Financial Management Assessment 1.1 Introduction€¦ · Financial Management Assessment 1.1...

South Asia Tourism Infrastructure Development Project -Additional Financing (RRP NEP 39399-034)

Financial Management Assessment 1.1 Introduction 1. The Financial Management Assessment of the South Asia Tourism Infrastructure Development Project (Nepal Portion) additional financing (the Project) for upgrading of the Gautam Buddha Airport (GBA) to an international standard has been carried out through financial management assessments questionnaire filled up by the Civil Aviation Authority of Nepal (CAAN)1. This has been done in accordance with ADB’s Financial Due Diligence: A Methodology Note, January 2009 and Financial Management Technical Guidance Note, June 2013,which focuses on funds flow, staffing, accounting policies and procedures, internal controls, financial reporting, monitoring, as well as internal and external audits. The assessment has been informed by EA/IAs as well as lessons learnt during implementation of the ongoing project and the Governance and Risk Assessment of the Nepal Country Partnership Strategy.2 By and large, the financial management arrangements in the ongoing Project (Loan 2579/Grant 0179) have been satisfactory, and no significant additional risk mitigation measures are proposed. 1.2 Executing and Implementing Agencies

2. The Ministry of Culture Tourism and Civil Aviation (MOCTCA) is the executing agency (EA) and CAAN and the Lumbini Development Trust (LDT) under MOCTCA are the implementing agencies (IA) of the ongoing Project, which have project management and implementation units (PMIUs) in each agency. The Project Coordination Unit (PCU) and PMIUs have different legal status. Financial administration of PCU and PMIUs is governed by the rules and regulations of the respective entities. PCU’s and PMIUs’ financial management systems are described in the following sections.

1.3 Major Experiences in Managing ADB-Financed Projects

3. CAAN is implementing two ongoing ADB-financed projects: (i) South Asia Tourism Infrastructure Development Project (Loan 2579/Grant 0179), signed on 25 May 2010for $46.5 million cost, with 15 March 2015 as the expected closing date; and (ii) Air Transport Capacity Enhancement Project (Loan 2581/Grant 0181), signed on 25 May 2010for $80.0 million with 31 December 2016 expected closing date. The first project’s implementation progress has been slow due to the change in detail design under its connectivity improvement component, which resulted in need for additional financing and delayed contract award and disbursement for GBA upgrading related civil works. Implementation of the second project is progressing well. CAAN has also satisfactorily implemented (fully or partially) additional six ADB-financed projects in the past and has completed on time.3

1.4 Legal Framework 4. The Government and CAAN financial management systems are governed by a number of Acts and Regulations, which are presented in Table 1.

1 FMA questionnaire filled up by CAAN is attached for the reference in Appendix 3

2 ADB. 2013. Nepal Country Partnership Strategy 2013-2017 (Draft). Manila

3 Loans 0026 ($6.01m), 0233 ($10m), 0388 ($11m with Supplementary Loans 0422 [$6m) and 0936 [$8m]), 1156

($10.4m), 1451 ($17.2m), and 1512 ($27).

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Table 1: Acts, Regulations and Summary of Key Provisions S.N. Acts and Regulations Summary Provisions

1 Financial Procedure Act, 1999 Regulate and manage financial procedures, including budget formulation process; manage government treasury and consolidate funds; release funds and expenditure authorization; manage expenditure; undertake internal control; and make audit provision.

2 Financial Procedure Regulations, 2007 Provides detail procedure for operation of the Financial Procedure Act, 1999.

3 Public Procurement Act, 2006 Providesprocedures, processes and decision-making steps for procurement by public sector and local bodies in open, transparent, reliable, and objective ways.

4 Public Procurement Regulations, 2007 Elaborates the Public Procurement Act, 2006 and details procedure that need to be followed by public entities and local bodies.

5 Audit Act, 1991 Provides legal basis for auditing, different audit methods and audit reporting.

6 Civil Aviation Authority of Nepal Act, 1996

CAAN was established under this Act.

7 Financial Administration Rules, 2000 Regulates and manages financial procedures of CAAN.

8 Airport Tariff Rules, 1981 (latest amendment, 2010)

Aims to regulate airport tariffs for all Civil Aviation Offices.

1.5 Improvement in Public Financial Management at Country Level 5. Following the Public Expenditure Financial Assessment (PEFA) Report, 2008 the Government has established PEFA Secretariat in 2009 to enhance the overall performance of Public Financial Management (PFM) and its accountability in Nepal. The Secretariat is a government agency, which works under the guidance of PEFA Steering Committee chaired by the Secretary, Ministry of Finance (MOF). The Committee is responsible for providing overall leadership, coordination and strategic direction of the PFM reform program. Under the steering committee, the PEFA Secretariat is working to achieve results based on the PEFA indicators. 6. The PEFA Secretariat will monitor implementation of the PFM Strategy. The main roles of the PEFA Secretariat are to (i) develop overall framework of the Public Financial Management Reform Program (PFMRP), (ii) design a capacity building program, (iii) prepare measurable milestones to monitor progress, (iv) assess and report progress over time, (v) organize seminars and workshops on various themes that relate to PFM reform, (vi) coordinate review meetings on progress made in various sectors and sharing major outcomes, (vii) liaison

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with donors, (viii) disseminate the PFMRP activities within government, media and civil society based on communication and reporting strategy; (ix) share knowledge by awarding best PFMRP performers, (x) develop PEFA website and publish PEFA and PFM newsletters, and (xi) conduct research on PFM innovations. 7. The Government has received a grant of $4.3 million from the World Bank – Multi-Donor Trust Fund towards Strengthening Public Financial Management System. This project is under the PEFA Secretariat within the premises of Financial Comptroller General Office (FCGO). Its objectives are to improve expenditure control and enhance government accountability and transparency by strengthening the treasury system, improving financial reporting, and building up PFM capacity. There are three parts in the project component (i) implementation of Treasury Single Account (TSA) system,(ii) strengthening accounting and reporting practices in the public and private sectors, and (iii) capacity building of the PEFA Secretariat.

8. The Government has already implemented TSA system in all 75 districts, and has taken decision on 15 September 2009 to implement the Nepal Public Sector Accounting Standard (NPSAS), and the recording and reporting formats will be revised during its implementation. The other PFM reform initiatives are ongoing such as convergence of International Financial Reporting Standard and repeat PEFA assessment. In addition, Government Finance Statistics, based on new codes and classification of budget and expenditure,has already been implemented by the Government from FY2012/13. 1.6 Financial Management System of PCU and PMIUs

1.6.1 The Ministry of Culture, Tourism and Civil Aviation

9. The financial rules and regulations of MOCTCA are based on the cash accounting system of the Government. The accounting transactions and the financial statements are prepared based on the annual budget release and expenditure. Assets and liabilities are not reflected in the financial statements. However, the records of assets and inventories are recorded in a separate ledger prescribed by the Government. MOCTCA has the support of experienced accounting staff in keeping the accountingrecords who are deputed by FCGO. Account officer has capacity to maintainaccounting records of the Project. Hence, there has not been aproblem in maintaining separate project accounts for ADB loan and grant, operating the Imprest Account and compiling and producing consolidated financial reports,including the project accounts. There is no automated accounting software developed to capture all financial transactions at PCU, and records are kept and accounting is carried out manually on spreadsheets. PCU has already recruited Project Management Consultants (PMC) whowill assist PCU in coordination, financial management, and performancemonitoring, and reporting on the Project.

1.6.2 Civil Aviation Authority of Nepal

10. CAAN receives government counterpart fund on a trimester basis from PCU. There is a separate operating account for the Project under CAAN. Eligible expenditures for ADB-financing such as for consulting services, supplies and incremental operations can be incurred from Sub-imprest Accounts. 11. CAAN is responsible for air traffic services, operation, development, and management of all airports in Nepal. Although it is an autonomous body, it is operated under MOCTCA. CAAN Board is headed by the Minster, MOCTCA. Upgrading of GBA will be supervised by the Airport

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Transport and Development Directorate of CAAN. PMIU under this Directorate will be headed by a Project Manager. For design and supervision works, consultants are recruited. Till now, there are 34 Civil Aviation Offices (airports) in operation in different parts of the country. Planning and budgeting of the project activities, financial management and coordination with PCU will be undertaken by PMIU.

