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  • 1. Kreditanstalt für Wiederaufbau DAC TASK FORCE ON DONOR PRACTICES FINANCIAL REPORTING AND AUDITING DRAFT REPORT 18 MARCH 2002 BY TORUN REITE AND JENS CLAUSSEN
  • 2. TABLE OF CONTENTS 1 Executive Summary ........................................................................................................... 1 2 Introduction ........................................................................................................................ 4 2.1 Scope of work ............................................................................................................ 4 2.2 Approach .................................................................................................................... 4 2.3 Different forms of aid – different requirements ......................................................... 6 2.4 Reference to international and/or national standards ................................................. 6 3 Donor reporting requirements ............................................................................................ 7 3.1 Financial reporting requirements ............................................................................... 7 3.2 External Auditing ....................................................................................................... 8 4 Transaction costs of Donor reporting requirements ........................................................... 9 5 Scope for Harmonisation.................................................................................................. 13 5.1 Steps towards harmonised procedures ..................................................................... 13 5.2 Identifying best practices for financial reporting and auditing ................................ 15 5.3 Proposed main principles for harmonised procedures ............................................. 19 5.4 Implications for donors ............................................................................................ 21 5.5 Standard terms of reference for audits ..................................................................... 22 5.6 Next steps for implementation of a common framework......................................... 22 Annex I – Terms of Reference Annex II - Matrix of donor procedures Annex III – Basic Financial Reporting Requirements and sample formats for reporting Annex IV – Proposed Standard Terms of Reference for Audits
  • 3. 1 EXECUTIVE SUMMARY This report presents the outcome of a review of donor practices in the area of Financial Reporting and Auditing commissioned by Kreditanstalt für Wiederaufbau (KfW), Germany, on behalf of the OECD/DAC Sub-Group on Financial Management and Accountability. This review has been conducted as a desk study. It has been based on review of documentation collected by KfW from various donors in the OECD/DAC Sub-Group and supplemented by additional information collected by the consultants from the same donors. The review has covered the following main tasks: • Assessment of current reporting and auditing requirements. • An assessment of the scope for harmonisation of the procedures. • Based on the above developed a proposed common framework for financial reporting and auditing. The assessment of current reporting and auditing requirements has revealed that the requirements vary substantially among the donors/institutions. 1. Some donors/institutions use comprehensive guidelines and/or regulations including specific formats and procedures for reporting. 2. Some have comprehensive guidelines and/or regulations that serve as guidance for financial monitoring but formats and procedures for financial reporting are not specified. 3. Finally, some donors/institutions only have general guidelines with reference to financial monitoring without any specific requirements concerning financial management systems and procedures to be applied and no specific formats and procedures for reporting. The few donors/institutions that makes reference to international standards are to be found in the two first categories. Based on the above assessments and with reference to international standards for accounting and auditing some basic principles, procedures, reporting formats and terms of reference for audits have been developed. The following basic principles should be considered as minimum requirements concerning financial reporting: • The Financial Reporting and the auditing procedures should provide information about 1
  • 4. all financial sources, allocation and uses of financial resources of the total project (not only components related to one source of finance like an individual donor contribution). • Financial information should allow a reasonable control of how resources are used and be linked with physical progress to allow assessment of cost efficiency • Clarity of roles and responsibilities within financial management should be documented as part of the internal procedures and the internal control system of the executing agency. • Reference to the government public finance management system should be made. If the systems cannot be adopted, a development action plan for converging towards the government public finance management system should be developed. • As part of the appraisal, financial management arrangements, accounting policies and procurements arrangements, including an overall financial management system review should be carried out. This assessment should be carried out with a view to tailoring the arrangements to the country context ant the specific requirements of the project and the executing agency. • Harmonisations should include content, accounting principles, timing, format, the chart of accounts, frequency of reporting provided by recipients, including auditing arrangements. • Monitoring mechanisms for the harmonisation process should be defined. The financial management arrangements should be reviewed/evaluated at regular intervals. • Procedures for financial reporting and auditing should be well documented within each donor organisation. A sample format for reporting with basic requirements is outlined in annex III. The Standard terms of reference for audits has been based on International Standards for Auditing (ISA) with specific reference to special purpose audits. It has drawn upon previous reviews of joint donor support (basket funding models etc.), the experience in undertaking joint audits and the process in developing an agreed set of terms of reference. The terms of reference has taken as a point of departure the basic principles for financial reporting mentioned above. 2
  • 5. A standard terms of reference for auditing is provided in annex IV. As a next step each donor in the subgroup should initiate a process to analyse the gap between basic principles as mentioned above and identify areas of needed adjustments in internal procedures/regulations. Based on the reviews of the above common principles, a unified financial reporting and auditing framework can be introduced. In order to test the feasibility of the framework some country case studies may be conducted. By identifying some new projects under design, donors could jointly commission a design exercise to test the opportunity to develop a financial reporting procedure and format based on the mentioned principles, formats and standard terms of reference. Following the outcome of the “design test” as mentioned above, the principles could be elaborated into detailed guidelines to be adopted by the OECD/DAC members. 3
  • 6. 2 INTRODUCTION 2.1 Scope of work This report presents the outcome of a review of donor practices in the area of Financial Reporting and Auditing. The review has been commissioned by Kreditanstalt für Wiederaufbau (KfW), Germany, on behalf of the OECD/DAC Sub-Group on Financial Management and Accountability. The report presents the outcome of the various tasks in accordance with the Terms of reference (annex I). It has been based on review of documentation collected by KfW from various donors in the OECD/DAC Sub-Group and supplemented by additional information collected by the consultants from the same donors. The review has covered the following main tasks: • Assessment of current reporting and auditing requirements • Assessment of transaction costs for partner countries and donors associated with current donor reporting requirements • An assessment of the scope for harmonisation of the procedures The assessment of the scope for harmoninsation of donor procedures has included assessment of the scope for single reporting and auditing frameworks, the implications it will have on donors to move towards a proposed common framework and procedures to implement it. In addition an outline of standard terms of reference for audits has been presented based on the above and in compliance with International Standards of Auditing (ISA). 2.2 Approach This review has been conducted as a desk study. Accordingly, it has been depending on the availability of relevant documentation describing donor practises in the area of financial monitoring and reporting. During the initial stages of the review it became evident that the relevance of the documentation provided varied significantly. Initially documentation relevant to the task was available only for a limited number of the eight donors listed in the Terms of reference. On the other hand, some other donors not listed had submitted documentation. Accordingly, a process was initiated to collect supplementary information from all the donors/institutions. In total eight donors/institutions has provided documentation and thus 4
