Management Letter On the Labor Based Public …...2.1.2.2 During the conduct of the audit, the PFMU...

Management Letter

On the Labor Based Public Works Project Initial Grant

For the Fiscal Period 2012/2013

Yusador S. Gaye, CPA, CGMA

Auditor General

Monrovia, Liberia

December 2015

Management letter on the Labor Based Public Works Project (LBPWP) Initial Grant Financial Statement for the fiscal Period 2012/2013

1 Promoting Accountability of Public Resources

ACRONYM

Acronym/Abbreviation/Symbol Meaning

APA Assistant Project Accountant

CA Chartered Accountant

CBL Central Bank of Liberia

CGMA Chartered Global Management Accountant

COBIT Control Objective Information Technology

COSO Committee of Sponsoring Organization of the Treadway

Commission

CPA Certified Public Accountant

CSA Control Self-Assessment

GAC General Auditing Commission

GoL Government of Liberia

IFAC International Federation of Accountants

ILO International Labor Organization

IPSAS International Public Sector Accounting Standards

ISSAI International Standards of Supreme Audit Institutions

IT Information Technology

LBPWP Labor Based Public Works Project

MPW Ministry of Public Works

PA Project Account

PFMU Project Financial Management Unit

PFS Project Financial Statement

PIU Project Implementation Unit

PV Payment Voucher

SA Special Accounts

SOE Statement of Expenditure

US$ United States Dollars



Table of Contents

1.1 Introduction ...................................................................................................... 3

1.2 Scope and Determination of Responsibility ..................................................... 3

2 DETAILED FINDINGS AND RECOMMENDATIONS ............................................ 4

2.1 Administrative Issues ........................................................................................ 4

2.1.1 Internal Audit Function ......................................................................................... 4

2.1.2 Disaster Recovery Plan ........................................................................................ 5

2.1.3 Risk Management Policy ....................................................................................... 6

2.1.4 Control Self-Assessment ........................................................................................ 7

2.1.5 Audit Trail ........................................................................................................... 8

2.1.6 Environmental Control ......................................................................................... 9

2.1.7 Segregation of Duties ........................................................................................ 10

2.1.8 Access control (IT Security) ................................................................................. 11

2.2 Financial Issues ............................................................................................... 12

2.2.1 Authorization Date ............................................................................................. 12

2.2.2 Project Components ........................................................................................... 13

2.2.3 Statement of Comparison of Budget VS Actual Amounts ....................................... 15

2.2.4 Chart of Account Code ....................................................................................... 16

2.2.5 Financial ledger .................................................................................................. 17

2.2.6 Annual Statement of Expenditure ......................................................................... 18

2.3 Internal Control Issues ................................................................................... 20

2.3.1 Third Party Payment ........................................................................................... 20

2.3.2 Fixed Asset/Other Registers ................................................................................ 21



1.1 Introduction

1.1.1 The audit of the Labor Based Public Work Project (LBPWP) Initial Grant Financial

Statements for the fiscal period 2012/2013 was commissioned by the Auditor-General

under her statutory mandate as provided for in Section 53.3 of the Executive Law as

well as the Engagement (Audit) Terms of Reference. The audit was scheduled to be

completed and the report issued before 31 December 2014, however, due to the

outbreak of the deadly Ebola Virus Disease, the execution was delayed by several

months.

1.1.2 The LBPWP project account is managed by the Ministry of Public Works in terms of the

Grant agreement of 29 February 2008.

1.2 Scope and Determination of Responsibility

1.2.1 The audit was conducted in accordance with International Standards of Supreme Audit

Institutions (ISSAIs) as well as the Engagement (Audit) Terms of Reference. These

standards require that we plan and perform the audit so as to obtain reasonable

assurance that, in all material respects, fair presentation is achieved in the annual

financial statements.

1.2.2 An audit includes:

• Examination on a test basis of evidence supporting the amounts and

disclosures in the financial statements;

• Assessment of the accounting principles used and significant estimates made

by management; and

• Evaluation of the overall financial statements presentation.

1.2.3 An audit also include an examination, on a test basis, of evidence supporting

compliance in all material respects with the relevant laws and regulations which came

to our attention and are applicable to financial matters.

1.2.4 The financial statements, maintenance of effective control measures and compliance

with laws and regulations are the responsibility of the Project Coordinator and the Unit

Manager of the PFMU. Our responsibility is to express our opinion on these financial

statements.