12. Since the organizational structure of CAAN was transformed into an autonomous authority, it slowly transcribed its financial administration system to a commercial accounting system. An accounting manual for this purpose was developed. Finance staffsare trained on commercial accounting system, and the current accounting system is based on this principle. 13. The Finance Department of CAAN is headed by the Finance Director, who is responsible for the overall financial administration system of CAAN. It has an Internal Audit Department, which is headed by a Director. However, a Chartered Accountant has been recruited by CAAN for internal audit through outsourcing. Internal audit report is submitted to the Director General of CAAN. 14. The financial report of CAAN consists of (i) balance sheet, (ii) income statement, and (iii) cash flow statement, supported by other notes to accounts. These financial reports are consolidated and prepared by the Finance Section. For donor-funded projects, CAAN has a system of maintaining a separate project account. CAAN has experience in maintaining separate project accounts. So, there has been no problem in keeping a separate project account of government share of expenditure, ADB grant, ADB loan, and OFID loan. 15. CAAN has taken initiatives to gradually replace the current practice of manual accounting system by a software accounting system at the central level, and this is being used from the beginning of FY2013/14. The revenue and expenditure will be consolidated from the Civil Aviation Offices in districts, which will be posted in software system on an annual basis, and complete set of annual financial statements will be prepared. These initiatives are encouraging.

16. CAAN has also recruited a Chartered Accountant on an intermittent basis to assist/guide on day-to-day financial related matters. The Chartered Accountant’s primary functions are to assist the management in preparing budget, record keeping, reporting, assisting in financial management information system, and providing training to the district and central finance staff. This will help CAAN in establishing sound financial management system.

17. Civil Aviation Office at GBA has an accounting section located at the airport. Full set of the accounting records are maintained at GBA. The accounts section consists of an account officer, an accountant and a storekeeper. At GBA, like in other airports, the account section has expenditure and revenue wings. Store accounting falls under the expenditure wing. At present, these functions are administered by one staff. The accounting records of GBA are maintained as prescribed in the accounting manual of CAANonan accrual basis. Full set of revenue and expenditure records are maintained manually. These records are supported by subsidiary records – salaryledger, revenue ledger, budget expenses ledger, revenue accounts, and cash and bank accounts. The central accounting department in CAAN’s head office in Kathmandu is responsible for compiling and consolidating the financial statements of all the civil aviation offices of the districts.

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1.6.3 Lumbini Development Trust

18. LDT was formed by the Lumbini Development Trust Act, 1985 to restore the Lumbini Garden under the Master Plan.LDT is an autonomous, non-governmental and nonprofit organization, which is under the MOCTCA. Its Executive Committee is headed by the Minster. LDT is based in Lumbini with a liaison office in Kathmandu. 19. LDT follows the government accounting system. The financial rules of LDT state that it will follow an appropriate accounting system applicable to non-governmental organizations (NGO) based on accrual accounting system. The current practices of adopting the government accounting system and procedures do not meet statutory requirements of LDT. At the end of the year, any unspent fund related to donor-funded projects needs to be returned to the Government. The LDT Financial Administration Bylaws was approved by the Government in February 2001. The financial report of LDT consists of income and expenditure of funds, which is called “financial statement”. Funds flow statements show funds received and expenditure incurred during the fiscal year. Separate records of assets and liabilities are kept for control purpose. The overall financial administration system is administered by a senior account officer, who is deputed from FCGO.

20. LDT has not had experience in maintaining a separate account for donor funded project before the ADB-financed South Asia Tourism Infrastructure Development Project. LDT has been satisfactorily maintaining current accounting records of the fund received from the Government, donors and the funds collected from internal sources. The current accounting staff is capable of maintaining a separate project accounting records. However, the financial recording and reporting format needs to transition from cash to accrual basis. There is an accounting software package which is already in operation at LDT. There is one Senior Account Officer deputed by FCGO. LDT has deputed a permanent Accountant to look after the project related financial matters. 1.7 Fund Flow Arrangements for Existing Loan/Grant, and Additional Financing

1.7.1 Fund Flow Arrangements 21. After annual budget is approved by the Parliament, the Ministry of Finance (MOF) will issue expenditure authorization to MOCTCA. MOCTCA will then issues expenditure authorization to PCU with annual budget breakdown and approved annual program. MOCTCA will then release the government and ADB funds to PMIU-CAAN for project related expenditure. The District Treasury Control Office, Kathmandu will issue check as per the payment order request of PCU under the Treasury Single Account (TSA) system.

22. PMIUs will report MOCTCA on project implementation progress. There will be a separate budget code in the Red Book of MOF to identify priority (P1) projects. PMIUs will be responsible to prepare and submit to PCU the annual budget and program related to the Project. The annual program will be approved by the National Planning Commission. PCU will maintain close coordination with the concerned stakeholders for timely budget release for project implementation. The Government will ensure allocation of sufficient counterpart fund for each fiscal year.

23. Annual financial statement is prepared by PMIU-CAAN, and any unspent fund balance of PMIU-CAAN at the end of fiscal year is carried forward to next fiscal year as per the provision

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of subsidiary loan agreement signed between MOF and CAAN. In case of PMIU-LDT, project budget unspent at the end of fiscal year is refunded to the Government.

1.7.2 Disbursement Procedures 24. All disbursement will be in accordance with ADB’s Loan Disbursement Handbook, 2012 (as amended from time to time). The disbursement procedure will follow (i) direct payment,(ii) commitment letter,(iii)reimbursement, and (iv) imprest fund procedures as appropriate. Direct payment procedure will be used whenever practical for quick, efficient, and economic disbursement. 1.7.3 Imprest Account 25. An imprest account for the Project has been opened for PCU at the Nepal Rastra Bank(NRB) in the $. The imprest account ceiling is 10% of the total loan amount. The imprest account is operated with joint signatories as authorized by MOF. 26. If the Imprest Account turnover ratio is less than 2.0, PCU should submit the estimate of expenditure for forthcoming six months to be financed from the Imprest Account (Appendix 10B of Loan Disbursement Handbook 2012) along with the withdrawal application for replenishment. PCU will reconcile the bank statement of the imprest account in each month as per its own ledger.

27. Under the current funds flow system, PCU transfers the $ amount from the main ImprestAccount to the Sub-imprest Accounts as requested by PMIU-CAAN. The amount of Sub-imprest Accounts is in the $for ADB loan/grant and is opened at a commercial bank (Nepal Investment Bank Limited) in the name of the Project. There are two Sub-imprest Accounts for PMIU-CAAN for the ADB loan/grant.

1.7.4 Fund Flow for Additional Financing

28. In addition, there will be an additional Imprest Account in $ for the additional financing of the ADB loan, which will be opened in NRB, Kathmandu for PCU and the ceiling of Imprest Account initial deposit will be 10% of the loan amount. PMIU-CAAN will also open a Sub-imprest Account in $in a commercial bank acceptable to ADB. PCU will transfer the $ amount in Sub-imprest Account within seven days as per the request of PMIU-CAAN. PCU will be responsible for timely transfer of the $ amount in Sub-imprest Account of PMIU-CAAN to avoid any delays in the payment process. The PMIUs will submit statement of expenditure (SOE) with supporting documents (contract documents, invoices and receipts) to PCU to expedite the disbursement process. PCU will submit withdrawal applications to ADB after consolidating the eligible expenditures of PMIUs. 30. The additional financing agreement will have a separate loan number to identify the Project. However, the proposed civil work and equipment contract packages for GBA will be the same. PMIU-CAAN needs to be careful for charging the disbursement percentage from the existing Loan 2579/Grant 0179 (which also have Government fund and OFID loan) and the proposed additional financing (ADB loan). Hence, the total project costs by category and disbursement percentage (including additional financing) will be specified in the Report and Recommendations of the President (RRP), and the Project Administration Manual (PAM) so that consolidated audited project financial statements will be prepared by PCU for loan and grants after the end of each fiscal year. For this purpose, PCU and PMIUs (CAAN and LDT) will

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maintain separate record for the government funds, ADB loans/grant, OFID loan, and the Asian Clean Energy Fund (ACEF) grant. Since, there will be an overlap of the existing loan/grant, and the additional financing, PCU will prepare the Audited Project Financial Statements on a consolidated basis for both the original loan/grant and the additional financing. Imprest Account is operated by PCU and Sub-Imprest Account is operated by CAAN. There is no Sub-Imprest Account established at LDT. In addition, PCU consolidates and submits withdrawal application to ADB (including expenditures of PMIUs-CAAN and LDT). Hence, PCU will prepare consolidated audited project account on the basis of the project financial statements, as both the PMIUs will keep the project related expenditures on cash basis. However, entity level (for overall CAAN and LDT) annual financial statements will be prepared and submitted to ADB separately for each year, which also includes status of project related income and expenditures. 31. Before submission of the first withdrawal application for the additional financing, PCU will have to submit to ADB sufficient evidences of the authority of the person(s) who will sign the withdrawal applications on their behalf, together with the authenticated specimen signatures of each authorized person. The format is provided in Appendix 4B (evidence of authority to sign withdrawal applications) of the Loan Disbursement Handbook, 2012.The PCU must notify the ADB promptly of any changes in signature authority through MOF.

