Kreditanstalt für Wiederaufbau
DAC TASK FORCE ON DONOR PRACTICES
FINANCIAL REPORTING AND AUDITING
DRAFT REPORT
18 MARCH 2002
BYTORUN REITE
ANDJENS CLAUSSEN
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
1
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
2
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.
3
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.
4
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
5
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).
6
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).
7
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
formats/procedures for reporting
UNDP, Japan, Germany
2. Comprehensive guidelines and general
formats/procedures for reporting
Holland, World Bank
3. General guidelines, no specific
formats/procedures for reporting
Norway, Sweden, United Kingdom
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
8
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.
9
4 TRANSACTION COSTS OF DONOR REPORTINGREQUIREMENTS
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.
10
Box 1: Program aid/balance of payments support to Mozambique
For many years several donors provided program aid (balance of payments support) toMozambique guided by individual donor agreements. Although generally subscribing to thesame objectives and benchmarks for the support, the disbursement mechanisms applied andfinancial reporting requirements deviated. The cooperation suffered from adequate financialmanagement capacity by the Government in providing relevant and timely information relatedto the foreign exchange utilisation as well as the counterpart funding generated. If theGovernment was to comply it would have demanded resources to entertain extraordinaryreporting requirements not compatible with their financial management system. It demandedextraordinary 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 externalreviews demanding additional resources and time spent by the Government. In a move tosimplify and harmonise procedures to improve overall quality of monitoring and subsequentlyreduce 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 alsojoint audits. This step alone reduced the transaction costs on the donor sidesubstantially (shared cost of a single audit rather than multiple audits) and on theGovernment side with the time spent on entertaining several donor initiated audits.
2. Technical assistance was provided to establish a financial monitoring system withinthe Ministry of Finance to account for counterpart funding associated with donorforeign exchange contributions. It reduced the need for repeated follow up by theindividual donors related to their own contributions, however, it led to significantlyincreased 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 theirdisbursement procedure and gradually decided to rely on the financial information thatthe Government system can produce. TA was directed to improve on the Governmentsystem rather than maintaining a parallel donor funded system. This latter step hasproven a significant step in reducing transaction costs and at the same time increasedthe level assurance of the financial information provided.
The above may serve as an illustration of how donors can invoke steps to harmoniseprocedures using the host Government financial management system as a point of departureinstead 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
11
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 donorsjoined with the Government in a move to harmonise disbursement and reporting procedures inorder to reduce the transaction costs by simplifying monitoring and reporting requirements. Inthis project the World Bank was given the role of monitoring resource use including flow offunds from the donors through the Government to the program (the disbursementmechanism).
This model proved to be conducive for the Government in as much as it only had to relate toone financial management system rather than several and that release of resources from thedonor side was associated with only one reporting requirement rather than several. Thus itproved to be an illustration of harmonising donor requirements.
On the other hand, the project suffered severely from problems in providing the requestedinformation. This led to substantial delays in disbursements and subsequent delays inimplementation. This was due to the fact that the reporting requirement was based on aspecific chart of accounts incompatible with the Government financial management system.Accordingly, technical assistance was provided to train the financial officers of the 94 costcentres involved in the financial management of this national programme. With quarterlyreporting the 94 cost centres produced some 370 reports annually which needed to bereconciled 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 agencyhad to develop a “key” on how to translate Government chart of accounts to the donorrequired chart of accounts presenting the information in a manner that satisfy the donorrequirements.
The auditing requirements are met by the Auditor General through its regular audits inaccordance with the Governments standard chart of accounts and a special purpose audit toreconcile the information with the donor requested procedure.
In terms of financial reporting it induces significant additional costs to the Government, whilein terms of auditing the additional cost is minimal since the basis for the financial reports aresubject to a regular audit annually.
The above may serve as an illustration of the fact that harmonisation of donor procedures maybe an important step in the direction of reducing transaction costs, but it is not alone sufficientunless one takes into account the compatibility of the financial system by the hostGovernment.
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
12
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.
13
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
14
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
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.
3 GAP- analysis
2 Propose common principles
6 Evaluation
5 Monitoring
4 Implementation
1 Identify ”best practice”
15
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.
