co-operation of audited entities in maintaining and providing access to all relevant data necessary for a comprehensive assessment of the activities under audit. [k) SAIs should work toward improving techniques for auditing the validity of performance measures. [l) SAIs should avoid conflict of interest between the auditor and the audited entity. * The full scope of government auditing includes regularity and performance audit. Regularity audit embraces:. Attestation of financial accountability of accountable entities, involving examination and evaluation of financial records and expression of opinions on fmancial statements; Attestation of financial accountability of the government administration as a whole;. Audit of financial systems and transactions including an evaluation of compliance with applicable statutes and regulations; Audit of internal control and internal audit functions: 27

42 ANNEX B I Audit of the probity and propriety of administrative decisions taken within the audited entity; and Reporting of any other matters arising from or relating to the audit that the SA1 considers should be disclosed. Performance audit entails the audit of economy, efficiency and effectiveness and embraces: I Audit of the economy of administrative activities in accordance with sound administrative principles and practices, and management policies; 1 Audit of the efficiency of utilization of human, financial and other resources, including examination of information systems, performance measures and monitoring arrangements, and procedures followed by audited entities for remedying identified deficiencies; and 1 Audit of the effectiveness of performance in relation to the achievement of the objectives of the audited entity, and audit of the actual impact of activities compared with the intended impact. General auditing standards The auditor and the SA1 must be independent. The auditor and the SA1 must possess the required competence. The auditor and the SA1 must exercise due care and concern in complying with the INTOSAI auditing standards. This involves due care in planning, specifying, gathering and evaluating evidence, and in reporting findings, conclusions and recommendations. The SA1 should adopt policies and procedures to recruit personnel with suitable qualifications. The SA1 should adopt policies and procedures to develop and train SA1 employees to enable them to perform their tasks efficiently, and defme the basis for the advancement of auditors and other staff. The SA1 should adopt policies and procedures to prepare manuals and other written guidance and instructions concerning the conduct of audits. The SA1 should adopt policies and procedures to support the skills and experience available within the SA1 and identify the skills which are absent; provide a good distribution of skills to auditing tasks and assign a sufficient number of persons for the audit; and ensure proper planning and supervision to achieve its goals at the required level of due care and concern. The SA1 should adopt policies and procedures to review the efficiency and effectiveness of the SAI's internal standards and procedures. Field standards (a) The auditor should plan the audit in a manner that ensures that an audit of high -. aualitv - is carried out in an economic, efficient and effective way and in a timely manner. (b) The work of the audit staff at each level and audit phase should be properly supervised during the audit; and documented work should be reviewed by a senior member of the audit staff. (c) The auditor, in determining the extent and scope of the audit, should study and evaluate the reliability of internal control. (d) In conducting regularity (financial) audits, a test should be made of compliance with applicable laws and regulations. The auditor should design audit steps and procedures to provide reasonable assurance of detecting errors, irregularities, and illegal acts that could have a direct and material effect on the financial statement amounts or the results of regularity audits. The auditor also should be aware of the possibility of illegal acts that could have an indirect and material effect on the financial statements or results of regularity audits. Reporting standards (a) At the end of each audit, the auditor should prepare a written opinion or report, as appropriate, setting out the findings in an appropriate form; its content should be easy to understand and fiee from vagueness or ambiguity, include only information which is supported by competent and relevant audit evidence, and be independent, objective, fair and constructive. (b) It is for the Auditor General to decide finally on the action to be taken in relation to fraudulent practices, or serious irregularities discovered by the auditors. 28