  • 7. been included in the review of which six are among those initially selected in accordance with the Terms of Reference. The donor administration in some countries is subdivided into credit institutions, technical assistance agencies and institutions providing financial assistance in the form of grants. For some of the countries information was not available for all the relevant institutions in the country. Accordingly, the information may be biased since procedures vary between credit institutions and agencies providing support on a grant basis. The countries and institutions included in this review have not been selected in any scientific manner. They represent donor agencies and multilateral institutions that voluntarily have submitted information after an open invitation by the OECD/DAC task team. The information may accordingly be biased towards those with a specific interest in the issue. A set of criteria has been used to analyse the current donor practises related to financial auditing and reporting. The criteria has been developed under the assumption that a minimum set of requirements needs to be included if donors/institutions are to subscribe to the same framework. The criteria reflect the overall objective of the review; to assess opportunities for harmonisation. One criterion has been to assess the comprehensiveness of their guidelines and procedures in their financial monitoring of projects and programs. As part of this assessment specific issues have been reviewed like: • The extent that objective and purpose of financial monitoring and audit is clearly defined. • That systems and procedures of the recipient/executing agency are subject to an assessment to ensure that financial information produced gives reasonable assurance. • That the financial management procedures in the donor agency/institution are clearly defined and sufficient to allow reasonable assurance to how resources are used. • To what extent financial information is requested in a manner that gives sufficient basis for assessing overall financial performance specifying what type of information is to be presented and in what form. • To what extent the information is presented to allow assessment of cost efficiency, i.e. comparison of resource use with outputs produced (output or activity based financial reporting). 5
  • 8. Some donors have elaborated detailed guidelines for financial monitoring and control. They include requirements related to financial management systems and procedures of executing agencies, and their internal procedures for assessing the information provided. Some has included pre-assessment of financial management systems and/or accountability assessments as a procedure to give added assurance to the reliability of financial information presented. Among those donor with comprehensive guidelines and procedures some have developed specific formats for reporting that executing agencies needs to produce and according to a specific schedule complying with internal financial management requirements of the donor. Another criterion has been related to the extent to which donor agencies/institutions have applied a flexible approach in their requirements for financial reporting. While some donors specifically state that they will to the extent possible use the reports of the recipient agency for financial monitoring other donors request detailed formats and/or procedures for reporting to be used (e.g. specific chart of accounts, schedules of reporting according to the donor financial year). In the latter case the various requirements differ substantially among them. 2.3 Different forms of aid – different requirements Many donors apply different procedures pending forms of finance and agreements like state level bilateral cooperation agreements, co-financing and/or other forms of joint financing, grant and credit financing, financing though cooperating partners, institutions and NGOs in donor countries, etc. This issue has become visible in our review since there are clear differences between forms of disbursement (advance payments, direct payment to suppliers, replenishment, reimbursement, letter of credit, etc.) and in grant versus credit financing. 2.4 Reference to international and/or national standards The main references for assessing the requirements of donors have been the International Standards of Accounting (IAS) and Auditing (ISA) issued by The International Federation of Accountants (IFAC). The International Public Sector Accounting Standards (IPSAS) which build on the IAS has been used as an additional reference, in particular IPSAS 1 concerning presentation of financial statements. In addition reference are made to the international guidelines for financial management issued by International Organisation of Supreme Audit Institutions (INTOSAI). 6
  • 9. 3 DONOR REPORTING REQUIREMENTS 3.1 Financial reporting requirements In the following the main findings from the review of the documentation is presented. A more detailed presentation for each donor is provided in annex II. The requirement concerning financial reporting varies substantially among the donors/institutions. They can be classified into the following three main categories: 4. Those donors/institutions with comprehensive guidelines and/or regulations including specific formats and procedures for reporting. 5. Those with comprehensive guidelines and/or regulations that serve as guidance for financial monitoring but were formats and procedures for financial reporting are not specified. In these cases financial reporting formats and procedures are to a large extent determined by the financial reporting systems and procedures of the executing agency. 6. Those with general guidelines to financial monitoring but only limited specific requirements elaborated concerning systems and procedures to be applied and no specific formats and procedures for reporting. The few donors/institutions that makes reference to international standards are to be found in the two first categories. Table 3.1 gives a summary of donors/institutions according to the above classification. Table 3.1 Donors/institutions according to financial reporting requirements. Category Donor 1. Comprehensive guidelines and detailed UNDP, Japan, Germany formats/procedures for reporting 2. Comprehensive guidelines and general Holland, World Bank formats/procedures for reporting 3. General guidelines, no specific Norway, Sweden, United Kingdom formats/procedures for reporting The first category of donors/institutions would need to revise own procedures and requirements to adjust to a common framework for reporting. Donors/institutions in Category 7
  • 10. 2 and 3 would by and large be able to adapt to a common framework without a need to revise internal procedures. Donors/institutions in Category 3 could adopt more comprehensive guidelines for financial management with a common framework as appoint of departure. For these donors, the accountability assessment reviews conducted by some donors/institutions would be useful to assess the level of assurance that is provided by the financial management systems of recipient institutions. 3.2 External Auditing In terms of auditing, three of the eight donors/institutions presents specific procedures for audit engagements and reporting of which two has elaborated standard Terms of References for audit engagements. In general, most donors/institutions require that audits shall be conducted by an independent auditor and in accordance with “generally accepted principles” or standards. Some make reference to International Standards of Auditing (ISA) and some makes reference to financial administration regulations applicable to the Government institutions of donor country. The above suggest that there should be a scope to elaborate a general framework for audit engagements in the form of some broad standard Terms of References in which all donors/institutions may use as a point of departure. The frequency and procedure for audit engagements would however need to be determined in each case and may by some donors/institutions require that they adjust their internal guidelines to allow for audits to be conducted in accordance with the recipient country fiscal year. 8
  • 11. 4 TRANSACTION COSTS OF DONOR REPORTING REQUIREMENTS In this section we will briefly address the issues of transaction costs to give some guidance to a way forward for harmonisation. Transaction costs related to financial reporting and auditing can be associated with the following: • Transaction costs for executing agencies in recipient countries due to incompatible reporting and auditing requirements by donors compared to financial reporting and auditing requirements of host countries. • Additional transaction costs for executing agencies in recipient countries due to multiple donor requirements in the same projects and programs. • Transaction costs for the donors related to the above. In the following the two first issues will be the focus of our attention all though they are closely related to the third issue. As an illustration we present the case of program aid to Mozambique. There are obvious transaction costs related to multiple financial reporting requirements by donors to the same projects/programs. Obvious since they would require a financial management system capable of producing reports in accordance with different chart of accounts, different frequencies of reporting and sometimes also in accordance with different fiscal years of the different donors. In many case it leads to the establishment of separate budget and accounting procedures and systems tailored to meet individual donor requirements. In addition, it demands a special effort by the recipient executing agency to acquire what is of its core interest, a full overview of resources used for its regular financial monitoring purpose. In order to produce such an overview it needs to reconcile the information from various financial management systems. 9