2 DETAILED FINDINGS AND RECOMMENDATIONS

2.1 Administrative Issues

2.1.1 Internal Audit Function

Observation

2.1.1.1 Section 14.1.1 of the Project Financial Management Unit Financial Procedures Manual

states that “Project / Program activities would be periodically reviewed by the Internal

Audit Team which will be in place as part of Project Financial Management Unit

(PFMU). The internal auditing function shall ensure the orderly and efficient conduct of

operations including, among others, the adherence to Project / Program Management

policies, rules and regulations, safeguarding of Project / Program assets, prevention

and detection of errors and irregularities and promoting the accuracy and reliability of

the accounting records”.

2.1.1.2 Section 14.1.2 of the PFMU Financial Procedures Manual also provides that “The

internal auditor should work within a well-defined framework of programs and

reporting requirements. Importantly, the internal auditing function should be closely

linked to and complement the project‟s monitoring and evaluation system. The internal

audit program for each year should be developed by the internal auditor and discussed

with the Heads of the PFMU and Project Implementing Units and finalized thereafter”.

2.1.1.3 During the period under audit we could not find any evidence that the LBPWP activities

at the PIU in the Ministry of Public Works had been reviewed by the Internal Audit

Unit. Interview with the Project Coordinator for the Labor Based Project at the MPW

revealed that there was no Internal Auditor recruited for the Project.

Risk

2.1.1.4 The lack of internal audit function in the LBPWP operations and activities may lead to

the non-detection of errors and omission and safeguarding of project assets.

Recommendation

2.1.1.5 The PIU at the MPW should recruit an Internal Auditor who shall review the activities

of all project managed by the PIU including the Labor Based project in line with the

guideline of the PFMU Financial Procedure Manual.

Management’s Response

2.1.1.6 The PFMU and the PIU have over the period co-existed and work closely together.

Consistent with its mandate, PFMU has a full functional Internal Audit Section. The

Internal Audit Section as part of its mandate, reviews all projects activities at the

various PIUs including LBPWP at MPW. For the period under audit there was risk

assessment conducted by the PFMU Internal Audit Section on the activities of the

LBPWP. (See Internal Audit Report attached).



Management’s 2nd Response (July 15, 2015)

2.1.1.7 As explained during the conduct of the Audit, Labor Based Public Work Project did not

make provision for the hiring of a separate internal Auditor. As such, the Project

Financial management issues pertain to this project have always been reviewed by

PFMU Internal Audit Section whilst technical issues are the responsibility of the Ministry

of Public Works. Hence, risk management matters which are non-financial in nature

are purely the responsibility of the Ministry of Public.

Auditor General’s Position

2.1.1.8 The scope of internal auditing within the PIU is broad and may involve PIU's

governance, risk management and management controls over the

efficiency/effectiveness of its operations. Moreover, section 14.1.2 of the PFMU

Financial Procedure Manual states “that the Internal Auditing function of the PFMU

should closely be linked to and complement the project‟s monitoring and evaluation

system.” In the absence of evidence to show that the internal auditing function

covered the entire operations (financial and non-financial) of the PIU, we maintain our

recommendation.

2.1.2 Disaster Recovery Plan

Observation

2.1.2.1 COBIT 4.1 DS 4.2 states that management should develop IT continuity plan based on

the framework and designed to reduce the impact of a major disruption on key

business functions and processes. The plans should be based on risk understanding of

potential business impacts and address requirements for resilience, alternative

processing and recovery capability of all critical IT services. They should also cover

usage guidelines, roles and responsibilities, procedures, communication processes, and

the testing approach.

2.1.2.2 During the conduct of the audit, the PFMU Management and the PIU at the MPW had

not developed a documented Disaster Recovery Plan to help recover transaction data

and information in the event of disaster to ensure business continuity.

Risk

2.1.2.3 The failure to establish a disaster recovery plan may result in the complete loss of

transaction data and information in the occurrence of an unforeseen event.

Recommendation

2.1.2.4 The Project Coordinator for the LBPWP and Unit Manager at the PFMU must establish a

disaster recovery plan for the project as part of its risk management strategy. This

would mitigate the risk of loss of transaction data and information in the event of an

unforeseen occurrence.




2.1.2.5 PFMU since its establishment in 2006 has established and implemented disaster

recovery strategies. The Unit has put in place backups both onsite and offsite. There

are two functional servers onsite whilst the third server is located outside the Ministry

of Finance - at the Infrastructure Implementation Unit (IIU) of Ministry of Public

Works. Whereas daily backups are carried out onsite, that of the offsite is done

weekly. In spite of numerous frequent power outages during the period under audit,

the unit has continued to strive at all times because of efficient and effective disaster

recovery program. This issue came up in the IPFMRP Audit but mechanism is been put

in place to adapt the Ministry of Finance Disaster Recovery Plan since this is a unit

under the Ministry (Copy already submitted to you, however re-attached for your

review).