43 ANNEX B International Standards on Auditing Framework: International Framework for Assurance Engagements General Principles and Responsibilities: 200 Objective and General Principles Governing an Audit of Financial Statements 2 10 Terms of Audit Engagements 220 Quality Control for Audits of Historical Information 230 Documentation 230R Audit Documentation 240 The Auditor s Responsibility to Consider Fraud in an Audit of Financial Statements 240A Fraud and Error 250 Consideration oflaws and Regulations in an Audit of Financial Statements 260 Communications of Audit Matters with Those Charged with Governance Risk Assessment and Response to Assessed Risks: 300 Planning an Audit of Financial Statements 3 15 Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement 320 Audit Materiality 330 The Auditor s Procedures in Response to Assessed Risks 402 Audit Considerations Relating to Entities Using Service Organizations Audit Evidence: 500 Audit Evidence 50 1 Audit Evidence - Additional Considerations for Specific Items 505 External Conjrmations 5 10 Initial Engagements - Opening Balances 520 Analytical Procedures 530 Audit Sampling and Other Means of Testing 540 Audit of Accounting Estimates 545 Auditing Fair Value Measurements and Disclosures 550 Related Parties 560 Subsequent Events 570 Going Concern 5 80 Management Representations Using the Work of Others: 600 Using the Work of Another Auditor 6 10 Considering the Work of Internal Auditing 620 Using the Work of an Expert Audit Conclusions and Reporting: I00 The Auditor s Reports on Financial Statements 700R The Independent Auditor s Report on a Complete Set of General Purpose Financial Stat em ents I0 1 Modifications to the Independent Auditor s Report 7 10 Comparatives 720 Other Information in Documents Containing Audited Financial Statements Specialized Areas: 800 The Auditor s Report on Special Purpose Audit Engagements 29

44 Annex C Annex C. Afghanistan Auditing and Accounting Legislation Auditing Legislation (N.B this is an old translationof the still prevailing 1996 law and has been amended for grammatical sense - there is a need to read the original text for exactness)) In the Name of God, the Compassionate, the Merciful The Islamic Emirate of Afghanistan Control and Audit Law General Ordinances Chapter One Part 1. This law is specially issued for organizing the audit and control affairs of public properties. Part 2. The basic objectives of the law are as follows: (a) Getting precise account for expenses of public property. (b) Effective control of accounting and financial affairs of state departments, organizations, and firms. (c) Control for state program outcomes and that the expenses of affairs provide advantages accruing to the state. (d) Performance of audit and control to strengthen and improve the state economy. (e) Saving public property through audit and control. The aforementioned terms in this law shall have the following meanings. Part 3. Control is a process that gives assurance from true performance of activities in different economic and social sections. The control mentioned in this part is in three kinds: (a) Primary Control is a process that will be performed to avoid any kind of abuse and violation before starting activities. (b) Progressive Control is a process which will control activities progressively to avoid any kind of maltreatment and abuse during the work. (c) Final Control is a process that checks and compares accomplished and unaccomplished affairs. Audit is an annual check of activities considering existing evidence. Auditor is a professional official who performs the audit and control affairs. Part 4. Ministries, departments, firms, cooperatives, social organizations, state agencies, banks, and municipalities are named under control organizations. 30

45 ANNEX C Part 5. General Department of Audit and Control (ACD) is the highest and the most competent reference for audit and control in the country. This Department may run its activities according to Islamic Sharia and domestic laws. Part 6. The General Department of Audit and Control consists of the Heading Council, the General President of Department and assistants, and the Chairmen of special sections of the Department. Part7. The General President and the assistants of the Department will be appointed according to the proposal of the Prime Minister and ratification of the President. Part 8. The General President has responsibility for carrying out the assigned affairs. The Heading Council is the most competent reference in the Department. Appointment of the members of this Council will be according to the proposal of the General President of the Department and the approval of the President. The Heading Council will have the following tasks: (a) Making the plan for the Department. (b) Receiving reports from related offices, and determining about their activities. Part 10. Determination and approval of the Heading Council will be according to a referendum (vote). Part 11. Experienced professionals and experts are preferred for appointment to the Department. Part 12. The General Department of Audit and Control provides timely reports for highranking government authorities. Part 13. The following evaluation will be carried out by ACD: (a) Certain accounts for state expenses. (b) Considering the dominant role for accountants in preparing and organizing the budget of state departments. (c) Better expenses of properties, and evaluating the state income processes. (d) Evaluating performance of the domestic auditors, for better cooperation in work and efficient development of activities. Part 14. The domestic auditors are under direct control of the minister. They have mutual responsibilities and can play a contributing role with ACD. Part 15. The domestic auditors have responsibilities in providing reports about their performance to ACD. Part 16. ACD has the right to recheck the documents and reports provided by domestic auditors. 31