  • 12. Box 1: Program aid/balance of payments support to Mozambique For many years several donors provided program aid (balance of payments support) to Mozambique guided by individual donor agreements. Although generally subscribing to the same objectives and benchmarks for the support, the disbursement mechanisms applied and financial reporting requirements deviated. The cooperation suffered from adequate financial management capacity by the Government in providing relevant and timely information related to the foreign exchange utilisation as well as the counterpart funding generated. If the Government was to comply it would have demanded resources to entertain extraordinary reporting requirements not compatible with their financial management system. It demanded extraordinary efforts on the donor side to enable some form of “value for money assessment” both by the donor representatives of the country concerned as well as though various external reviews demanding additional resources and time spent by the Government. In a move to simplify and harmonise procedures to improve overall quality of monitoring and subsequently reduce transaction costs, the following were among the various steps taken: 1. One of the first steps taken was to conduct not only joint program reviews but also joint audits. This step alone reduced the transaction costs on the donor side substantially (shared cost of a single audit rather than multiple audits) and on the Government side with the time spent on entertaining several donor initiated audits. 2. Technical assistance was provided to establish a financial monitoring system within the Ministry of Finance to account for counterpart funding associated with donor foreign exchange contributions. It reduced the need for repeated follow up by the individual donors related to their own contributions, however, it led to significantly increased transaction cost on the Government side to be able to maintain the system. 3. As a step further donors in collaboration with the Government revised their disbursement procedure and gradually decided to rely on the financial information that the Government system can produce. TA was directed to improve on the Government system rather than maintaining a parallel donor funded system. This latter step has proven a significant step in reducing transaction costs and at the same time increased the level assurance of the financial information provided. The above may serve as an illustration of how donors can invoke steps to harmonise procedures using the host Government financial management system as a point of departure instead of limiting their efforts to harmonise requirements among themselves. With the current trend of moving towards program aid within sector wide approaches to programming (SWAPs), the focus has in some cases been shifted from financial reporting of individual donor contributions to outcomes and resource use of the total programme regardless of the source of funding. Such an approach would be more in line with the regular management approaches of similar institutions in donor countries were source of funding is not the key issue, but total outputs and outcomes produced compared to total resources used are the main issues. As an illustration of the process in moving towards a harmonised 10
  • 13. procedure to reduce transaction costs, the case of Primary Education Project in Nepal is presented in Box 2. Box 2: Basket funding approach in the Basic and Primary Education Project in Nepal. In the phase II of the Basic And Primary Education Project in Nepal (BPEP II) several donors joined with the Government in a move to harmonise disbursement and reporting procedures in order to reduce the transaction costs by simplifying monitoring and reporting requirements. In this project the World Bank was given the role of monitoring resource use including flow of funds from the donors through the Government to the program (the disbursement mechanism). This model proved to be conducive for the Government in as much as it only had to relate to one financial management system rather than several and that release of resources from the donor side was associated with only one reporting requirement rather than several. Thus it proved to be an illustration of harmonising donor requirements. On the other hand, the project suffered severely from problems in providing the requested information. This led to substantial delays in disbursements and subsequent delays in implementation. This was due to the fact that the reporting requirement was based on a specific chart of accounts incompatible with the Government financial management system. Accordingly, technical assistance was provided to train the financial officers of the 94 cost centres involved in the financial management of this national programme. With quarterly reporting the 94 cost centres produced some 370 reports annually which needed to be reconciled at the central level and translated into the reporting format required by the donors. In order to comply with the specific reporting procedure the Government executing agency had to develop a “key” on how to translate Government chart of accounts to the donor required chart of accounts presenting the information in a manner that satisfy the donor requirements. The auditing requirements are met by the Auditor General through its regular audits in accordance with the Governments standard chart of accounts and a special purpose audit to reconcile the information with the donor requested procedure. In terms of financial reporting it induces significant additional costs to the Government, while in terms of auditing the additional cost is minimal since the basis for the financial reports are subject to a regular audit annually. The above may serve as an illustration of the fact that harmonisation of donor procedures may be an important step in the direction of reducing transaction costs, but it is not alone sufficient unless one takes into account the compatibility of the financial system by the host Government. At the one end harmonising donor procedures may entail that one donor takes the “lead” through which all other donors institutions route their contributions. At the other, all donors/institutions may provide resources in “parallel” applying a common set of procedures and reporting requirements. In both cases, from the recipient side it enables them to consider 11
  • 14. one and only one financial management system and reporting requirement. However, as box 2 illustrates in the case of the basket-funding model in Nepal, it is often still an opportunity to explore further the possibility of building on the host Government financial management system. This leads us to the third issue of transaction costs on the donor side. Although the ideal situation may be that the donors work through a lead donor with co-financing arrangements, it will still require that the “lead” donor requirement to the extent possible is open to adjust to the financial management system of the host country. Even if a single reporting framework was achieved it may not necessarily comply with host Government systems or capacities to deliver. This leads us to the next sections of the report discussing and presenting some basic guidelines and procedures which at the one end may provide reasonable assurance and meet basic donor requirements and at the other, allow opportunity to adjust the requirements in accordance with host Governments systems and capacities to deliver. 12
  • 15. 5 SCOPE FOR HARMONISATION 5.1 Steps towards harmonised procedures Harmonisation will require a change management perspective to the process of adopting common donor reporting requirements and procedures. The section presents some main steps towards harmonising procedures for financial reporting and auditing among donors. Harmonisation of procedures for financial reporting and auditing will induce changes in internal procedures in various organisations in OECD countries. It will require commitment and participation of the relevant stakeholders within the respective organisations. Commitment, realism and monitoring of progress are key critical success factors in this process. Potential “reality gaps” between formal procedures and actual practices should be addressed to benefit from developing harmonised procedures. To capture such discrepancies the need for monitoring mechanisms and evaluations are emphasised. This report will provide input for preparation, discussion and decision-making related to some key areas that needs to be considered in order to develop harmonised procedures for financial reporting and auditing; 1) analysis, 2) decision-making on the functional scope and time frame for adopting harmonised procedures, 3) GAP analysis in each agency and 4) elaborating implementation strategies. It is our view that streamlining recommendations with those of interrelated sub-groups within the Task Force’s work is important. The sub-group on reporting and monitoring is assumed to be closely interrelated with the sub-group for financial reporting and auditing. To following is an outline of the proposed steps to be taken (ref figure 5.1): Step 1: Identify “best practice” Based on a review of documentation on existing donor procedures for financial reporting and auditing this report will present some findings that provide the basis for identifying “best practices” among OECD/DAC donors. “Best practices” are identified with reference to criteria that contribute to reduce transaction costs of recipients, facilitate the process of harmonisation, and with content-quality in line with existing international standards. Step 2: Agree on main principles and a “concept” for harmonised procedures Main principles for financial reporting and auditing are proposed with a view towards 13