16
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
17
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,
Holland
UNDP, Japan,
Germany, Holland,
World Bank
World Bank, Norway,
Sweden
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
18
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:
19
� funds are used for the intended purpose,
� project implementation is on track, and
� 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:
� Reporting requirements that necessitate recipients investing or
maintaining parallel or duplicate systems should be avoided, as far as
possible.
� 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.
� 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.
� 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
20
• 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 basedfinancial reporting)
o be complemented with evaluation of efficiency of the instruments applied atspecific 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 bedocumented as part of the internal procedures and the internal control system of theexecuting 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
21
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
22
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.
23
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.
1
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-
2
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 BCollaboration on Diagnostic Work
• Task CDonor 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.
3
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: [email protected].
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.
4
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 [email protected]
Frankfurt, December 2001
1
ANNEX II
Matrix of donor practisesUNDP HOLLAND
General UNDP has a comprehensive framework for financialmonitoring and auditing. Detailed guidelines are found in theUNDP Programming Manual in addition to UNDP FinancialRegulations and Rules.
In addition, UNDP carries out Country Assessments inAccountability and Transparency (CONTACT) for which aseparate manual has been developed.
Holland has elaborated detailed guidelines includingfinancial monitoring in their Operational ProceduresManual. The manual presents clearly defined objective andpurpose for financial management, reporting and audit
Financialmonitoring
Specific formats have been developed (annexed to UNDPmanual). The budget format uses a specific chart of accounts.Accordingly, in terms of financial reporting the executingagency will need to maintain accounts with cross reference tothe UNDP proposed accounting structure unless theproject/programme accounts are maintained separate fromthe regular accounting system of the recipient institution..
UNDP requires quarterly reporting with financial year equalto the calendar year and annual auditing presented within 30April.
UNDP has also developed formats for reporting to enableactivity based financial monitoring.
The Operational Procedures Manual presents a standardproject cycle with guidelines and checklists for each elementin the cycle.
Specific formats with checklists for monitoring has beendeveloped, but not for financial reporting. Specific formatsfor financial reporting are not presented (i.e. flexible chart ofaccounts).
Progress reports have to be submitted semi-annually withoutspecifying the financial year.
Activity based financial reporting has specifically beenstated as an important factor to assess in the ActivityAppraisal phase and for monitoring. To what extent it isactually implemented is unknown.
Externalaudit
UNDP has defined objective and purpose as stated both inthe UNDP Manual and Financial Regulations.
In terms of procedures and guidelines the UNDP Manualalso gives reference in the UNDP Financial AdministrationRules and Regulations.
The Operational Procedures Manual presents detailedguidelines for audit with clearly defined scope andobjective.
It makes reference to and has elaborated audit guidelines onthe basis of ISA.
A specific scope and content of auditors report and opinionare presented.
Audit reports are to be submitted within 6 months of thepartner’s financial year and end of project.
Overallassessment
Comprehensive framework that would need adjustments informat for reporting if it was to be harmonised with acommon framework and to apply standard ToRs for audits.
Comprehensive procedures and requirements howeverflexible to allow adjustment to partner financial year,reporting formats, etc. Gives details of content (like achecklist) rather than demanding specific forms andschedules.
2
GERMANY JAPAN
General KfW has not presented any specific financial managementguidelines, rules or regulations. They appear as an integralpart of general guidelines and part of the standard loanagreement/grant agreements.
In the area of financial monitoring there are no specificobjectives defined other than assessment of planned versusactual resource use.
JBIC has not presented any specific financial managementguidelines, rules or regulations. Like KfW they are anintegral part of general guidelines and part of the standardloan agreement/grant agreements.
In the area of financial monitoring there are no specificobjectives defined other than assessment of planned versusactual resource use.
Financialmonitoring
In the area of financial reporting there are specific formatspresented but with flexible classification. The outlined chartof accounts is divided between procurement (investment) andother services.
Specific procedures apply pending form of disbursement(replenishment, advance, direct payment and LC). Reportingis linked to procurement and replenishment and similar toWorld Bank procedures applying to investment lending.
No specific schedule of reporting is presented (financialreporting quarterly, semi-annually, annually).