46 ANNEX C CHAPTER I11 Competence and Responsibilities Part 17. ACD auditors have the following functions: (a) Auditing of state incomes, cash, expenses and valuable documents and materials. (b) Visual checking of provision, conservation, distribution and costs of materials. (c) Checking the existence of cash, materials and valuable documents; locking up the properties and the safes in emergency cases. (d) Receiving essential information from officials about references. (e) Checking the evidence and asking for the reports and information from the responsible officials regarding their previous performance. (0 Providing special ACD reports outlining reforms so as to prohibit future abuse and violations. (8) Providing urgent ACD reports in case of instances of abuse, illegal expenses and violation by officials. (h) Keeping documentary evidence of illegalities temporarily, until they are sent to related reference authorities. (i) Dual auditing of both references in cases of connected affairs and precise observation and comparison of documents. (i) Issuing instructions for stopping illegal operations under control reference and providing timely ACD reports. (k) Control of manufactures during the production process and implementation of plans for improving quality. Part 18. Auditor and controllers of ACD have the following responsibilities: (a) Impartially performing of duties according to law. (b) Limiting time for providing information and explanations on related references. (c) Offering fast, clear, adequate, reasonable, and legal suggestions. (d) Devising the logical way for using property in order to enhance the efficiency of activities. (e) Proving causes and conditions which may create wastage, shortage, and embezzlement of state properties. Part 19. Auditors and controllers will be considered guilty in the following cases: (a) Ignorance of illegal performance. (b) Non-disclosure of suspicious papers. (c) Non-disclosure of lost papers and files. (d) Hiding or collection of papers for maltreatment. (e) Accusing officials without documentary evidence. 32

47 ANNEX C (f) Fabrication, and tampering of documents. (g) Any action which may cause losses for the government. (h) Violation of the law. Part 20. Audit and control department has the following responsibilities: (a) Offering systematic reports about the result of evaluation which may need urgent decisions, to state authorities. (b) Taking necessary decisions towards improving diagnostic faults in economic and social affairs. (c) Offering suggestions about adjustment and responsibilities of under control organizations to state authorities. (d) Sending improvement suggestions to those responsible for the reference to avoid violations and faults which appeared during control. (e) Establishing relationships with international supreme audit institutions for cooperation with them in technical and professional fields. Part 2 1. Organisation under control references have the following obligations: (a) Providing sufficient facilities for ACD officials during work. (b) Providing experts, professional workers and experienced officials to cooperate with auditors. (c) Observing Chapter 3, Part 18 of this law about providing necessary information to auditors. (d) Drawing the attention of auditors to budget drafting and financial arrangements of their organization. (e) Providing special reports about the result of their activities. CHAPTER IV The Final Ordinances Part22. For securing the public property, the ACD is considered as cooperator for exposure of crimes. Part 23. (a) High Court of Islamic Emirate of Afghanistan (IEA) has responsibilities in providing reports of the assigned affairs to ACD. (b) In case of objections, justices of IEA should deliver the files back to ACD for solution. (c) Justices have to state reason to ACD in case of not following up legally the assigned issues. Part 24. ACD s officials in combination with delegates of Ministries and state departments responsible for signing economic and financial agreements can travel abroad after approval from state authorities. 33

48 ANNEX C Part25. ACD can observe the activities of State agencies abroad considering the principals of the government. Part 26. ACD officials can only be employed for the jobs mentioned in this constitution. Part 27: ACD officials have special identification cards. Part 28. To avoid corruption, controllers of the other references including the high court, cannot use the ordinance of this law. They have to carry out only their own occupations. Part 29. This law, after issue is dominant and will be inserted in the state official publication. And any domestic ordinances, if contrary to this, will be cancelled. 34