  • 16. decision-making and commitment of new harmonised procedures within OECD/DAC Sub- group on Financial Management and Accountability. The main principles are proposed with a view towards establishing minimum requirements for financial reporting and auditing as a point of departure for harmonisation. Subsequently the main principles should be developed and applied to define a “concept” for harmonised procedures based on examples from donors with best practises. Figure 5.1 Steps towards harmonised donor procedures for financial reporting and auditing 6 Evaluation 5 Monitoring 4 Implementation 3 GAP- analysis 2 Propose common principles 1 Identify ”best practice” Step 3: Carry out GAP analysis at organisational level Gaps between existing procedures and the concept model needs to be identified by each donor to adopt and implement harmonised procedures. The GAP analysis should be prepared by each donor/agency with reference also to the OECD/DAC Sub-group on Financial Management and Accountability. Methodology should be uniform to facilitate harmonisations and to avoid differences in terminology. Step 4: Time schedule and implementation Based on input from the GAP analysis, a realistic time-schedule for gradual adoption of the new harmonized procedures by each donor should be made. This could be shared as information on where each donor is in the process of adopting the framework. 14
  • 17. Step 5: Establish monitoring mechanism for implementation of main principles Mechanisms for monitoring progress and actual implementation of the main principles and the “concept model” will be required. Some pooling of resources or coaching by institutions with “best practices” should be considered to facilitate the procedural changes for donors/agencies with large GAPs. Step 6: Evaluate and/or assess the effects of harmonised procedures A basic assumption for initiating harmonised procedures for financial reporting and auditing is to reduce transaction costs at a project level in recipient/borrower countries. Another assumption is that the downscaling of parallel systems will lead to a strengthening of government public finance management systems in recipient countries. The actual effects of harmonised procedures should be evaluated periodically. 5.2 Identifying best practices for financial reporting and auditing In the first sections of this report documentation of donor requirements for financial reporting and auditing are presented. As illustrated in previous sections the donor requirements vary in terms of comprehensiveness and flexibility. In this section the analysis is further extended. A normative assessment is made with a view towards identifying agencies with “best practices” according to specific criteria. Before presenting the specific criteria, the overall objective, key assumptions and some critical success factors are outlined. Overall objective, key assumptions and critical success factors The overall objective of the work within OECD/DAC Task Force on Donor Practices is to cost-effectively reduce the burden on the capacities of partner countries in managing aid relationships. A performance indicator of the extent to which this objective is met is actual reduction in the transaction costs of recipient countries. Harmonisation of donor procedures is regarded as a key instrument to reduce the burden on the capacities of partner countries. In addition to harmonisation of donor procedures a key assumption is that the procedures are compatible with government’s public finance management systems in recipient country. These key assumptions are critical success factors and the point of departure for the recommendations put forward in this report. • One critical success factor is actual tailoring to country context adopting procedures compliant with recipient governments financial management systems. • A second critical success factor is actual convergence between donor procedures. 15
  • 18. If convergence takes place between donor requirements and procedures, and donors actually tailor the procedures to country context adopting government public finance management systems, the number of specific reporting relations will be significantly reduced. The process will reduce the transaction costs of both donors and recipients. Some organisational implications will be highlighted in another section of this report. Criteria for identifying “best practices”. As a point of departure for our work we have identified criteria for differentiating between donors. In doing so, we have carried out a normative assessment of donor procedures and features that contribute to reducing recipients’ transactions costs. The assessment has been carried out using three important aspects/dimensions; 1) the content-quality dimension, 2) the transparency dimension, and 3) the tailoring-to-country dimension. These are briefly described in the following paragraphs. The content-quality dimension. To develop cost-effective financial reporting and auditing mechanisms the effectiveness of the system is one aspect and the costs are another. The transaction costs are closely related to the complexity of the financial management system, herein the financial reporting and auditing requirements, and the absolute quality level the donors demand. Many and detailed requirements, ceteris paribus, will involve higher transaction costs. However, it is important to identify minimum standards in the harmonisation process to ensure that financial reports gives a “fair” presentation and audits gives “reasonable” assurance. The variation between donors in minimum requirements is highlighted as a point of departure. The international standards for financial reporting and auditing have served as benchmarks in the normative assessment. The issue of transparency. To be able to harmonise procedures there is a need to address the issue of transparency associated to procedures and practices that donor agencies apply. Transparency is closely related to the level of documentation of policies, procedures and practices, including compliance control. To be able to develop a common understanding of the main principles and minimum requirements for financial reporting and auditing, the level of documentation is an important aspect to ensure transparency in application of procedures. A move towards more comprehensive guidelines and thus more transparent procedures is, in our 16
  • 19. view, a prerequisite to successful harmonisation. It is important to note that a demand for increased transparency, in the short run, will lead to an increase in the administrative burden of some OECD/DAC donors. This should be taken into consideration and ways and means to facilitate the change should be discussed in the Task Force. Tailoring to country/project dimension. Harmonisation of procedures must take place at a project/programme level and take into account the country context. Thus the level of tailoring to the country context and the flexibility in adapting adequate procedures according to existing financial management systems, risk, management cycle and other project specific factors are important. Designing adequate systems require assessment of the country context, the nature of the project, the implementing agency, staff skills and the inherent and control risks involved. Table 5.1 presents an overview of the results of the normative assessment of donor procedures. A scale, from; Low (1) – Medium (2)– High (3) indicate each donor countries score in each dimension according to the available documentation provided. The donor with the highest total score has the overall “best practice”. Table 5.1. Overview of normative assessment of donor procedures “Score”/criteria Content-Quality Transparency Tailoring to country- context High (3) World Bank, UNDP, UNDP, Japan, World Bank, Norway, Holland Germany, Holland, Sweden World Bank Medium (2) UK, Germany, Japan UK UK, UNDP, Holland Low (1) Norway, Sweden Norway, Sweden Japan, Germany The World Bank has the highest overall score with a high score on all the criteria; content- quality, transparency and tailoring to country context. It is important to note that the guidelines of the World Bank have recently undergone a substantial revision and reflects the World Banks’ policies that emphasise tailoring to country context, dialogue with partners and recipients and focus on development of government public finance management systems in recipient countries. The assessment is made based on available documentation. Other donors might have practices that to a large extent are on par with the World Bank’s practices in several areas. Due to the 17