2.1.2.6 The assertions made by PFMU Management are not backed by any documentary

evidence. Hence, we maintain our recommendation.

2.1.3 Risk Management Policy

Observation

2.1.3.1 The Committee on Sponsoring Organization of the Treadway Commission (COSO)

framework required the Project Coordinator for the LBPWP to establish a documented

risk management policy which will set the basis for conducting a formal risk

assessment within the project and the beneficiary entities. Risk assessment process

entails identifying and analyzing the risk that may impact negatively on the

achievement of PIU‟s objectives and determines appropriate responses. This implies

risk identification, risk evaluation, assessing PIU‟s risk appetite, and developing

appropriate risk responses. Risk identified should be recorded in a risk register. The

performance of risk assessment as a component of internal control plays a key role in

the selection of the appropriate control activities to be undertaken.

2.1.3.2 During the audit, the PIU at the MPW could not provide evidence that they had

developed risk management policy.

Risk

2.1.3.3 The failure by the PFMU Management to develop Risk Management Policy could

indicate that the PIU at the MPW is unable to track risks that exist within the project‟s

operations. This may also negative impact on the PIU‟s ability to deliver quality service

and achieve desired outcome.

Recommendation

2.1.3.4 The PIU should establish a risk management policy which will guide the entire risk

identification and management processes.




2.1.3.5 All of the Financial Management activities of the LBPWP are performed by PFMU. The

PFMU has a comprehensive Risk Management Policy that covers LBPWP. In as much as

all of the controls over the project‟s financials lie within the scope of PFMU, the

absence of Risk Management Policy at the PIU does not pose substantial risks to the

Financial data of the project. However, Audit Recommendation noted.


2.1.3.6 We acknowledge PFMU Management‟s acceptance of our recommendation. However,

we will make follow up on the implementation of this recommendation.

2.1.4 Control Self-Assessment

Observation

2.1.4.1 Section 11.3.2 of the PFMU Financial Procedure Manual stipulates that “The Internal

Control or Control Self-Assessment (CSA) Checklist provided in Appendix 28 may be

used by the Implementing Agencies/PFMU Management as a guide for assessing the

adequacy of the Project / Program Internal Control System”.

2.1.4.2 The Management at the PFMU and the PIU at the MPW provided no evidence that

Control Self-Assessment of the Labor Based Project was conducted during the period

under audit.

Risk

2.1.4.3 The effective and efficiency of internal control activities cannot be assured.

Recommendation

2.1.4.4 Internal Audit function at the PFMU must conduct on a timely basis an assessment of

established internal control procedures.


2.1.4.5 PFMU in compliance with its Risk Management Policy conducted its Annual Risk

Assessment of the LBPWP for the period under audit. (see copy of report).


2.1.4.6 We acknowledged the error of omission in the fiscal year to which this report relates

during the audit. Going forward, we will not only perform the task, but will ensure that

the period to which the Control Self-Assessment related is adequately disclosed.


2.1.4.7 We acknowledge PFMU Management‟s acceptance of our recommendation. However,




2.1.5 Audit Trail

Observation

2.1.5.1 COBIT 4.1 part DS10.2 states that for Problem Tracking and Resolution, management

should ensure that the problem management system provides for adequate audit trail

facilities that allow tracking, analyzing and determining the root cause of all reported

problems considering:

All associated configuration items

Outstanding problems and incidents

Known and suspected errors

Tracking of problem trends

2.1.5.2 In addition, section 11.2.2 of the Financial Procedure Manual states that the Project‟s /

Program‟s Information System or that of its PFMU shall provide:

A complete audit trail for each transaction.

A chain of evidence that connects account balances and other summary

results with original transaction data through:

i. Proper coding

ii. Appropriate cross references, and

iii. Adequate documentation.

2.1.5.3 During the review of the Sun-System, it was observed that the System Administrator

had not enabled the audit trail on System. We were unable to track the flow of

transactions that were processed through the Sun-System during the period under

audit.

Risk

2.1.5.4 Failure by the system administrator to enable the audit trail on the Sun-System may

not provide evidence of timely detection of security violation, performance problem

and flaws in the application.

Recommendation

2.1.5.5 The System Administrator must subscribe to the provision of part 10.2 of the COBIT

Standard and section 11.2.2 of the Financial Procedure Manual of the PFMU.