32. The Clean Public Transport Services (CPTS) for Lumbini for $3.0 million to be financed from ACEF will be managed by LDT. There will be no Imprest Account for the OFID loan and ACEF grant, which will be follow reimbursement procedure. Withdrawal application will be sent to ADB through PCU. PMIU-LDT will also submit SOEs and supporting documents to PCU on a monthly basis to expedite disbursement process. The funds flow system will remain the same as per the existing loan/grant agreement for PMIUs of CAAN and LDT. Authority flow and reporting is in Figure 1, and funds flow arrangement is in Figure 2.

Figure-1

Authority Flow and Reporting Including for Additional Financing

MOF

PCU-MOCTCA

PMIU-CAAN

Implementation of Gautam Buddha Airport Upgrading

PMIU-LDT

Implementation of Clean Public Transport Services and other project component, Lumbini

Authority Flow Reporting

8 Figure-2

Fund Flow Diagram for Replenishment, Reimbursement and Direct payment

ADB’s Fund Flow

PCU-MOTCA

Imprest Account ($) PCU-MOCTCA (two for existing loan/grant

and one for additional financing)

Payment to large civil works contractors/supplier/consultants

WAs request to ADB through PCU

(includingPMIUs’ expenditure)

PMIU-CAAN

Direct payment by ADB

Replenishment

Contractors/suppliers/consultants

Fund Flow Reporting

Payment through Imprest Account

Sub-imprest Accounts ($) PMIU-CAAN (two for existing and

one for additional financing)

PMIU-CAAN and PMIU-LDT will report to PCU regarding financial and physical progress

GON Central Treasury A/C

Reimbursement By donors

OFID loan/ ACEF grant

PMIU-LDT

Reimbursement to GON treasury

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1.8 Organization and Staffing 33. There are 21 finance staff positions in CAAN: (ii) finance department 2, (ii) central accounting division 4, (iii) account section (in central office) 10, (iv) audit coordination and supervision unit 1, (v) central budget appropriation and control unit 2, and (vi) central revenue collection and monitoring unit 2. All positions have been filled. 34. There are already an Under Secretary (Account) and an Account Officer at MOCTCA, who are deputed by FCGO. They are assigned to look after both MOCTCA and PCU operations. Hence, a full time dedicated Account Officer is required at PCU to ensure adequate financial management for the Project, timely submit withdrawal applications/SOEs with requisite supporting documents, prepare audited project financial statements and monthly/quarterly/annual financial reports, and carry out day-to-day financial transactions. CAAN has already deputed an Account Officer for PMIU. Whereas in LDT, the project component is small and the existing Senior Account Officer and Accountant handle the financial management matters including of this Project.

1.9 Accounting Policy, Procedure, and Information System 35. At PCU, account is maintained in cash transaction based on the double-entry book-keeping principles, and advance payments are treated as expenditures. Transactions are counter-checked and recorded upon approval by the Project Manager. Accounting records are kept upto-date with regular balancing, and asset registers are maintained. The system contains a wide range of formats to be used by PCU for book-keeping, accounting and financial reporting. Accounts are reconciled on a monthly basis. Account Officer is responsible to safeguard check book, cash and bank deposits, and receipts and records. Likewise, storekeeper safeguards the physical assets. 36. The Imprest Account is operated under joint signatories of the Project Coordinator and the Chief, financial administration section of MOCTCA. The Sub-Imprest Accounts are operated under the joint signatories of the Project Manager and the Account Officer of PMIU-CAAN authorized by CAAN. The current account staff PCU comprising an Account Officer and an Accountant are assigned on a part-time basis although the Loan and Agreements require fulltime staff. Hence, there is a need to assign the staff on a fulltime basis during the project implementation period, which will strengthen the financial management and reporting capacity of PCU.

1.10 Statement and Expenditure 37. The SOE procedure will be applied to reimburse/replenish expenditures and liquidate advances under the Imprest Account. The ceiling for the SOE procedure will be $100,000 for individual payment. Imprest Account will be used for small payments to contractors, suppliers and consultants and to reimburse the ADB’s eligible expenditures to the Government’s central treasury. There will be direct payment procedure for payment of large payments for civil works and supply contracts. 38. The Government will provide counterpart funds as well as donor’s reimbursable funds to the Project as per the financing and disbursement percentage. The expenditures for donor funds is first incurred by the Government and later reimbursed by donors as per eligible expenditures. Funds will be channeled through FCGO. PCU and PMIUs will maintain separate

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record for the government and donor funds, prepare monthly and annual financial statements and submit to concerned authorities.

39. PCU will then consolidate and verify the eligible expenditures and prepare/submit withdrawal applications to ADB along with SOEs and supporting documents of PMIUs’ expenditure. A copy of the bank statement of Imprest Account, its turnover ratio and reconciliation statement will also be submitted along with withdrawal application for replenishment/liquidation. 1.11 Threshold for Withdrawal Application 40. The minimum value per withdrawal application is $100,000, unless otherwise approved by ADB. The PCU will consolidate claims to meet this limit for direct payment/reimbursement/replenishment. Withdrawal applications and supporting documents will demonstrate, among other things, goods and/or services were produced in or from ADB members, and are eligible for ADB financing. Loan Disbursement Handbook 2012 is available in the website http://www.adb.org/documents/loan-disbursement-handbook and ADB’s websitehttp://lfis.adb.org. 1.12 Accounting and Auditing

41. Accounting. The double-entry book-keeping system is applied on an accrual basis in CAAN. CAAN will maintain separate records and accounts adequate to identify goods and services financed by the loan proceeds, financing received, expenditure incurred, and use of counterpart fund. The account will be maintained in accordance with sound accounting principles. PCU and PMIUs should maintain the contractors’ and consultants’ contract ledger for each contract package. LDT follows the government accounting system. LDT’s financial rules state that it will follow an appropriate accounting system applicable to NGOs based on accrual accounting system. The current practices of adopting the government accounting system and procedures do not meet LDT’s statutory requirements. However, they maintain separate records for loan/grants and additional financing. 42. Internal Audit. The District Treasury Controller Office (DTCO) will undertake internal audit of the financial transactions of PCU, whereas CAAN has outsourced Chartered Accountant for internal audit of project related expenditures although it has separate internal audit department. The Office of the Auditor General (OAG) reviews the internal audit report at the time of final audit. However, there is no separate internal audit section at LDT. Internal audit should be done through outsourcing of internal auditor or setting up a separate internal audit section with qualified human resources. 43. External Audit. OAG of Nepal is the supreme audit institution of the country. The scope of final audit of PCU and PMIUs falls under OAG which conducts an audit on an annual basis. OAG recruits Charted Accountant to conduct CAAN’s final audit but it conducts the final audit of LDT and PCU by itself. OAG has the experience and capability of carrying out the audit of donor funded projects. Audited reports and related financial statements in English should provide an audit opinion on the use of loan/grant proceeds, and in compliance with financial covenants, Imprest Account and SOE procedures, and management letter.

44. Further, the audit report must also include progress made by PCU and PMIUs of the previous years’ audit observations. PCU will be responsible for consolidating project accounts of PMIUs and submit to ADB not later than 6 months after the end of fiscal year. ADB will also

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provide templates for preparing the audited project financial statements. The Government Auditing Standards Part 3: Segment Audit Guidelines – Project Financial Statements – October 2005 also provides a template for preparation of the audited project financial statements.

45. OAG has recruited a chartered accounting firm to conduct final audit of CAAN’s FY2011/12 expenditures, and the final audit has already been completed and final audit of FY 2012/13 is also ongoing. CAAN submitted unaudited annual financial statement to ADB of FY2011/12 (entity level) on 15 January 2013. Since CAAN was established in 1998, the audited annual financial statements from FY1998/99 to FY2011/12 have not been certified by OAG and the certified opening balances are to be carried out in the succeeding years. But, in the absence of certified figures of the previous years, CAAN is not able to submit the annual audited financial statement on time. CAAN in coordination with OAG will solve this problem and will report to ADB as soon as possible. CAAN should submit audited financial statements (entity level) to ADB within one month of their approval by the relevant authority.