  • 20. high level of documentation and thus transparency of World Bank practices, these guidelines are considered as a good example of “best practice” and will provide a useful point of departure for further harmonisation. Some elements in the procedures of UNDP and Holland should also be considered as examples of “best practice” in some areas. A brief presentation of some of the World Bank’s principles and procedures is given in the following: • As part of the appraisal, financial management arrangements, accounting policies and procurements arrangements, including an overall financial management system review is carried out. Project supervision procedures are elaborated, negotiated and agreed upon between World Bank staff and recipients. Other donors involved in the project are invited to participate in the discussions. Agreements include content, timing, format and frequency of reporting provided by recipients, including auditing arrangements. • Prior to carrying out the financial management assessment, the country context should be examined. The Country Financial Accountability Assessments (CFAA) and other relevant information on fiduciary risks in the country context are important instruments at this stage. • The World Bank guidelines create clarity of roles and responsibilities within the World Bank and between World Bank and recipient. Documentation of roles and responsibilities within financial management is an integral part of designing the financial management system. • According to the guidelines, the Financial Monitoring Reports should provide information about financial sources, allocation and uses of financial resources of the whole project (entity), and are not limited to providing information on World Bank- funded resources. • The World Bank accepts either cash or accrual accounting, depending on the nature of the activity. The cash basis of accounting is normally accepted for projects implemented by non-revenue-earning entities. The accrual basis is required of all commercial/revenue-earning entities in receipt of World Bank funds. Project accounting policies are agreed on as part of the appraisal of the project. • The main principles for financial monitoring reports, are the following: o Financial Management Reports should provide the World Bank with sufficient information to establish whether: 18
  • 21. Œ funds are used for the intended purpose, Œ project implementation is on track, and Œ budgeted costs will not be exceeded. o Financial information should be linked with information on physical progress and procurement to give assurance on consistency between financial and physical progress. o Project monitoring by the World Bank should be cost-effective from the viewpoint of both the World Bank and the recipient. Ways and means to strengthen cost-effectiveness are: Œ Reporting requirements that necessitate recipients investing or maintaining parallel or duplicate systems should be avoided, as far as possible. Œ The same structure of financial information should normally be used for project planning and costing, Financial Monitoring Reports, audited financial statements of the project, and implementation completion reports. Œ The requirements for financial and procurement monitoring should, as far as possible, be aligned and integrated with other World Bank requirements for project progress reporting and monitoring, including project outcome monitoring and reporting. For example, when semi- annual progress reporting is required, the Financial Monitoring Reports should be an integral part of these reports. Œ Wherever possible, common reporting and monitoring arrangements should be agreed with other donors involved in the project. 5.3 Proposed main principles for harmonised procedures This section aims at proposing some main principles that can serve as a point of departure for the harmonisation of donor procedures. The main principles are deducted partly from “best practices” and partly from international financial reporting and auditing standards. Content-quality 19
  • 22. • The Financial Reporting and the auditing procedures should provide information about all financial sources, allocation and uses of all financial resources of the total project (not only components related to one source of finance like an individual donor contribution). • Financial information should; o allow a reasonable control of how resources are used o cover all funds, regardless of source o be linked with physical progress to allow assessment of cost efficiency, i.e. comparison of resource use with outputs produced (output or activity based financial reporting) o be complemented with evaluation of efficiency of the instruments applied at specific intervals. • The harmonised donor procedures for financial reporting should define clear roles and responsibilities between donor and recipient. • The role of the internal auditor and external auditor should be clearly defined. • Terms of Reference for external auditors should be negotiated and agreed upon. • Reference to the government public finance management system should be made. If the systems cannot be adopted, a development action plan for converging towards the government public finance management system should be developed. • At regular intervals the financial management arrangements should be reviewed/evaluated. Transparency • Clarity of roles and responsibilities within financial management should be documented as part of the internal procedures and the internal control system of the executing agency. • Procedures for financial reporting and auditing should be well documented within each donor organisation. • If government public finance management systems are not used, a development plan should be elaborated and monitored as part of the project monitoring/ or country 20
  • 23. portfolio monitoring. Tailoring to country-context • As part of the appraisal, financial management arrangements, accounting policies and procurements arrangements, including an overall financial management system review should be carried out. This assessment should be carried out with a view to tailoring the arrangements to the country context ant the specific requirements of the project and the executing agency. • All donors involved in the project should be invited to participate in the definition of financial reporting and auditing procedures. Harmonisations should include content, accounting principles, timing, format, chart of accounts, frequency of reporting provided by recipients, including auditing arrangements. • Monitoring mechanisms for the harmonisation process should be defined. To benefit from harmonisation actual practices must change at the project level. Key Performance Indicators would be based on measuring the extent to which government public finance management systems in recipients’ countries are adopted or measuring the actual transaction cost of recipients. A sample format for reporting with basic requirements are outlined in annex III. A discussion on the proposed main principles should be carried out in the OECD/DAC Task Force on Donor Practices. On the basis of the main principles and a presentation of the “best practices” identified previously in the report, a concept for harmonised procedures should be elaborated. 5.4 Implications for donors As the above indicate, in order to adopt a principle of tailoring financial reporting to country financial management systems requires for some donor discontinuation of specific formats and schedules of reporting. It means for all donors to consider adopting a process of conducting assessment and design of financial reports as an integrated component of overall project and program design rather than applying predefined standard formats and procedures in all countries/projects. For some donors that to day only have general guidelines for financial monitoring to adopt the principles as presented above and elaborate them into more comprehensive internal guidelines. For those with detailed guidelines and principles it would mean to allow 21
  • 24. adjustment in accordance to country financial management systems. The proposed standard terms of references would be applicable to any format and procedure for reporting as long as the basic accounting principles are followed along the lines mentioned above. 5.5 Standard terms of reference for audits Standard terms of reference for audits are considered as one of the “tools” which may be used in harmonisation of donor procedures. The Standard terms of reference for audits has been based on ISA with specific reference to special purpose audits. It has drawn upon previous reviews of joint donor support (basket funding models etc.), the experience in undertaking joint audits and the process in developing an agreed set of terms of reference. The terms of reference has taken as a point of departure the basic principles for financial reporting mentioned above which among others include: • The financial reports should reflect total project/programme resource use, not only use of a specific source of funding • A review of the financial management system and procedure. • It should include review of assets, review of management procedures including procurement procedures applied and, reconciliation of financial reporting according to regular chart of accounts with activity based financial reporting. The Terms of reference assumes that all donors providing support to the project should be provided copies of letter of engagements, audit opinions and management reports even though the client is the executing agency of the recipient country. In annex IV a proposed standard is introduced. 5.6 Next steps for implementation of a common framework As a next step each donor in the subgroup should initiate a process to analyse the GAP between basic principles as mentioned above and identify areas of needed adjustments in internal procedures/regulations. Based on the reviews of the above common principles, a unified financial reporting and auditing framework can be developed. 22