49 ANNEX C Accounting Legislation Extracts from the Budget Law of the Democratic Republic of Afghanistan 6-5 State accountants-within their own jurisdictions-will keep adequate records of the uncollected revenues and will execute the expenditures of the appropriate departments on the provincial levels. Further, after accounting for expenditures in the current month, the said state accountants shall transfer-to the general accounts receivable (administered by the Treasury through the Ministry of Finance) of the government-any additional revenues which cannot possibly be used for expenditures for the next month. Furthermore, if [during a given period] the revenues should not prove adequate for meeting the expenditures of a state, based on the request of the state accountants and when the necessity of the same shall be adequately evidenced, the Treasury may allow the transfer of fundsfiom its own resources to the said state so as to bridge the gap. 8.4 Government expenditures are comprised of amounts paid by the government in exchange for execution of services, delivery of goods, and carrying out of other obligations for the purpose of: growth of national economy; advancement of material and cultural level of the nation; strengthening of the national defense; and providing for the consumption of the governmental bureaucracy. Any payment for expenditures must take place in accordance with-and under the guidance of-the applicable laws and regulations and generally accepted accounting standards [mavazeen-e hessabi: hereinafter, GAAS]. Public Finance and Expenditure Management Law - extracts Article 4. The Ministry of Finance is responsible for implementing the provisions of this law, and shall have the following duties and authorities:.. Setting the financial and public expenditure policy of Afghanistan. To report to the government and the National Assembly [of Islamic Republic of Afghanistan] on the implementation of the provisions of this law. To propose the adoption of regulations to the government To adopt procedures (tarzulamal) and rules (layeha), for [ensuring] better implementation of this law. Article 6. The responsible authorities for financial affairs of state administrations shall have the following obligations: 1. To prepare, arrange and submit the draft budget to the Ministry of Finance 2. To submit report of financial affairs in accordance with this law, and the related regulations and Rules To ensure that this Law is applied concerning expenditure commitments within the established budget allotments, regulation of the financial system and efficient controls on the executions within the relevant administration. 35

50 ANNEX C Article 7. In order to carry out the relevant affairs, the Treasury of the Ministry of Finance shall have the following responsibilities and authorities: Maintaining the Treasury General Ledger and recording transactions according to budget classification and accounting rules compliant with internationally accepted standards and principles; Providing regular reports on the implementation of the State's budget and other financial matters for the Ministry of Finance Upon the confirmation of the Ministry of Finance, issuing necessary instructions covering the relevant affair. Performing management for the debts of the state Compilation of the annual accounts of the financial operations of state including appropriation accounts and financial statements Managing and controlling the affairs related to processing of expenditures and other treasury related responsibilities in the Mustufiats of centre and provinces Article 34. The financial statistics such as revenues, expenditures and financing in the annual budget documentation shall be set out, organized and published by the International Monetary Fund, in consistency with the Government Finance Statistics classification. Article 53. Classification of budget records 1) The Ministry of Finance shall establish classification systems for budget and accounting records in observance of the following: (1) To facilitate the control of expenditures by state administrations; [and] (2) To permit analysis of expenditure by organization, function, and economic category according to the Government Financial Statistics cash basis classification requirements as set out by the International Monetary Fund. 2) To achieve the objectives of paragraph one, the Ministry of Finance shall maintain, records of: a. Government income receipts; b. Appropriations and adjustments to appropriations of state administrations 36

51 ANNEX C c. Documents for Actual expenditures made and outstanding liabilities. d. Appropriations made available to state administrations for expenditure by means of allotment form; 3) State administrations shall maintain accounting records in accordance with Ministry of Finance instructions and provide copies of the accounting records to the Ministry of Finance when requested, except in cases where the law provides for the confidentiality of such records. Article 55. Final Report on the Budget 1) The Ministry of Finance shall publish the following information upon submission to the President and the government: (1) Final budget reconciliation report on the budget for previous fiscal year. This shall be submitted no later than the end of the month of Sonbola (the second quarter of the year); [and] (2) A set of financial statements compiled according to the international accounting principles that have been audited as required by article 59. 2) The final budget reconciliation report referred to in paragraph one shall cover the following issues: Article 56. Budget overview information a. Budget overview information; b. A revenue and expenditure report; [and] c. Assets and liabilities information. The budget overview information will include: Article 57. Revenue and expenditure report (1) Tasks accomplished and the main plan for the new fiscal year; (2) An overview of important actual revenues and expenditures; (3) Details of how a budget deficit was financed or how a surplus was invested; and (4) Other information considered necessary by the Ministry of Finance. The revenue and expenditure report shall include: (1) Actual revenues compared with projected revenues; 37