46. PCU submitted a consolidated audited project account (including PMIUs) of FY2011/12 to ADB on 24 January 2013, and PMU of the Air Transport Capacity Enhancement Project also submitted Audited Project Account on 27 May 2013.

1.13 Reporting 47. PCU will submit to ADB, annual contract awards and disbursement projections with quarterly breakdown at least two months before the start of each calendar year using the prescribed templates. PCU will monitor overall implementation progress and will prepare brief progress report and submit theses to ADB within 30 days after the end of each quarter. PMIUs(CAAN and LDT) will submit the monthly and quarterly progress reports to PCU in order to enable the PCU to prepare quarterly and annual progress reports.

48. The established project performance monitoring system will be operational immediately after effectiveness of the additional financing. Within six months of physical completion of the Project, the Government will provide ADB a project completion report with detail evaluation of project design, costs, performance of contractors and consultants, social and economic impact, and other related details.

1.14 Project Review 49. MOCTCA and the donors will jointly conduct biannual reviews. At the latest, 15 days before the review mission, PCU will submit to the donors a comprehensive progress report covering issues identified during project implementation. A report on the outcome of each mission will be prepared by ADB who will issue aid memoire and circulate to the Government for action.

50. ADB reserves the right to verify the Project’s financial accounts to confirm that the ADB’s financing is used in accordance with ADB’s policies and procedures. Project accounts will follow international accounting principles and practices or those prescribed by the National Accounting Standard or the Government Accounting Standard. Further, any critical audit observations on the Project should be reported to ADB, and actions taken should also be monitored.

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1.15 Risk Analysis

51. CAAN and LDT are autonomous institutions under MOCTCA, the EA. Coordination among these institutions is a must for smooth implementation of the Project. Apart from establishment of project management system, these institutions are required to develop good working relationships. The working module of procurement, reporting, coordination, financial management including disbursement, approval of documents, auditing and information sharing need to be discussed and clarified among the EA and IAs for smooth project implementation. Table 3 assesses associated risks and mitigating measures.

Table3: Risks Assessment and Mitigation Measures S.N. Risk Type Risk

Assessment Risk Description Risk Mitigation

Measures 1 Entity level–

LDT Medium LDT follows the government

accounting system. LDT’s financial rules state that it will follow an appropriate accounting system applicable to NGOs based on accrual accounting system. The current practices of adopting the government accounting system and procedures do not meet LDT’s statutory requirements.

LDT should transition from the cash-based accounting system to accrual based NGO’s accounting system.

2 Entity level – LDT

Medium There is no separate internal audit section at LDT.

Internal audit should be done through outsourcing of internal auditor or setting up a separate internal audit section with qualified human resources.

3 Entity Level - CAAN

Medium CAAN’s audited annual financial statements since its establishment in 1998 until FY2011/12 has not been certified by OAG. In the absence of the certified figures of the previous years, CAAN is not able to submit the annual audited annual financial statement to ADB. The final audit up to the last fiscal year has already been completed by the chartered accountant recruited by OAG.

CAAN is initiating to solve this issue in close consultations with OAG for certification of the previous years’ audited annual financial statements. CAAN will submit the audited annual financial statements to ADB within one month after certification from OAG.

4 Project level Medium Disbursement progress may be low as per the set target. Financial management –capacity enhancement is needed.

The financial management consultant already in place will assist PCU and PMIUs during project implementation. Templates for financial statements and audit needs are provided in

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Appendix 1 and 2.

5 Project level Medium Trained financial staffs may be transferred as per GON rule at PCU

GON should ensure that trained/experienced financial staff should be retained for the entire project period and if it is not possible, GON should depute equally qualified/ experienced financial staff

1.16 Conclusion 52. The financial management assessment establishes that the EA and IAs have the basic financial reporting, internal controls, and audit systems for the Project. Capacity improvement is still needed for better project implementation in the area of financial management. ADB will also provide training on disbursement/financial management and will give proper guidance related to disbursement of loan/grant. The EA/IAs needs to retain trained financial personnel during the project implementation. 53. Air Transport Capacity Enhance Project (ADB Grant 0181) will also help in capacity development of CAAN, and the Project has been implementing a 3-year capacity development program enhancing CAAN's organizational and management capabilities. This includes (i) completing the ongoing preparation of the civil aviation regulations based on international standards; (ii) preparing a strategy for separating regulatory and service functions with a legal framework and implementation plan; (iii) developing a national air transport development plan and corporate business plan; (iv) devising and implementing a human resources development plan with a staff training policy and program; (v) improving the financial management system, including installation of accounting software and training to integrate physical and financial planning and management systems; (vi) implementing a computerized management information system with training; and (vii) conducting due diligence studies for private sector participation in the development and operation of airport infrastructure.4Hence, as per the progress made till now by the consultants, it is expected that FMIS system will be further improved at CAAN in future. 54. As mentioned above, training/orientation is needed at the implementation stage to strengthen the capacity of financial staffs of EA/IAs. Hence, the proposed additional financing will not have any high level risks in the area of financial management. Based on the experience of the ongoing project, there will be further improvement in the future.

4 ADB. 2009. Loan 2581/Grant 0181-NEP: Report and Recommendation of the President to the Board of Directors for

Air Transport Capacity Enhancement Project. Manila.

14 Appendix 1

Government of Nepal

[Name of Ministry or EA ]

[Name of Project]

Funded by [Donor(s)] [Name of Fund] under [Loan/ Grant number]

For the period [July 16, 20xx or loan effectiveness date] to July 15, 20xx

Fiscal year 2011/ xx

Sources and Uses of Funds

NRs '000

Sources Note

During the

Prior Year

During the

current year

Cumulative from

beginning of the

Project to end of current

year

Applications Catego

ry Note

During the Prior Year

During the

current year

Cumulative from

beginning of the

Project to end of current

year

[For 1st year, nil]

For current period

As at current year

end

[For 1st

year, nil]

For current period

As at current year

end

A: II Civil Works 1 I

GON Fund II Consulting Services 2 I

GON Reimburseable Fund

Training Courses 3 I

ADB Reimburseable Vehicles 4 I

Equipment and Materials 5 I

Total Remiburseable Staff Development 6 I

III Studies and Reviews 7 I

Appendix 1 15

ADB Grant:

Project Management, Monitoring and Evaluation 8 I

Reimbursement Others 9 I

Replenishment Transfer to Central Treasury

Direct Payment

Charged in the next year

Subtotal

B:

ADB

Special Imprest IV Imprest A/C Balance

Account/ Initial Deposit Oustanding Replenishment

Exchange Gain Exchange Loss

Subtotal

Grand Total

Notes I to VI of the financial statements form an integral part of these financial statements

( ) ( ) ( ) ( ) ( )

Account-In Charge Project Manager Secretary Financial Comptroller

General Auditor General

16 Appendix 1

Government of Nepal


[Name of Depertament or IA]

[Name of Project]


July 16, 20xx to July 15, 20xx

Fiscal Year 20xx/xx

Statement of Budget Vs Actual (or Consolidated Annual Financial Statement)

Current Year Amount in NRs '000

Item No.

Budget Item

Budget Allocation Budget Released Expenditure Balance (Released-

Expenditure)

GON

ADB Reimbur

sable Loan

ADB D.P. Loan Total GON

ADB Reimbursable Loan



ADB D.P. Loan

Total

GON

ADB Reimbursa

ble Loan

ADB D.P. Loan Total

Budget Head - Recurrent Expenditure

xx

xx

xx

Sub Total

Budget Head - Capital Expenditure

xx

xx

xx

Subtotal

Grandtotal

Cumulative to Date Amount in NRs

Item No.