  • 25. In order to test the feasibility of the framework some country case studies may be conducted testing the principles and procedures on some projects with multiple donor support. By identifying some new projects under design, donors could jointly commission a design exercise to test the opportunity to develop a financial reporting procedure and format based on the above principles. Following the outcome of the “design test” as mentioned above, the principles could be elaborated into detailed guidelines to be adopted by the OECD/DAC members. 23
  • 26. ANNEX I TERMS OF REFERENCE FOR CONSULTANTS TO ELABORATE ASPECTS OF FINANCIAL MANAGEMENT AND AUDITING OF BILATERAL DONORS PURPOSE OF THE CONSULTANCY • To identify and to document requirements in the area of financial management and auditing related to financial and technical co-operation by bilateral donors to recipient countries. • To guide and advise on ways and means to optimally harmonise and streamline the above-mentioned requirements that are currently in effect in the development community, and • To provide guidance on the various options to facilitate the development of a widely agreed reporting and audit framework. BACKGROUND To respond to the challenge to harmonise procedures of bilateral donors the Development Assistance Committee (DAC) of the Organisation for Economic Co- operation and Development (OECD) set up the Task Force on Donor Practices in January 2001, with a two years mandate, to identify and document practices that could cost-effectively reduce the burden on the capacities of partner Countries in managing aid relationships. The purpose of the Task Force is not to decide on fundamental policy questions related to individual agencies‘ choice of modalities but to look at the most appropriate practices where such modalities are applied. The Task Force is focusing on three sets of activities, each the responsibility of a Sub- Group: • Financial Management and Accountability • The pre-implementation phase of the project and programme Cycle, including design, appraisal and risk assessment. • Reporting & Monitoring Each Sub-Group has agreed a work programme over the period to end 2002 (see attached). These comprise a combination of desktop studies and examination of field- 1
  • 27. level experience. The programmes of the Sub-Groups on Pre-Implementation (SPI) and Reporting and Monitoring (SRM) are closely inter-related as the framework for reporting and monitoring is generally designed prior to implementation. To build on these synergies this Consultancy will address elements of both Groups’ work programmes. The Sub-Group on Financial Management (SFM) is responsible for all financial issues including financial reporting by partners. The Task Force is open to all Members of the DAC, as well as its regular observer organisations (the World Bank, the IMF, the UNDP), the OECD Development Centre, the European Commission, and the Club du Sahel. The Task Force, and its Sub- Groups, are developing close links with other networks and working groups within the DAC, and other relevant initiatives to promote greater harmonisation of donor procedures (e.g. the various Multilateral Development Bank Working Groups and the Special Partnership with Africa). The Sub Group 1 on Financial Management and Accountability has divided its work into five task • Task AConceptual Framework • Task B Collaboration on Diagnostic Work • Task C Donor Accountability • Task D Standards • Task E Financial Reporting and Auditing WORK OF TASK E The sub-group noted that multiple financial reporting and auditing requirements by individual donors is a significant contributor to additional costs and capacity overload in recipient countries, especially those with weaker capacity. It also noted that there is already a well developed body of international standards in this area. The sub-group agreed to: Identify and document the policies and procedures of DAC Member countries with respect to financial reporting and auditing of different forms of donor-financing (i.e. traditional projects and newer models of aid delivery). Compare these procedures to available international standards, and identify differences. 2
  • 28. Develop a range of options by which common financial reporting and auditing requirements could be accepted by all (or most) donors in individual projects and programs in a way that is cost effective, provides donors with the information and assurance that they need, and contributes to better quality reporting and auditing in the recipient country. The members of Task E of the Sub Group 1 on Financial Management and Accountability are seeking the support of a Consultancy for the work formulated below: SCOPE OF WORK On the basis on the documentation available the Consultant’s task is as follows: • Document and analyse donor reporting arrangements in the field of financial management and auditing including comparison to international standards; • Assess the cost of Donor reporting requirement on partner countries; • Make the case for harmonisation of diverse bilateral donor reporting procedures more compelling; • Identify scope for single reporting frameworks and single audit frameworks; • Assess the implications of these models so that each of the Members can form an assessment about how different that is from where they are now; • Based on this analysis and the objectives of the subgroup options should be developed as to how the objectives in this key area can be furthered. • Develop standard terms of reference for auditing development co-operation funds based on international standards To carry out his work, the Consultant is asked to co-operate very closely with the Consultant of the MDB Group, Mr. Charles Coe, e-mail: ccoe@canda.com. TIMETABLE The Consultant should start with his work in January 2002, analysing the available documentation. The first draft of the study should be submitted middle of March whereas comments by the members of Task E will be made available at the middle of March 2002 so that the final version of the study can be submitted by end of March 2002. 3
  • 29. It is estimated that the Consultant will need six weeks to prepare the documents. SKILLS REQUIRED The Consultant will need an understanding of the financial management and auditing in the field of development aid. He should also be familiar with international auditing standards. DOCUMENTATION AVAILABLE The following bilateral donors have send their rules and regulation to KfW: France,, Germany, Ireland, Japan, New Zealand, Norway, Sweden, Switzerland, UNDP, World Bank This documentation will be the basis for the analysis to be carried out. FUNDING ARRANGEMENTS The Consultant will be financed by KfW; the contract with the Consultant will be made between the respective consulting firm and KfW. Contact person within KfW is Mr Knut Bäse Secretariat of International Credit Affairs Kreditanstalt für Wiederaufbau Palmengartenstr. 5 - 9 60325 Frankfurt am Main Germany Telephone +49 69 7431 - 2562 Telefax +49 69 7431 - 3363 e-mail knut.baese@kfw.de Frankfurt, December 2001 4
  • 30. ANNEX II Matrix of donor practises UNDP HOLLAND General UNDP has a comprehensive framework for financial Holland has elaborated detailed guidelines including monitoring and auditing. Detailed guidelines are found in the financial monitoring in their Operational Procedures UNDP Programming Manual in addition to UNDP Financial Manual. The manual presents clearly defined objective and Regulations and Rules. purpose for financial management, reporting and audit In addition, UNDP carries out Country Assessments in Accountability and Transparency (CONTACT) for which a separate manual has been developed. Financial Specific formats have been developed (annexed to UNDP The Operational Procedures Manual presents a standard monitoring manual). The budget format uses a specific chart of accounts. project cycle with guidelines and checklists for each element Accordingly, in terms of financial reporting the executing in the cycle. agency will need to maintain accounts with cross reference to Specific formats with checklists for monitoring has been the UNDP proposed accounting structure unless the developed, but not for financial reporting. Specific formats project/programme accounts are maintained separate from for financial reporting are not presented (i.e. flexible chart of the regular accounting system of the recipient institution.. accounts). UNDP requires quarterly reporting with financial year equal Progress reports have to be submitted semi-annually without to the calendar year and annual auditing presented within 30 specifying the financial year. April. Activity based financial reporting has specifically been UNDP has also developed formats for reporting to enable stated as an important factor to assess in the Activity activity based financial monitoring. Appraisal phase and for monitoring. To what extent it is actually implemented is unknown. External UNDP has defined objective and purpose as stated both in The Operational Procedures Manual presents detailed audit the UNDP Manual and Financial Regulations. guidelines for audit with clearly defined scope and In terms of procedures and guidelines the UNDP Manual objective. also gives reference in the UNDP Financial Administration It makes reference to and has elaborated audit guidelines on Rules and Regulations. the basis of ISA. A specific scope and content of auditors report and opinion are presented. Audit reports are to be submitted within 6 months of the partner’s financial year and end of project. Overall Comprehensive framework that would need adjustments in Comprehensive procedures and requirements however assessment format for reporting if it was to be harmonised with a flexible to allow adjustment to partner financial year, common framework and to apply standard ToRs for audits. reporting formats, etc. Gives details of content (like a checklist) rather than demanding specific forms and schedules. 1