2.1.5.6 Audit recommendation is being considered for suitable implementation.


2.1.5.7 We acknowledge PFMU Management‟s acceptance of our recommendations. However,




2.1.6 Environmental Control

Observation

2.1.6.1 COBIT 4.1 part DS12.4 states that “Management should design and implement

measures for protection against environmental factors. Install specialized equipment

and devices such as fire alarm, fire suppression system to monitor and control the

environment”.

2.1.6.2 During the audit, we did not find evidence that the IT environment had a complete

Fire suppression system to help detect and control hazardous conditions that made

arise.

2.1.6.3 Physical inspection of the PFMU environment revealed that there were two (2) fire

extinguishers installed, however, there was no evidence that the staff of PFMU had

undergone fire drills to provide knowledge on the use of the fire extinguishers.

Risk

2.1.6.4 An IT environment without installed fire suppression system may not provide any

assurance of the safety for the IT equipment, data and personnel.

2.1.6.5 Failure by the PFMU Management to prepare a documented procedure to guide

employees on the usage of fire extinguishers in the event of disaster, may lead to the

loss of critical data and IT equipment.

Recommendation

2.1.6.6 The PFMU Management should collaborate with Management of the Ministry of Finance

and Development Planning to install fire alarm and fire suppression system.

2.1.6.7 Additionally, the PFMU Management should liaise with the Liberia National Fire Service

to conduct fire drill for its staff.


2.1.6.8 PFMU has not only fully installed Fire suppression mechanism in the Unit, but also

ensured that the Liberia National Fire Service conducted a drill on the full use of the

extinguishers. This issue came up in the IPFMRP Audit and measure has been put in

place to ensure compliance.


2.1.6.9 Please see attached the communication made on May 7, 2015 to the Deputy Minister

for Administration - Finance and Development Planning requesting his authorization for

full implementation of similar recommendation raised during the audit of IPFMRP

during the 2013/14 fiscal year. This is being worked on. See Exh 1 attached.




2.1.6.10 We acknowledge PFMU Management‟s acceptance of our recommendations. However,

we will make follow up on the implementation of the recommendations.

2.1.7 Segregation of Duties

Observation

2.1.7.1 COBIT 4.1 part DS5.3 states that “management should ensure that all users (internal,

external and temporary) and their activity on IT systems (business application, IT

environment, system operations, development and maintenance) are uniquely

identifiable. Enable user identities via authentication mechanisms. Confirm that user

access rights to systems and data are in line with defined and documented business

needs and that job requirements are attached to user identities. Ensure that user

access rights are requested by user management, approved by system owners and

implemented by the security-responsible person. Maintain user identities and access

rights in a central repository. Deploy cost-effective technical and procedural measures,

and keep them current to establish user identification, implement authentication and

enforce access rights”.

2.1.7.2 Additionally, section 11.3.1 of the Financial Procedure Manual in parts states that

“control procedures will be established to ensure, as far as possible, that the Project‟s /

Program‟s overall objectives are achieved. Control procedures shall include general

(where the system is computerized) and/or applications controls including proper

authorization, appropriate documentation and independent checks; segregation of

duties, physical controls and performance reviews.

Duties within the PFMU would be segregated so that work of one individual

automatically provides a cross check on the work of another such that the

added benefit of an independent check results”.

2.1.7.3 It was observed during the audit that there was no evidence of segregation of duties

for top level managers on the Sun-System. The Unit manager, the Senior Project

Accountant and the System Administrator had the same right to perform the same

duties on the system.

Risk

2.1.7.4 Failure by the Management of the PFMU to segregate the duties of top level managers

may lead to overlapping of functions and misused of access right on the Sun-System.

Recommendation

2.1.7.5 The Management at the PFMU should adhere to the provision section 11.3.1 of the

Financial Procedure Manual.

2.1.7.6 The duties of the Unit Manager, Senior Project Accountant and System Administrator

on the Sun-System should be segregated, documented and communicated.




2.1.7.7 Following recommendation from the GAC Audit of the IPFMRP, corrective steps have

been taken. As at now, there is only one Super User, and one Systems Administrator

(See copy of user levels attached).


2.1.7.8 In our attempt to implement the recommendation of GAC, we observed that it was

impracticable for Amos Fahn (IT System Administrator) to efficiently operate the entire

IT environment if he was not a super user – as he had to wait for the Unit Manager

(Dr. Chris Sokpor) on many issues before he could assist over twenty (20) Project

Accountants in the performance of their respective duties. Hence, substance over form

concept, as prescribed in accounting had to be applied in this instance.


2.1.7.9 The issue raised in our observation has to do with equal rights by the three top users

on the SUN System. We therefore maintain our recommendation.