Budget Item

Budget Allocation Budget Released Expenditure Balance (Released-

Expenditure)

GON

ADB Reimbur

sable Loan





ADB D.P. Loan

Total

GON


ADB D.P. Loan

Total

Appendix 1 17

Budget Head - Recurrent Expenditure

xx

xx

xx

Sub Total

Budget Head - Capital Expenditure

xx

xx

xx

Sub Total

Grand Total

Notes I to VI of the financial statements form an integral part of these financial statements

( ) ( ) ( ) ( ) ( ) Account-In Charge Project Manager Secretary Ministry of

Education Financial

Comptroller General

Auditor General

18 Appendix 1

Government of Nepal



[Name of Project]


July 16, 20xx to July 15, 200x

Fiscal year 20xx/xx

Notes to Account - I Category- wise Expenditures

Category Line Item Particular

During the Prior year

During the current year

Cumulative upto end of current year

NR '000

1 Civil Works

xx Building Construction

xx Capital Improvement

Subtotal

2 Consulting Services

xx

xx

Subtotal

3 Training Courses

xx

xx

Subtotal

4 Vehicles

xx

xx

Subtotal

5 Equipment and Materials

xx

xx

Subtotal

6 Staff Development

xx

xx

Subtotal

7 Studies and Reviews

xx

xx

Subtotal

8 Project Management, Monitoring and Evaluation

xx

xx

Subtotal

9 Others

xx

xx

Subtotal

Grand Total

Appendix 1 19

Government of Nepal



[Name of Project]



Fiscal year 20xx/xx

Notes to Account - II - GON Replenishment and Reimburseable

S. N

Particular

Prior year [nil for 1st

year] Current Year

Cumulative from beginning of

project upto end of the current year

NR

A Total Budget Release

GON Fund

GON Reimburseable

Subtotal A

Less: B Unspent Balance

Subtotal B

C Reimbursements

Subtotal B

Total Fund (A-B-C)

D GON Fund

E GON Reimburseable Fund

F ADB Direct Payment

Total Fund (D+E+F)

20 Appendix 1

Government of Nepal



[Name of Project]



Fiscal year 20xx/xx

Notes to Account - III- Details of Payment by ADB by Currency and Method of Funding

Particulars Categor

y

During the Prior year [nil for 1st

year]

During the current year to July 15,

20xx

Cumulative from inception of Project

till end of current year

NRs US$ SDR NRs US$ SDR NRs US$ SDR

Direct Payments

Civil Works 1

Consulting Services 2

Training Courses 3

Vehicles 4

Equipment and Materials 5

Staff Development 6

Studies and Reviews 7

Project Management, Monitoring and Evaluation 8

Others 9

Subtotal

Replenishment

Civil Works 1


Training Courses 3

Vehicles 4


Staff Development 6



Others 9

Subtotal

Reimbursement

Civil Works 1


Training Courses 3

Vehicles 4


Staff Development 6



Others 9

Subtotal

Total

Appendix 1 21

Imprest Account Initial Deposit

Diff between Disb and Liquidation

Sub Total of Imprest A/c

Interest Capitalization

Grand Total

22 Appendix 1

Government of Nepal



[Name of Project]



Fiscal year 20xx/xx

Notes to Account IV - Statement of Imprest Account

S.N. Particulars Equivalent NRs

('000) US$

A Balance in Imprest Account as at [beginning of the current year]

Exchange Rate 1 UD$ = NRs xx.xx

B Outstanding Replenishments as of [previous year]

(i) Remibursement to GON

(ii) Direct Payment

Total B

C Add:

Disbursements during the year


(ii) Direct Payment

Total C

D Less:

Replenishment during the year


(ii) Direct Payment

Total D

E Liquidation/ Recovery of Initial Balance


(ii) Direct Payment

Total E

F Outstanding Replenishment as of [end of the current year]

(i) Remibursement to GON (B+C-D-E)

(ii) Direct Payment (B+C-D-E)

Total F

G Outstanding Amount of Imprest Account (A+F)

H Initial Deposit as at (original date)

I Exchnage Gain/Loss (G-H)

Appendix 1 23

Government of Nepal



[Name of Project]



Fiscal year 20xx/xx

Notes to Account V - Project Output Wise Cost

Category

Output 1 : [Name of Output]

Output 2: [Name of Output]

Output 3: [Name of Output]

Output 4 : [Name of Output]

Output 4 : Effectice Project Management

and M&E Unallocable Costs Total Expenditure

Prior Year

Current

Year

Cumulative

to Date

Prior Year

Current

Year

Cumulative to Date

Prior Year

Current

Year

Cumulative to Date

Prior Year

Current

Year

Cumulative to Date

Prior Year

Current

Year

Cumulative to Date

Prior Year

Current

Year

Cumulative

to Date

Prior Year

Current

Year

Cu

mul

ativ

e to

Dat

e

Civil Works

Consulting Services

Training Courses

Vehicles

Equipment and Materials

Staff Development

Studies and Reviews

Project Management, Monitoring and Evaluation

Others

Total

24 Appendix 1

Government of Nepal



[Name of Project]


July 16, 20xx to July 15, 200x Fiscal year 20xx/xx

NOTES VI TO THE FINANCIAL STATEMENTS - Accounting policies and explanatory notes

1. Project Nature and Activities

1.1

Description of the Project, the nature of activities, commencement and expected completion dates. Mention location, domicile, legal form, controlling IA/ EA, brief nature of the project outputs,

1.2

Give legislative framework

2. STATEMENT OF COMPLIANCE

Project Financial Statements have been prepared in accordance withn the Government Auditing

Standards Part 3: Segment Audit Guidelines - Project Financial Statements issued by the Office of the Auditor General, Nepal in October 2005, and the Statement of audit Needs provided by the Asian Development Bankunder the Loan _________ dated _______

3. SIGNIFICANT ACCOUNTING POLICIES

3.1

Basis of measurement

The project has maintained accounts according to the Government of Nepal Accounting policies on a

cash basis of accounting and double entry accounting systems. Capitalisation amount is not included in the main Sources and Application of Funds, and is shown is Note III to the Project Financial Statements.

3.2

Fund Flow mechanism

Describe the fund flow mechanism , in particular , whether the IA/EA control funds or whether all

payments are centralized 3.3

Advances and other receivables

Advances are treated as expenditure. Unspent advances amount to ___________________ as at July

15, 20xx ( 20xx: ____)

3.4

Cash and cash equivalents

Cash equivalents comprise [ define components of cash]. Explain if the entity controls unspent advances,

only petty cash, or has a nil balance , as applicable

3.5

Accrued and other liabilities

Disclose any major liabilities which have not been accrued under the cash basis policy

3.6

Income

i) Describe nature of different types of income and how they are recognised. For eaxample grants, sale of proceeds of fixed assets, interest income on bank accounts etc.

Appendix 1 25

iii) Free of cost office space, electricity and certain other services provided by {insert name] are not valued and accordingly, are not recognized in these financial statements as income of the Project.

3.7

Foreign currency transactions and translation

(a) Functional and presentation currency

Items included in the financial statements of the Project are measured using the currency of the primary economic environment in which the entity operates (the functional currency), which is the Nepal Rupee (NR).

(b) Transactions and balances

Foreign currency transactions are translated into functional currency using the exchange rate prevailing at the date of the transaction. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income and expenditure account. Conversion Rate: USD $ 1= INR __ as of 30 June 20__

3.8

Allocation of Common Costs

Describe how commom costs are allocated to differenet output/ activities

4. Funds Received from the Government

Give details of the government budgeting and funding mechanism. Explain the replenishment and

reimbursement mechanism

5. Funds from ADB

Givepertinent details of the ADB loan/ grant including effective date, amount in US$, period etc.

5.1

Loan

5.2

Grant

6. DATE OF AUTHORIZATION

These financial statements have been authorized for issue by the _____________ of _________________ on RRRRRRR..

26 Appendix 2

STATEMENT OF AUDIT NEEDS TEMPLATE5

A. BACKGROUND

1. The ADB and the Government of Nepal (GON) have entered into a [Loan and/or Grant Agreement] whereby, ADB shall provide [$ xx million] for the purpose of financing [name and purpose of Project] in Nepal. The GON shall contribute [$ xx million] against this funding. This will be carried out through the [Implementing Agency]. [IA] shall maintain separate books of account which will be consolidated [by the PMU] with respect to this Project, including all items of expenditure financed out of the proceeds of the loan and grant agreement.