52 ANNEX C (2) Actual special funds received during the fiscal Year; (3) Actual expenditures from special funds appropriations; (4) Actual number of permanent and temporary State employees paid from appropriations in the fiscal year; (5) Actual payments of interest or amounts in the nature of interest on debt owed by the State and [for] repayment of debt principal; (6) Actual expenditures in respect of each appropriation category compared with the budget appropriation for that category, the actual expenditure for that category in the previous fiscal year, and details of additional appropriations under this law; (7) Details of all recipients of public grants and the amount they received; (8) Details of the contingency expenditures; (9) Details of all adjustments made to appropriations in the fiscal year; (10) Actual user fee receipts for the fiscal year; [and] (11) Other information considered necessary by the Ministry of Finance. Article 58. The assets and liabilities information The assets and liabilities information will include: (1) Details of investments of public money made during the fiscal year; (2) Details of any changes made to loans during the previous fiscal year; (3) Details of any loans made by the State during the fiscal year; (4) Details of any borrowings by the State during the fiscal year; (5) Details of differences in the amount of guarantees planned to be made and loans to be incurred by the State during the fiscal year and guarantees actually made and loans actually incurred; (6) Details of difference between the estimated amount of contingent liabilities of the State that were expected to give rise to actual liabilities during the fiscal year and amount of contingent liabilities that actually gave rise to liabilities; (7) A full accounting of assets held by the State at the end of the fiscal year; [and] (8) Other information considered necessary by the Ministry of Finance. Article 59. Independent Audit 1. The independent auditors shall have the right to acquire all information and explanations deemed necessary for auditing. 38

53 ANNEX C 2. The administration for inspection and control shall prepare an independent audit report with in six months from the end of a fiscal year and submit it to the government. The independent audit report shall include: (a) Certification of the appropriation accounts; and (b) Recommendations for fines to be applied consistent with this Law. 3. The government shall submit the report referred to in paragraph 2 of this article to the first meeting of the National Assembly. The report shall be made publicly available upon submission to the National Assembly. Article 60. Reporting to the National Assembly The government shall report to the National Assembly on decisions taken pursuant to the audit and control report. Article 61. Audit Powers of the Ministry of Finance 1. The Ministry of Finance shall establish an internal audit administration and appoint auditors to audit the financial and accounting affairs of all State administrations. 2. The auditors referenced in paragraph one may require the relevant administrations to provide all information needed for auditing financial affairs. Article 64. Exceptions State-owned companies and enterprises are not subject to this law, and their affairs shall be regulated under their related Laws. Article 65. Entry into Force This law shall be enforced from the date of signature and shall be published in the official Gazette and with its entry into force the budget Law dated 30/8/1362, published in official gazette # 544, and other contrary provisions shall be eliminated. 39