  • 31. GERMANY JAPAN General KfW has not presented any specific financial management JBIC has not presented any specific financial management guidelines, rules or regulations. They appear as an integral guidelines, rules or regulations. Like KfW they are an part of general guidelines and part of the standard loan integral part of general guidelines and part of the standard agreement/grant agreements. loan agreement/grant agreements. In the area of financial monitoring there are no specific In the area of financial monitoring there are no specific objectives defined other than assessment of planned versus objectives defined other than assessment of planned versus actual resource use. actual resource use. Financial In the area of financial reporting there are specific formats In terms of financial reporting, specific formats for reporting monitoring presented but with flexible classification. The outlined chart (SOEs) with specific chart of accounts are introduced. of accounts is divided between procurement (investment) and Specific procedures apply pending form of disbursement other services. (replenishment, advance, direct payment and LC). Reporting Specific procedures apply pending form of disbursement is linked to procurement and replenishment and similar to (replenishment, advance, direct payment and LC). Reporting World Bank procedures applying to investment lending. is linked to procurement and replenishment and similar to Not activity based financial reporting. World Bank procedures applying to investment lending. No specific schedule of reporting is presented (financial reporting quarterly, semi-annually, annually). Not activity based financial reporting specified. External KfW has elaborated standard Terms of Reference for None of the documents provided give any specifications. audit auditing with a clearly stated objective reflecting general objectives in program guidelines. There are no specific references to national and international standards. There are no specific format required but types of reports stated like management letter, etc. are included in standard Terms of Reference. No specific schedule for auditing has been stated. Overall Financial monitoring guidelines are part of general Financial monitoring guidelines are part of general assessment guidelines and the standard loan /grant agreements. guidelines and the standard loan /grant agreements. Adjustments will be required in reporting framework and If format for reporting are to be harmonised with a common ToRs for auditing if it is to be harmonised with a common framework (use a specified chart of accounts) it will require framework. adjustments in the formats and procedures specified. 2
  • 32. WORLD BANK UNITED KINGDOM General The World Bank has an extensive framework for financial DFID has provided the team with the general instructions monitoring and auditing, and puts an emphasis on used for DFID staff. The emphasis is put on internal streamlining the reporting and auditing procedures. The financial management systems and internal control. World Bank underlines the principle of tailoring the reporting The instructions have limited explicit standards for financial and auditing procedures according to the level of risk and the monitoring and audits of DFID-funded projects. complexity of the project. Nevertheless some minimum requirements are explicit. Principles of aid management are not published yet. The World Bank has a sample of reporting formats and minimum requirements for reporting frequency. An assessment for developing financial management arrangements is carried out prior to approval of project and throughout the implementation. Financial It is World Bank policy that financial reports, as far as No explicit requirements for reporting. monitoring possible, should be in a format that the recipients systems can Reference to disbursement. produce. If required the World Bank staff aim at developing acceptable formats in collaboration with the recipients. The (A more detailed assessment will be pending additional underlying principles for financial monitoring reports are as documentation to be collected) follows: 1) The reports should provide information to establish whether funds disbursed are being used for the purpose intended, project implementation is on track and budget cost will not be exceeded. 2) Financial information should be linked with information on physical progress and procurement. 3) Cost effective from the viewpoint of both World Bank and recipient/borrower. Content, formats and frequency of reporting should be determined as part of project appraisal. Minimum requirements are; - Financial reports must include a statement showing cash receipts (periodic and cumulative) by source and expenditure by main expenditure classification; beginning and ending cash balances; and supporting schedules comparing actual and planned expenditures. - Cash accounting and accrual accounting principles are acceptable. Commercial/revenue-earning entities must apply accrual principle. - Avoid duplicate systems. The monitoring cycle should as far as possible be streamlined with the project management cycle. The World Bank makes reference to the International Accounting Standards (IAS). External Yearly audits of financial statements are required. There are According to DFID policy auditing can be carried out audit no specific formats for audit reports. through the auditing systems in the recipient country or other For audits of commercial, industrial or business entities, external auditors with a specified Terms of reference. reference is made to the International Standards of Auditing DFID makes reference to the GAGAS (General Accepted (ISA). Government Auditing Standards) defined by INTOSAI. Overall The World Bank has developed a comprehensive framework Based on the available information the financial monitoring assessment with opportunities to adjust reporting requirements to the and reporting requirements are integral part of general financial management systems of executing agencies. programme management guidelines with no detailed requirement concerning format and procedures for reporting. (A more detailed assessment will be pending additional documentation to be collected). 3
  • 33. NORWAY SWEDEN General NORAD strongly advocates the principle of recipient The team has not yet been provided with guidelines and responsibility that implies that the partner’s systems and regulations expressing Sida’s policy for its financial routines are to be applied as far as possible. This applies i.a. monitoring and audits nor any printed formal financial to procurement procedures, accounting and audit, reports and control guidelines. disbursements. According to one source, before committing funds to any NORAD has printed formal, general guidelines focusing on programme a checklist of budgetary/financial some core requirements. management/audit issues is used to ascertain the quality of recipient or partner government financial arrangements. (Source: Crown Agents, Appendix F, p.29; the checklist is not submitted to the team). Financial NORAD has no requirement that accounts shall be The agreement template shows some core requirements, but monitoring performed according to a specified standard. If the partner no formal format requirements. country has established a standard for accounting NORAD The Progress Report shall show at a minimum present expects this to be followed. In the opposite case NORAD allocated budget, advances, expenditure and unutilised will usually expect accounting to be performed in accordance balance. with generally accepted accounting principles. The Annual Progress Report, based on LFA, should contain There are no specific report formats required. However, the an analysis and an assessment of the implemented activities, specific content of the reports and the procedures for time frame and actual cost in relation to the annual plan of approval of them must be regulated in the operations. Agreement/contract or other binding format. The Results Analysis Report, prior to the End-term Review Core financial reporting requirements: shall present a cumulative overview of all costs and inputs - Progress in accordance with work plans and budgets versus all realized outputs for the entire period. - Expenditure reports in accordance with budget, and audited accounts. Disbursement of Norwegian aid funds shall be based on approval of these reports. External NORAD makes no requirement that audits shall be The project/programme shall be audited annually. The audits audit performed according to a specified standard. If the partner shall be carried out by an independent and qualified auditor country has established a standard for auditing NORAD (e.g. Auditor General, Certified Public Accountant, expects this to be followed. In the opposite case NORAD