B. [PROGRAM/PROJECT6] DEVELOPMENT OBJECTIVES

2. The Project is designed to [insert purpose] in Nepal. It will address [insert outcome or impact]. The project outputs will be:

(i) Output 1 Summary (ii) Output 2 Summary (iii) Output 3 Summary

C. FINANCIAL REPORTING AND AUDIT REQUIREMENTS

3. [IA] will prepare [name of project] [consolidated]7 financial statements on a cash basis, in accordance with the [Government Auditing Standards Part 3: Segment Audit Guidelines for Project Financial Statements issued in October 20058. This shall not be construed to refer to the financial statements of [IA] as a whole. 4. The audit of the project financial statements shall be carried out by the Office of the Auditor General (OAG) of Nepal9 in accordance with the GON Auditing Standards10 as supplemented by this Statement of Audit needs. The auditor will review that the funds received from all sources and expenditures incurred during the reporting period are as per agreed terms and conditions. This will include all expenditure to the extent that it relates to the activities of the [IA] supporting this Project. 5. [IA] will submit to ADB audited project financial statements as of 15 July each year, within 6 months of the end of the fiscal year in English. A complete set of audited project financial statements includes:

5 This template has been prepared for Project Lending to government departments and ministries. Statement of Audit Needs for

Programs, Additional Financing, MFF, RBLs, FI Loans, or State Owned Enterprises using the accrual basis of accounting will

need to be further tailored 6 Use the term ‘Project’ or ‘Program’ as appropriate throughout the document

7 Consolidated financial statements may be required if there are multiple IAs

8 This template is primarily for government departments or ministries. For State Owned Enterprises using accrual basis of

accounting in line with Nepal Accounting Standards, this would need to be tailored and ADB should try to obtain project level

financial statements which are also on an accrual basis of accounting

9 In the situation that an external independent auditor is performing the audit of the Project financial statements instead of the OAG,

tailor as appropriate

10 OAG has adopted Auditing Standards issued by the International Organization of Supreme Audit Institutions (INTOSAI)

Appendix 2 27

(i) Audit Opinion on the Project Financial Statements in accordance with International Standard on Auditing (ISA) 800 or national equivalent

(ii) Audit Opinion on Specific Donor Requirements11 (in accordance with ISAE 3000 or national equivalent)

(iii) Project Financial Statements and Statement of Budget vs. Actual along with complete notes to the financial statements including necessary break downs and details, summary of accounting policies and descriptive explanatory notes

(iv) Management Letter (see paragraph F below)

6. To ensure the timely submission of audited project financial statements, [IA] will formally request the OAG to include [name of project] project audits in their yearly work plan. [IA] shall also ensure that progress against the Financial Reporting Table is monitored.12 To support timely submission, unaudited project financial statements should be submitted to the OAG for audit within 3 months of the end of the fiscal year. 7. In addition, [IA/EA] shall also submit a copy of their own entity level audited financial statements within one month of the date of their approval by the governing body of [IA/EA].13 D. SPECIFIC AUDIT NEEDS

8. The audit would cover the entire Project, i.e. covering all sources and application of funds, including the ADB, co-financiers and the GON. [The Financing Arrangement as currently agreed with ADB, includes Direct Payments (DPs) by ADB to suppliers.]14 The Project Director shall provide all pertinent information to the Auditors including preservation and use of resources procured and its reflection in the project accounts, so as to facilitate comprehensive audit coverage. The audits should be carried out annually from commencement of the Project. The audit for the first year should also cover transactions, which occurred from the commencement of the project, i.e. till the end of the fiscal year. In case the period is less than 6 months, GON may agree with ADB to provide APFS from the commencement of the Project to the end of the subsequent fiscal year. 9. The auditor will provide assurance as to whether the project financial statements present a true and fair view of the receipts and expenditures, or are presented fairly, in all material respects, in accordance with the applicable financial reporting framework. 10. In addition, ADB will also require an assessment by the auditors of compliance with provisions of the financing agreement with ADB, especially those relating to accounting and financial matters. Positive assurance should be provided in accordance with International Standard on Assurance Engagement-3000. An audit opinion shall be provided that will inter alia include verification that:

(i) All funds, including counterpart funds, have been used in accordance with the conditions of the loan agreements, with due regard to economy and efficiency, and only for the purposes for which the funds were provided;

(ii) The [IA] were in compliance as at [insert date] with all financial covenants of the loan agreement

11This may be combined with (i) above or given separately 12Timetable given as Annexure to the PAM 13This is only applicable when the IA or EA is a legal entity which has its own set of statutory financial statements 14Delete if not relevant

28 Appendix 2

(iii) With respect to SOEs, (a) adequate supporting documentation has been maintained to support claims to the Asian Development Bank for reimbursement of expenditures incurred, and (b) except for ineligible expenditures as detailed in the audit observations, if any, appended to this audit report, expenditures are eligible for financing under the Loan Agreement

(iv) The Imprest Account gives a true and fair view of the receipts collected and payments made during the year ended [insert date], and these receipts and payments support the Imprest Account Liquidation/ replenishments during the year

11. ADB may also require that the auditors should advise a calendar for discussion/review of audit observations (particularly any serious matters) through tripartite meetings and review meetings to facilitate executive follow-up on audit observations and recommendations. Moreover, ADB would need a review of actions taken on the recommendations presented in the previous audit report on the progress made.

E. PROJECT FINANCIAL STATEMENTS (PFSs)

12. Project Financial statements shall be prepared on a cash basis of accounting in accordance with GON accounting policies. These should include:

(i) Sources and Consolidated Uses of Funds showing the funds received and

expended from ADB and GON for [Name of Project], as well as imprest account balance for the current year, prior year and cumulative year to date.

(ii) Statement of Budget vs. Actual showing expenditure for the current year and cumulative year to date

(iii) Detailed notes to the financial statements including explanatory notes, break down of expenditure, reconciliation of reimbursements, Details of expenditure by Currency/Method of Funding/Output Component, Statement of Imprest Account, and Accounting Policies

(iv) Annexure to the APFS shall include the (a) Statement of Expenditure (b) Imprest Account Ledger (c) Imprest Account Reconciliation Statements (d) Reconciliation Statement of Reimbursable Fund (e) Disbursement Details (f) Photocopy of the Imprest Account Bank Statement and (g) Bank voucher for unspent balances.

13. [Project Books of Account shall be maintained by the Project Management Unit (PMU)]15

14. Project Financial Statements shall provide sufficient level of detail to identify types of expenditures as identified in the allocation Table of the [Grant and loan Agreements]; namely [civil works, consulting services, training, equipments, community initiatives and design and surveys etc.] 15. The project financial statements shall also provide sufficient level of detail to be able to identify expenditure relating to each of the [#] Outputs of the Project; namely, (i) Output1: [Name of Output], (ii) Output 2 [Name of Output] and, (iii) Output 3:[Name of Output]. 16. Template financial statements have been annexed to this Statement of Audit Needs for guidance. This Template is based on the Annexure given the Government Auditing Standards16,

15Delete this if there is no PMU

Appendix 2 29

tailored to incorporate the requirements of the Nepal Public Sector Accounting Standards (NPSAS), which have been approved for adoption by the GON in 2009. Although these are not yet effective in Nepal, given the elevated status of the NPSAS on the government’s accounting reform agenda, template Project Financial Statements have incorporated some of the key requirements.17 This is even more relevant since under ADB’s revised Public Disclosure Policy 2011, Project Financial Statements shall be disclosed on ADB’s website. Please note that any financial statement template is a working draft, which may require adjustment based on the actual activities of the Project as well as the Chart of Accounts in use. No template is provided for the Annexures to the Financial Statements, which should be prepared in accordance with the Government Accounting Standards.

F. MANAGEMENT LETTER

17. In addition to the audit report, ADB will require a separate management letter. The management letter should be prepared in accordance with Annexure 12 of the Government Auditing Standards Part 3: Segment Audit Guidelines for Project Financial Statements issued by the Office of the Auditor General, Nepal in October 2005. 18. The management letter should specifically:

(i) Give comments and observations on the notes to the accounts, accounting records, systems, and internal controls that were examined during the course of the audit;

(ii) Identify specific deficiencies and areas of weakness in systems and internal controls and make recommendations for their improvement including [IA] response to the identified deficiencies;

(iii) Communicate matters that have come to attention during the audit which might have a significant impact on the implementation of the Project; and

(iv) Follow-up audit recommendations made in preceding years

19. Serious issues, which affect the auditor’s opinion as to whether the financial statements give a true and fair view, should be referred to in the audit opinion. Management Letter should include only those issues which do not affect the fairness of the financial statements.