54 Annex D Annex D. Benefits of Accrual Accounting Extract from Study No. 14 Transition to the Accrual Basis of Accounting: Guidance for Governments and Government Entities, IFAC Public Sector Committee, December The PSC has commented extensively on the benefits of accrual accounting for governments and individual public sector entities in previous Studies (Studies 5, 6, 8, 9 10 and 11) and Occasional Papers (Papers 1, 3, 5, 6 and 7). In order to provide some context for readers who are not familiar with the PSC s other publications, this section contains a summary of the benefits of reporting on the accrual basis The information contained in reports prepared on an accrual basis is useful both for accountability and decision-making. Financial reports prepared on an accrual basis allow users to: assess the accountability for all resources the entity controls and the deployment of those resources; assess the performance, financial position and cash flows of the entity; and make decisions about providing resources to, or doing business with, the entity At a more detailed level, reporting on an accrual basis: Financial Position shows how a government financed its activities and met its cash requirements; allows users to evaluate a government s ongoing ability to finance its activities and to meet its liabilities and commitments; shows the financial position of a government and changes in financial position; provides a government with the opportunity to demonstrate successful management of its resources; and is useful in evaluating a government s performance in terms of its service costs, efficiency and accomplishments Accrual accounting provides information on an entity s overall financial position and current stock of assets and liabilities. Governments need this information to: make decisions about the feasibility of financing the services they wish to provide; demonstrate accountability to the public for their management of assets and liabilities recognized in the financial statements; plan for future funding requirements of asset maintenance and replacement; plan for the repayment of, or satisfaction of, existing liabilities; and manage their cash position and financing requirements. 40

55 ANNEX D 1.22 Accrual accounting requires organizations to maintain complete records of assets and liabilities. It facilitates better management of assets, including better maintenance, more appropriate replacement policies, identification and disposal of surplus assets, and better management of risks such as loss due to theft or damage. The identification of assets and the recognition of depreciation help managers to understand the impact of using fixed assets in the delivery of services, and encourage managers to consider alternative ways of managing costs and delivering services Accrual accounting provides a consistent framework for the identification of existing liabilities, and potential or contingent liabilities. The recognition of obligations meeting the definition of a liability and the criteria for recognition: compels governments to acknowledge and plan for the payment of all recognized liabilities, not just borrowings; provides information on the impact of existing liabilities on future resources; means that it is possible to allocate responsibility for the management of all liabilities; and provides necessary input for governments to assess whether they can continue to provide current services and the extent to which they can afford new programs and services Accrual accounting highlights the impact of financing decisions on net assets/equity and may lead governments to take a longer term view when making financing decisions than is generally possible when relying on cash or modified cash reports. Information on net assetdequity also means that governments may be held accountable for the financial impact of their decisions, on both current and future net assets/equity. Changes in an entity s net assetdequity between two reporting dates reflect the increase or decrease in its wealth during the period, under the particular measurement principles adopted and disclosed in the financial statements. Under the accrual basis of accounting, the financial statements will include a Statement of Financial Position which discloses information about assets and liabilities. Where assets and liabilities are not equal, a residual figure for net assets/equity will be reported. Where this figure is positive it can be interpreted as the net resources that may be applied for the provision of goods or services in the future, and therefore the community s investment in the reporting entity. Where the figure is negative, it may be viewed as the amount of future taxation or other revenues which are already committed to paying off debt and other liabilities. Net assets/equity can comprise some or all of the following components: contributed capital; accumulated surpluses and deficits; and reserves (for example revaluation reserve; foreign currency translation reserve). Financial Performance 1.25 Accrual accounting provides information on revenues and expenses, including the impact of transactions where cash has not yet been received or paid. Accurate 41

56 ANNEX D information on revenues is essential for assessing the impact of taxation and other revenues on the government s fiscal position, and in assessing the need for borrowing in the long term. Information on revenues helps both users and governments themselves to assess whether current revenues are sufficient to cover the costs of current programs and services Governments need information about expenses in order to assess their revenue requirements, the sustainability of existing programs, and the likely cost of proposed activities and services. Accrual accounting provides governments with information on the full costs of their activities so that they can: consider the cost consequences of particular policy objectives and the cost of alternative mechanisms for meeting these objectives; decide whether to fund the production of services within government subentities, or whether to purchase goods and services directly from nongovernment organizations; decide whether user fees should cover the costs associated with a service; and allocate responsibility for managing particular costs Accrual accounting can provide financial information on whether sub-entities are delivering specified services, and delivering them within agreed budgets. The same information, at a more detailed level, can also be used within sub-entities for the management of activity and program costs Accrual accounting allows an individual entity to: Cash Flows record the total costs, including depreciation of physical assets and amortization of intangible assets, of carrying out specific activities; recognize all employee-related costs and to compare the cost of various types of employment or remuneration options; assess the most efficient way of producing their goods and services and of managing the resources over which they have been delegated authority; determine the appropriateness of cost-recovery policies; and monitor actual costs against budgeted costs Accrual accounting provides comprehensive information on current cash flows and certain projected cash flows, including the cash flows associated with debtors and creditors. It can therefore lead to better cash management and may assist in the preparation of more accurate cash budgets. 42