Not activity based financial reporting specified.
In terms of financial reporting, specific formats for reporting(SOEs) with specific chart of accounts are introduced.
Specific procedures apply pending form of disbursement(replenishment, advance, direct payment and LC). Reportingis linked to procurement and replenishment and similar toWorld Bank procedures applying to investment lending.
Not activity based financial reporting.
Externalaudit
KfW has elaborated standard Terms of Reference forauditing with a clearly stated objective reflecting generalobjectives in program guidelines. There are no specificreferences to national and international standards.
There are no specific format required but types of reportsstated like management letter, etc. are included in standardTerms of Reference.
No specific schedule for auditing has been stated.
None of the documents provided give any specifications.
Overallassessment
Financial monitoring guidelines are part of generalguidelines and the standard loan /grant agreements.
Adjustments will be required in reporting framework andToRs for auditing if it is to be harmonised with a commonframework.
Financial monitoring guidelines are part of generalguidelines and the standard loan /grant agreements.
If format for reporting are to be harmonised with a commonframework (use a specified chart of accounts) it will requireadjustments in the formats and procedures specified.
3
WORLD BANK UNITED KINGDOM
General The World Bank has an extensive framework for financialmonitoring and auditing, and puts an emphasis onstreamlining the reporting and auditing procedures. TheWorld Bank underlines the principle of tailoring the reportingand auditing procedures according to the level of risk and thecomplexity of the project. Nevertheless some minimumrequirements are explicit.
The World Bank has a sample of reporting formats andminimum requirements for reporting frequency.
An assessment for developing financial managementarrangements is carried out prior to approval of project andthroughout the implementation.
DFID has provided the team with the general instructionsused for DFID staff. The emphasis is put on internalfinancial management systems and internal control.
The instructions have limited explicit standards for financialmonitoring and audits of DFID-funded projects.
Principles of aid management are not published yet.
Financialmonitoring
It is World Bank policy that financial reports, as far aspossible, should be in a format that the recipients systems canproduce. If required the World Bank staff aim at developingacceptable formats in collaboration with the recipients. Theunderlying principles for financial monitoring reports are asfollows:
1) The reports should provide information to establishwhether funds disbursed are being used for the purposeintended, project implementation is on track and budget costwill not be exceeded.
2) Financial information should be linked with informationon physical progress and procurement.
3) Cost effective from the viewpoint of both World Bank andrecipient/borrower.
Content, formats and frequency of reporting should bedetermined as part of project appraisal. Minimumrequirements are;
- Financial reports must include a statement showing cashreceipts (periodic and cumulative) by source and expenditureby main expenditure classification; beginning and endingcash balances; and supporting schedules comparing actualand planned expenditures.
- Cash accounting and accrual accounting principles areacceptable. Commercial/revenue-earning entities must applyaccrual principle.
- Avoid duplicate systems. The monitoring cycle should asfar as possible be streamlined with the project managementcycle.
The World Bank makes reference to the InternationalAccounting Standards (IAS).
No explicit requirements for reporting.
Reference to disbursement.
(A more detailed assessment will be pending additionaldocumentation to be collected)
Externalaudit
Yearly audits of financial statements are required. There areno specific formats for audit reports.
For audits of commercial, industrial or business entities,reference is made to the International Standards of Auditing(ISA).
According to DFID policy auditing can be carried outthrough the auditing systems in the recipient country or otherexternal auditors with a specified Terms of reference.
DFID makes reference to the GAGAS (General AcceptedGovernment Auditing Standards) defined by INTOSAI.
Overallassessment
The World Bank has developed a comprehensive frameworkwith opportunities to adjust reporting requirements to thefinancial management systems of executing agencies.
Based on the available information the financial monitoringand reporting requirements are integral part of generalprogramme management guidelines with no detailedrequirement concerning format and procedures for reporting. (A more detailed assessment will be pending additionaldocumentation to be collected).
4
NORWAY SWEDEN
General NORAD strongly advocates the principle of recipientresponsibility that implies that the partner’s systems androutines are to be applied as far as possible. This applies i.a.to procurement procedures, accounting and audit, reports anddisbursements.
NORAD has printed formal, general guidelines focusing onsome core requirements.