G. GENERAL

20. Review missions and normal program supervision will monitor compliance with financial reporting and auditing requirements and will follow up with concerned parties, including the external auditor. 21. ADB has made [IA] aware of ADB’s policy on delayed submission, and the requirements for satisfactory and acceptable quality of the audited financial statements18. ADB reserves the

16Government Auditing Standards Part 3: Segment Audit Guidelines – Project Financial Statements issued by the OAG in October 2005

Annexure 1 prepared to cater to donor requirements by the OAG 17Key modifications to the template are the inclusion of (i) prior year comparative information in all statements and notes (ii) details

of expenditure by Output (iii) detailed descriptive explanatory notes 18ADB Policy on delayed submission of audited project financial statements:

• When audited project financial statements are not received by the due date, ADB will write to the executing agency advising that

(i) the audit documents are overdue; and (ii) if they are not received within the next six months, requests for new contract awards

and disbursement such as new replenishment of imprest accounts, processing of new reimbursement, and issuance of new

commitment letters will not be processed.

30 Appendix 2

right to require a change in the auditor in a manner consistent with the constitution of the borrower, or for additional support to be provided to the auditor, if the audits required are not conducted in a manner satisfactory to ADB, or if the audits are substantially delayed. 21. ADB retains the right to verify or have audited (i) the project, (ii) the validity of [IA]’s certification for each withdrawal application, and (iii) that ADB’s financing is used in accordance with ADB’s policies and procedures. 22. In case an external auditor needs to be commissioned for a supplementary audit, the auditor should be given access to all legal documents, correspondences, and any other information associated with the commission and deemed necessary by the auditor. Confirmation should also be obtained of amounts disbursed and outstanding with ADB and the Government, etc.

H. PUBLIC DISCLOSURE

23. Public disclosure of the project financial statements, including the audit report on the project financial statements, will be guided by ADB’s Public Communications Policy (2011)19. After review, ADB will disclose the project financial statements for the project and the opinion of the auditors on the financial statements within 30 days upon date of their receipt by posting them on ADB’s website. The Audit Management Letter and entity level financial statements will not be disclosed.

Note: This is a statement of audit needs for ADB and does not in any way intend to limit the scope of the statutory audit.

• When audited project financial statements are not received within six months after the due date, ADB will withhold processing of

requests for new contract awards and disbursement such as new replenishment of imprest accounts, processing of new

reimbursements, and issuance of new commitment letters. ADB will (i) inform the executing agency of ADB’s actions; and (ii)

advise that the loan may be suspended if the audit documents are not received within the next six months.

• When audited project financial statements are not received within 12 months after the due date, ADB may suspend the loan. 19Available from http://www.adb.org/documents/pcp-2011?ref=site/disclosure/publications

Appendix 3 31

Financial Management Assessment Questionnaire Implementing Agency Responses Remarks

1.1 What is the entity’s legal status/registration? The Civil Aviation Authority of Nepal (CAAN), the implementing agency for upgrading of the Gautam Buddha Airport (GBA), is an autonomous body of the Government, which was established under the Civil Aviation Act, 1996.

1.2 Has the entity implemented an externally-financed project in the past (if so, please provide details)?

Ongoing: South Asia Tourism Infrastructure Development Project (ADB Loan 2579/Grant 0179) Air Transport Capacity Enhancement Project (ADB Loan 2581/Grant 0181) Completed: Tribhuvan International Airport Improvement Project (Loan RR.) Second Tourism Development Project (ADB Loan 1512/OFID Loan 689) Tourism Development Project (ADB Loan 1451)

1.3 What are the statutory reporting requirements for the entity?

CAAN submits annual financial statement to the Ministry of Finance (MOF), Office of the Auditor General and the Ministry of Culture, Tourism and Civil Aviation (MOCTCA). For the ADB-assisted South Asia Tourism Infrastructure Development Project (Nepal Portion), related financial statements are submitted to the Project Coordination Unit (PCU) on monthly and annual basis.

1.4 Is the governing body for the Project independent? Yes

1.5 Is the organizational structure appropriate for the needs of the Project?

Yes

2. Funds Flow Arrangements

2.1 Describe (proposed) project funds flow arrangements, including a chart and explanation of the flow of funds from ADB, government and other financiers.

See fund flow chart attached.

2.2 Are the (proposed) arrangements to transfer the proceeds of the loan (from the Government/MOF) to the entity satisfactory?

Yes

2.3 What have been the major problems in the past in receipt of funds by the entity?

None

2.4 In which bank will the Imprest Account be opened?

PCU-Nepal Rastra Bank (Thapathali) CAAN - Nepal Investment Bank (Battisputali)

32 Appendix 3

Implementing Agency Responses Remarks

2.5 Does the (proposed) project management implementing units (PMIU) have experience in the management of disbursements from ADB?

Yes Withdrawal applications are submitted to PCU.

2.7 Does the entity have/need a capacity to manage foreign exchange risks?

Yes

2.8 How are the counterpart funds accessed? Annual budget, and ADB’s financing percentage.

2.9 How are payments made from the counterpart funds?

There is an operating account at Nepal Investment Bank Limited for CAAN/government funds.

2.10 If part of the project is implemented by communities or NGOs, does the Project Management and Implementation Unit (PMIU) have the necessary reporting and monitoring features built into its systems to track the use of project proceeds by such agencies?

NA

2.11 Are the beneficiaries required to contribute to project costs? If beneficiaries have an option to contribute in kind (in the form of labor), are proper guidelines formulated to record and value the labor contribution?

NA

3. Staffing

3.1 What is the (proposed) organizational structure of the accounting department? Attach an organization chart.

A total of 21 staff positions are provisioned for the Finance Department of CAAN.

See attached organization chart.

3. Staffing Response Remarks

3.2 Identify the (proposed) accounts staff, including job title, responsibilities, educational background, and professional experience. Attach job descriptions and CVs of key accounting staff.

The qualification of Deputy Manager (Finance) is MBA and he has 15 years’ experience at CAAN. Director of Finance Department monitors all the financial transactions.

3.3 Is the project finance and accounting function staffed adequately?

Yes

3.4 Is the finance and accounts staff adequately qualified and experienced?

Yes

3.5 Is the project accounts and finance staff trained in ADB procedures?

Yes However, financial management consultant’s support is needed during project implementation.

3.6 What is the duration of the contract with the finance and accounts staff?

Accounts staffs are permanent staff of CAAN. They will be available for the entire project period.

3.7 Indicate key positions not contracted yet, and the estimated date of appointment.

There are other vacant positions to be filled and it will take one year to fill.

Recruitment ongoing.

Appendix 3 33


3.10 Does the project have written position descriptions that clearly define duties, responsibilities, lines of supervision, and limits of authority for all the officers, managers, and staff?

Yes

3.11 At what frequency are personnel transferred? After completion of at least two years’ assignment.

3.12 What is training policy for the finance and accounting staff?

Workshops are conducted for finance and accounting staff to help identify problems and solutions.

4. Accounting Policies and Procedures

4.1 Does the entity have an accounting system that allows for proper recording of project financial transactions, including allocation of expenditures in accordance with respective components, disbursement categories, and sources of funds? Will the Project use the entity accounting system?

Yes, there is a separate Financial Administration Rules 2001 for CAAN.

4.2 Are controls in place concerning the preparation and approval of transactions, ensuring that all transactions are correctly made and adequately explained?

Journal vouchers, invoices and receipts are prepared by the account section for financial transaction and thoroughly checked and certified by concerned authorized persons.

4.3 Is the chart of accounts adequate to properly account for and report on project activities and disbursement categories?

Yes

4.4 Are cost allocations to the various funding sources made accurately and in accordance with established agreements?

Yes

4.5 Are the General Ledger and subsidiary ledgers reconciled and in balance?

Yes

4.6 Are all accounting and supporting documents retained on a permanent basis in a defined system that allows authorized users easy access?

Yes The documents are retained for 10 years as per the Government Rules.

Segregation of Duties

4.7 Are the following functional responsibilities performed by different units or persons: (i) authorization to execute a transaction; (ii) recording of the transitioned, and (iii) custody of assets involved in the transaction?

Yes, the store officer is responsible to safeguard the assets. The officer keeps the books of record of inventory. Financial staff execute transaction and record as per prescribed form.

4.8 Are the functions of ordering, receiving, accounting for, and paying for goods and services appropriately segregated?

Store officer makes order and receive goods after approval from authorized person. Account section performs accounting and makes payments to suppliers. There is an internal control system. Store officer keeps the inventory record as expendable and non-expendable items.

34 Appendix 3


4.9 Are bank reconciliations prepared by someone other than those who make or approve payments?

Bank reconciliation is prepared by account section and is verified by Project Manager.