57 Annex E. PFM Reform Agenda The analysis of public financial management (PFM) conducted by the World Bank in 2005 developed a program of reform to concretely move forward. The two main points from the recommendations relating to accounting and auditing reforms, deal with the capacity development of the key PFM institutions. Without stronger capacity and institutional reforms, improvements in PFM performance, as well as progress toward key national development objectives, will be difficult to achieve and impossible to sustain. Priority areas include training, recruitment practices, pay structures, organizational reforms, detailed business processes, and specific information technology systems. While these issues cut across all levels of government, the Ministry of Finance s capacity is of particular importance. Since the Ministry is chief custodian of the PFM system, its capacity to develop and implement policies is at the core of PFM performance. Progress toward Ministry of Finance Strategic Plan (initiated in May 2005) will be important in developing its capacity and performance. The PFM capacity development in line ministries also is important but will take more time. The Government should adopt a clear action plan to improve PFM performance with time-bound milestones, quantified objectives, and clearly identified responsible agencies. The PFM analysis report seeks to provide a comprehensive, high-level roadmap of policy reforms (as illustrated in Table 10.1 of the report). It is comprehensive in the sense that all areas of public financial management are covered. It is high level in the sense that some concrete next steps are identified for the next 6-12 months, but many actions are less specific and will need to be converted into detailed action plans later, by the respective government departments. Also, some key accountability, left out of the PFEM Law, will need to be fully specified, especially with regard to the respective roles of the Ministry of Finance and the line ministries. The Procurement Law clearly gives authority to line ministries. Progress along this roadmap could be measured by key fiscal outcomes and implementation and progressive improvement of the Medium Term Financial Framework, and by the PFM performance indicators presented in this report. Monitoring of progress along with a meaningful feedback loop into subsequent decisionmaking, will be as important as the action plan itself. Key actions relevant to accounting and auditing reforms forming part of the way forward in the PFM analysis report are summarized in the following table. Area Accounting in year of reporting Short-term actions (next 6 to 12 months) Automate reconciliation of government accounting records with banking data, particularly the Treasury Single Account (TSA) Medium-term actions beyond 6 to 12 months Develop public accounting standards and clarify role of line ministries (regulations to implement PFEM Law) Enforce use of modem budget classification and increase capacity to issue 43

58 Area Transparent and accessible external financial reporting External audit Short-term actions (next 6 to 12 months) Develop the means to capture and report accurately expenditures of donor implemented projects Ministry of Finance (MoF) to commit to preparing formal accounting period cut-offs at least quarterly Carry-out accounting and auditing certification process for all professional staff Develop audit work of whole-of- Government annual accounts Medium-term actions beyond 6 to 12 months timely monthly reports Complete roll-out of AFMIS to line ministries for complete and timely in-year reporting Undertake roll-out of AFMIS to Mustoufiats Develop accounting capacity of municipalities Develop accounting capacity of SOEs Move toward modernized accounting standards over time Disclose state enterprises annual financial results and financial position, company objectives, ownership, governance structure and information on employees All information should be audited. All SOEs (regardless of form of public ownership) should be covered Establish the procedures and requirements for the line ministries for collection, review and follow-up of the external audits of donor implemented projects Finalize draft and gazette new Audit Law Develop external audit regulation, implement Audit Law Develop external audit of procurement Create Public Accounts Committee and its processes Develop a system for scrutiny and response to audit reports including responses by involved ministries and scrutiny by a Public Accounts Committee of Parliament Develop role of media and civil society in the scrutiny of the budget (formulation and execution) 44

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