The team has not yet been provided with guidelines andregulations expressing Sida’s policy for its financialmonitoring and audits nor any printed formal financialcontrol guidelines.
According to one source, before committing funds to anyprogramme a checklist of budgetary/financialmanagement/audit issues is used to ascertain the quality ofrecipient or partner government financial arrangements.(Source: Crown Agents, Appendix F, p.29; the checklist isnot submitted to the team).
Financialmonitoring
NORAD has no requirement that accounts shall beperformed according to a specified standard. If the partnercountry has established a standard for accounting NORADexpects this to be followed. In the opposite case NORADwill usually expect accounting to be performed in accordancewith generally accepted accounting principles.
There are no specific report formats required. However, thespecific content of the reports and the procedures forapproval of them must be regulated in theAgreement/contract or other binding format.
Core financial reporting requirements:
- Progress in accordance with work plans and budgets
- Expenditure reports in accordance with budget, and auditedaccounts.
Disbursement of Norwegian aid funds shall be based onapproval of these reports.
The agreement template shows some core requirements, butno formal format requirements.
The Progress Report shall show at a minimum presentallocated budget, advances, expenditure and unutilisedbalance.
The Annual Progress Report, based on LFA, should containan analysis and an assessment of the implemented activities,time frame and actual cost in relation to the annual plan ofoperations.
The Results Analysis Report, prior to the End-term Reviewshall present a cumulative overview of all costs and inputsversus all realized outputs for the entire period.
Externalaudit
NORAD makes no requirement that audits shall beperformed according to a specified standard. If the partnercountry has established a standard for auditing NORADexpects this to be followed. In the opposite case NORADwill usually expect audit to be performed in accordance with“generally accepted auditing principles”.
Disbursements made to the partner shall be audited either bythe partner country's Auditor General, or any othergovernmental auditing body that normally is auditing theaccounts of the implementing ministry/agency. If the AuditorGeneral or the auditing body lack the capacity or competenceto perform the audit, a recognised - preferably an“internationally recognised” - auditor firm should be used.
The basic audit frequency that should be followed is anannual audit in accordance with the partner's fiscal year.
There are no standard Terms of references for auditselaborated but in standard agreements it is required that theaudit shall confirm that funds have been accounted for at alllevels and that they have been applied as intended.
The project/programme shall be audited annually. The auditsshall be carried out by an independent and qualified auditor(e.g. Auditor General, Certified Public Accountant,Chartered Accountant) and in accordance with “generallyaccepted international standards on auditing”.
The audit report shall certify whether submitted financialreports are correct and give a true and fair view of theadministration of the project/programme in accordance with“generally accepted international accounting standards”.
If requested by Sida, the audit report shall also certify thatprogress reports give a true and fair view of theproject/programme. Furthermore, if requested by Sida, theaudit report shall comment on the management and theinternal control system of the project/programme.
The audit report shall state which measures have/have notbeen taken as a result of previous audit reports, and whethermeasures taken have been adequate to deal with the reportedshortcomings. The executing agency/institution subject tothe audit shall provide Sweden with copies of audit reportsfrom the audit of the project/programme.
Overallassessment
General guidelines addressing the issue of financial reportingand auditing.
General guidelines addressing the issue of financialreporting and auditing.
1
Annex III – Basic requirements and sampleformat 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
2
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[quarter/sixmonths/year]
Actual[quarter/sixmonths/year]
Variance CumulativeBudget
CumulativeActual
Note
Receipts bysource
…..
1
Expenditureby item
…..
2
Receiptslessexpenditure
..
Openingcashbalance
…..
..
Net change..Receiptslessexpenditure
...Foreignexchangeadjustments
Closingcashbalance
…..
NOTES:
1. ………………
2. ………………
3
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[quarter/sixmonths/year]
Actual[quarter/sixmonths/year]
Variance CumulativeBudget
CumulativeActual
Note
Activity 1. 1
Activity 2. 2
…. ..
Totalexpenditure
NOTES:
1. ………………
2. ………………
1
Annex IV – Sample terms of reference forauditing
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.
2
• 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 materialmisstatements 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 ISA800.
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:
3
• 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.