Budgeting System

4.10 Do budgets include physical and financial targets?

Yes

4.11 Are budgets prepared for all significant activities in sufficient detail to provide a meaningful tool with which to monitor subsequent performance?

Yes

4.12 Are actual expenditures compared to the budget with reasonable frequency, and explanations required for significant variations from the budget?

Variation above 25% in the line item budget is to be approved by the CAAN Board.

4.13 Are approvals for variations from the budget required in advance or after the fact?

Approval should be in advance.

4.14 Who is responsible for preparation and approval of budgets?

Corporate Directorate prepares overall CAAN budget. PMIU also prepares and submits budget to the Directorate. Final budget is approved by MOF for donor-assisted projects.

4.15 Are procedures in place to plan project activities, collect information from units in charge of different components, and prepare budgets?

Yes

4.16 Are the project plans and budgets of project activities realistic, based on valid assumptions, and developed by knowledgeable individuals?

Yes

Payments

4.17 Do invoice-processing procedures provide for: (i) copies of purchase orders and receiving reports to be obtained directly from issuing departments? (ii) comparison of invoice quantities, prices and terms, with those indicated on the purchase order and with records of goods actually received? (iii) comparison of invoice quantities with those indicated on the receiving reports? and (iv) checking the accuracy of calculations?

Yes

4.18 Are all invoices stamped PAID, dated, reviewed and approved, and clearly marked for account code assignment?

All invoices should be stamped PAID as per the rule. The invoices are reviewed and approved by authorized persons.

4.19 Do controls exist for preparation of payroll and are changes to the payroll properly authorized?

Yes

Policies And Procedures

4.20 What is the basis of accounting (cash, accrual)? CAAN follows accrual basis (entity level). However, the Project follows cash basis.

4.21 What accounting standards are followed? Nepal Accounting Standard/NPSAS

Appendix 3 35


4.22 Does the project have adequate policies and procedures/manuals to guide activities and ensure staff accountability?

Yes

4.23 Is the accounting policy and procedure manual updated for the project activities?

It has not been updated.

4.24 Do procedures exist to ensure that only authorized persons can alter or establish a new accounting principle, policy or procedure to be used by the entity?

Yes. The Government approves the financial management regulations.

The Government approves the financial management regulations.

4.25 Are there written policies and procedures covering all routine financial management and related administrative activities?

Yes

4.26 Do policies and procedures clearly define conflict of interest and related party transactions (real and apparent) and provide safeguards to protect the organization from them?

Yes

4.27 Are manuals distributed to appropriate personnel?

Separate project financial management manual has not been prepared for the project. There are not many cost centers. So, there is no need of preparing a separate accounting manual for the Project.

Cash and Bank

4.28 Indicate names and positions of authorized signatories in the bank accounts.

PMIUProject Manager and Deputy Manager Finance

For the ongoing project.

4.29 Does the organization maintain an adequate, up-to-date cashbook, recording receipts and payments?

Yes

4.30 Do controls exist for collection, timely deposit and recording of receipts at each collection location?

Yes

4.31 Are bank and cash reconciled on a monthly basis?

Yes

4.32 Are all unusual items on the bank reconciliation reviewed and approved by a responsible official?

Yes

4.33 Are all receipts deposited on a timely basis? Yes

Safeguard over Assets

4.34 Is there a system of adequate safeguards to protect assets from fraud, waste and abuse?

Yes

4.35 Are subsidiary records of fixed assets and stocks kept up to date and reconciled with control accounts?

Yes

4.36 Are there periodic physical inventories of fixed assets and stocks?

Yes Physical verification of fixed assets and un-spendable items is done annually.

36 Appendix 3


Repair, maintenance and auction of goods done by preparing status report.

4.37 Are assets sufficiently covered by insurance policies?

Insurance covers all vehicles, equipment and buildings of CAAN.

Other Offices and Implementing Entities

4.38 Are there any other regional offices or executing entities participating in implementation?

CAAN Gautam Buddha Airport Office in Siddhartha Nagar

4.39 Has the Project established controls and procedures for flow of funds, financial information, accountability, and audits in relation to the other offices or entities?

Yes

4.40 Does information among different offices/implementing agencies flow in an accurate and timely fashion?

Yes

4.41 Are periodic reconciliations performed among the different offices/implementing agencies?

Yes

Others

4.42 Has the project advised employees, beneficiaries and other recipients to whom to report if they suspect fraud, waste or misuse of project resources or property?

Yes

5. Internal Audit

5.1 Is there an internal audit department in the entity? Yes. Internal audit department exists in CAAN headed by Director. But, a Chartered Accountant has been contracted for internal audit from 2012.

5.2 What are the qualifications and experience of audit department staff?

Minimum bachelor degree for officer and intermediate for assistant. They are regular staff of CAAN.

5.3 To whom does the internal auditor report? Internal auditor reports to Director General, CAAN.

5.4 Will the internal audit department include the project in its work program?

Yes

5.5 Are actions taken on the internal audit findings? Yes

6. External Audit

6.1 Is the entity’s financial statement audited regularly by an independent auditor? Who is the auditor?

OAG recruits a certified Chartered Accounting firm to conductfinal audit.

Appendix 3 37


6.2 Are there any delays in audit of the entity? When are the audit reports issued?

Yes. Final audit for each year is completed on time. Certification of balance sheet (profit-loss account) and notes by OAG is still in process for several (previous) years. However, CAAN submitted unaudited financial statements (entity level) for FY2011/12 on 15 January 2012, and the Project’s financial statement has been submitted to ADB for FY2011/12.

There are some internal issues to be settled by OAG and CAAN. After CAAN was established, it has not been done up to last fiscal year.

6.3 Is the audit of the entity conducted according to the International Standards on Auditing?

Yes

6.4 Were there any major accountability issues brought out in the audit report of the past three years?

Not significant.

6.5 Will the entity auditor audit the project accounts or will another auditor be appointed to audit the project financial statements?

Same auditor audits the project accounts as well as overall transactions of CAAN.

6.6 Are there any recommendations made by the auditors in prior audit reports or management letters that have not yet been implemented?

No

6.7 Is the Project subject to any kind of audit from an independent governmental entity (e.g., the supreme audit institution) in addition to the external audit?

OAG, the supreme audit institution of Nepal, appoints a Chartered Accountant to conduct final audit.

6.8 Has the project prepared acceptable terms of reference for an annual project audit?

OAG appoints Chartered Accountant with TOR.

7. Reporting and Monitoring

7.1 Are financial statements prepared for the entity? In accordance with which accounting standards?

Yes, National Accounting Standards.

7.2 Are financial statements prepared for the implementing unit?

Yes

7.3 What is the frequency of preparation of financial statements? Are the reports prepared in a timely fashion and useful to management for decision making?

Monthly and annual basis.

7.4 Does the reporting system need to be adapted to report on the project components?

Yes

7.5 Does the reporting system have the capacity to link the financial information with the Project's physical progress? If separate systems are used to gather and compile physical data, what controls are in place to reduce risk that the physical data may not synchronize with the financial data?

Capacity exists to link financial information with physical progress of the Project. Integrated financial information system has not been established yet. However, this is done manually working in the spread sheet. The progress report indicates the financial as well as physical progress. The progress reports are prepared on

It is also known that an accounting software has been prepared and tested during fiscal FY2011/12, which are being used at central

38 Appendix 3


trimester and annual basis each fiscal year.

level from 16 July 2013 onwards.

7.6 Does the project have established financial management reporting responsibilities that specify what reports are to be prepared, what they are to contain, and how they are to be used?

Yes

7.7 Are financial management reports used by management?

Yes

7.8 Do the financial reports compare actual expenditures with budgeted and programmed allocations?

Yes

7.9 Are financial reports prepared directly by the automated accounting system or are they prepared by spreadsheets or some other means?

Spread sheet is used till now.

8. Information Systems

8.1 Is the financial management system computerized?

Not yet, in process.

8.2 Can the system produce the necessary project financial reports?

Not yet, in process.

8.3 Is the staff adequately trained to maintain the system?

Not yet, in process

8.4 Does the management organization and processing system safeguard the confidentiality, integrity and availability of the data?

Not yet, in process

Supporting Documents

1. Annual financial statements of CAAN-entity level (FY)2009/10 to FY2011/12) 2. Organization chart of the Finance Department (page 1) and Internal Audit Department (page 1) 3. Subsidiary Loan Agreement between CAAN and MOF (10 August 2010).

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