Chartered Accountant) and in accordance with “generally will usually expect audit to be performed in accordance with accepted international standards on auditing”. “generally accepted auditing principles”. The audit report shall certify whether submitted financial Disbursements made to the partner shall be audited either by reports are correct and give a true and fair view of the the partner country's Auditor General, or any other administration of the project/programme in accordance with governmental auditing body that normally is auditing the “generally accepted international accounting standards”. accounts of the implementing ministry/agency. If the Auditor If requested by Sida, the audit report shall also certify that General or the auditing body lack the capacity or competence progress reports give a true and fair view of the to perform the audit, a recognised - preferably an project/programme. Furthermore, if requested by Sida, the “internationally recognised” - auditor firm should be used. audit report shall comment on the management and the The basic audit frequency that should be followed is an internal control system of the project/programme. annual audit in accordance with the partner's fiscal year. The audit report shall state which measures have/have not There are no standard Terms of references for audits been taken as a result of previous audit reports, and whether elaborated but in standard agreements it is required that the measures taken have been adequate to deal with the reported audit shall confirm that funds have been accounted for at all shortcomings. The executing agency/institution subject to levels and that they have been applied as intended. the audit shall provide Sweden with copies of audit reports from the audit of the project/programme. Overall General guidelines addressing the issue of financial reporting General guidelines addressing the issue of financial assessment and auditing. reporting and auditing. 4
  • 34. Annex III – Basic requirements and sample format for financial reporting The following are basic requirements and principles to be observed when developing and agreeing on financial reporting procedures. The requirements are associated with the presentation of financial information: 1. The financial reports should provide information on who is the reporting entity. 2. The financial reports should provide information on the unit responsible for maintaining accounts and preparing the financial report. 3. It should state the accounting policy applied (e.g. accrual or cash basis). 4. It should specify all sources of funding; domestic and foreign. 5. The financial report should present all cash receipts and their uses for the total project including all sources of funding and all uses. 6. The financial report should present all cash receipts and their uses both for the reporting period and cumulative with presentation of beginning and end cash balance. 7. The financial report should present an additional schedule showing planned sources and uses of funds, both for the period and cumulative, to allow assessment of deviations between planned and actual resource use. 8. It should contain a separate schedule with notes to explain major deviations. 9. It should, to the extent possible use the chart of accounts of the recipient country executing agency for classifications of revenue, expenditure, financing, opening and end balance. 10. In a separate schedule it should present the classification of expenditure by activity compatible with reports on physical progress. 11. It should be presented on a quarterly, semi-annually or annual basis what ever is agreed upon complying with the fiscal year of the executing agency. 12. Sound accounting policies imply that the accounting entity reconciles accounts on a monthly basis. It should accordingly present the financial report for the 1
  • 35. relevant period within one month after the end of the period. Sample formats for reporting: Sources and uses of funds by [reporting entity] for [project]. Prepared by [entity/unit] Covering the period from [date] to [date] All figures in [currency] Budget Actual Variance Cumulative Cumulative Note [quarter/six [quarter/six Budget Actual months/year] months/year] Receipts by 1 source ….. Expenditure 2 by item ….. Receipts .. less expenditure Opening .. cash balance ….. Net change ..Receipts less expenditure ...Foreign exchange adjustments Closing cash balance ….. NOTES: 1. ……………… 2. ……………… 2
  • 36. MEMO ITEM: Specification of accounting policy. Uses of funds by activity by [reporting entity] for [project]. Prepared by [entity/unit] Covering the period from [date] to [date] All figures in [currency] Activity Budget Actual Variance Cumulative Cumulative Note [quarter/six [quarter/six Budget Actual months/year] months/year] Activity 1. 1 Activity 2. 2 …. .. Total expenditure NOTES: 1. ……………… 2. ……………… 3
  • 37. Annex IV – Sample terms of reference for auditing INTRODUCTION <Name of audit firm> has been assigned as auditor for <Name of Programme/Project>. <Brief description of the programme/project. Identification of the donor/funding organisation. Reference to and identification of the funding-agreement between the programme/project and the donor/funding organisation> AUDIT OBJECTIVES • The audit shall be carried out in accordance with international generally accepted standards on auditing (ISA 800) as issued by the International Federation of Accountants (IFAC). • The specific objectives of the audit are: o to give an opinion as to whether the financial statements give a true and fair view of the revenue collected, the expenses/costs occurred and the financial position of the programme/project at the time of reporting. o to evaluate and express an opinion on the programmes/projects accounting- and internal control systems established to ensure correct financial reporting and safe custody of programme-/project financed assets in accordance with the programme/project objectives. AUDIT SCOPE • The audit shall be designed to enable the auditor to express an opinion on the financial statements and accounting and internal control systems for the programme/project as a whole. • The audit shall be planned, documented and otherwise conducted in accordance with ISA 800 and related relevant ISA standards. This includes, - but are not limited to, - preparation of an audit plan and – programmes, documentation of tests and audit controls performed, and documented reporting of findings. 1
  • 38. • When planning and performing the audit, the auditor should consider the risk of material misstatements resulting from fraud or error. The auditor should design relevant audit procedures to obtain reasonable assurance that material misstatements are detected. Reference is made to ISA 240. REPORTING Auditors report to the financial statements The auditor shall issue a report to the financial statements in accordance with ISA 800. The report shall include: • an identification of the financial statements reported on. • a statement that indicates the basis of accounting used (or a reference to the note to the financial statements giving that information). • a statement that identifies the basis for the audit performed, International Standards on Auditing ISA 800, and a general description of the content of the audit. • an opinion as to whether the accounting and internal control systems are adequate to ensure correct financial reporting and safe custody of programme/project financed assets in accordance with the programme/project objectives. • an opinion as to whether the financial statements are presented in all material respects in accordance with the identified basis of accounting. • an opinion as to whether the financial statements give a true and fair view of the revenue collected, expenses/costs occurred and the financial position of the project at the time of reporting. • an identification and description on all material exceptions to the above (qualification of opinion). Management letter At the end of each audit the auditor shall issue a report (“management letter”) on all findings and suggested improvements. The reporting of such findings and improvements shall include, - but are not limited to: 2
  • 39. • a brief outline of the findings related to the accuracy and faithfulness of the financial statements. • a statement of expenditure that is irregular or have doubtful regularity. • findings related weaknesses and proposed improvements in the accounting and internal control systems. Identified weaknesses or errors that could cause the programme/project to collapse or detected major fraud or errors shall be reported immediately. The management letter shall include a comment as to measures taken by management to implement the recommendations. The management letter may include programme/ project management’s comments to matters raised and recommendations made in the letter. Engagement letter Upon acceptance of this audit engagement the auditor shall issue an engagement letter confirming: • the willingness and ability to conduct the audit. • the auditor’s independence to the assignment. • the objective and scope of the audit • adherence to the reporting requirements. The engagement letter should also identify the audit team assigned to the assignment together with an estimate of the fees and related costs for the audit. It is imperative that any limitation in the auditor’s ability to comply with these terms of reference and the audit requirements as stated in ISA 800 is clearly described and addressed in the engagement letter. 3