2.1.8 Access control (IT Security)

Observation

2.1.8.1 COBIT 4.1 part DS5 provides that “the need to maintain the integrity of information

and protect IT assets requires a security management process. This process includes

establishing and maintaining IT security roles and responsibilities, policies, standards,

and procedures. Security management also includes performing security monitoring

and periodic testing and implementing corrective actions for identified security

weaknesses or incidents. Effective security management protects of all IT assets to

minimize the business impact of security vulnerabilities and incidents. It is also best

practice in IT that access passwords are change frequently”.

2.1.8.2 Furthermore, part 3 paragraph 3 of PFMU IT Policy, in part, states that “Good practice

with passwords will largely be enforced by the systems themselves. However, users

are required to comply with the following.

Passwords must be a minimum of eight characters in length and they should

either contain both alphabetic and numeric characters or be a phrase of two or

more unrelated words. They must not be generated in a way which makes

them easy to guess, for example using personal details, obvious dates or

generic text (such as “password”, PFMU).

Password change is prompted by the system every 90 days. Please do so

when requested to”.

2.1.8.3 It was observed during audit that the staff of the PFMU having access to the Sun-

System did use their passwords for the more that period required by the IT Policy.

Also, there was no reminder on the system which prompts the user for the change of



password after its expiration date.

Risk

2.1.8.4 The failure to set criteria on the system to monitor and remind users to change

passwords on a regular basis could lead to unauthorized access to the Sun-System.

Recommendation

2.1.8.5 The System Administrator should abide by the provision of part 3, paragraph 3 of

PFMU IT Policy and COBIT 4.1part DS5 of for the monitoring and change of password.


2.1.8.6 All users of the Sun-System database have secret passwords that conform to standard

practices. These are changed regularly and cannot be guessed as purported. Our IT

system is designed to suit our activities.


2.1.8.7 We still stand by our assertion that all ALL Users have secret passwords which are

forcefully change after ten (days). During the conduct of the audit, only your IT

personnel (Madam Yamah) requested and was provided with the System‟s access. She

only accessed (used it for a week. Even though the audit was conducted for over 90

days, those audit staff were not accessing the SunSystems and was impracticable to

confirm this assertion. See Exh 3 attached.


2.1.8.8 Part 3 paragraph 3 of the PFMU IT Policy states that “ALL USERS of the system shall

be prompted every ninety (90) days for change of password not within ten (10) days

as asserted by the PFMU Management”. Therefore, we maintain our recommendation.

2.2 Financial Issues

2.2.1 Authorization Date

Observation

2.2.1.1 Paragraph 1.4.5 of the International Public Sector Accounting Standards (IPSAS) Cash

Basis of Accounting states that “An entity should disclose the date when the financial

statements were authorized for issue and who gave the authorization”.

2.2.1.2 The LBPWP Initial Grant Financial Statements for the fiscal period 2012/2013 have no

disclosure in the accompanying notes on when the LBPWP Initial Grant Financial

Statements were authorized for issue.

Risk

2.2.1.3 The non-disclosure of the authorization date may result in users not knowing the cut-

off of events that were included in the compilation of the LBPWP Initial Grant financial



statements.

Recommendation

2.2.1.4 The authorization date should be disclosed in the notes to the LBPWP Initial Grant

financial statements so that the cut-off date of events that were used during the

compilation of the financial statements is known to the users.


2.2.1.5 The financial statements submitted to the Auditors were dully labeled “Labor Based

Public Work Project –Main Grant for the year ended June 30, 2013. LBPWP: Grant

Nos.. This implies that the cut off period to which the financial statements relate is

very explicit and could not therefore be confusing to the readers of the LBPWP

Financial Statement for the period under audit. This reporting format is in line and

satisfactory to the donors reporting requirements.


2.2.1.6 Unlike profit oriented entities that seek Board‟s approval for the issuance of financial

statements on specified dates, the approval of the financial statement by the Project

Coordinator at the Project Implementing Unit (PIU) and the PFMU Unit Manager (

Project Financial Management Unit) with statement of the date to which the financial

statement relates is sufficient. This financial statement is further shared with the AfDB

Task Team Leader (TTL) for clearance. Your assertion applies to Public Sector Audit,

hence no board approval is required to issue the financial statements of the project

account.


2.2.1.7 The Authorization date on financial statements is intended to disclose events (both

favorable and unfavorable) occurring after the reporting period and the date when the

financial statements are authorized for issue. Subsequent events could be unknown

where there was no authorization date on the financial statements. In the absence of

an Authorization Date on the Financial Statement of the LBPWP as required by the

IPSAS Cash Basis of Accounting, we maintain our recommendation.

2.2.2 Project Components

Observation

2.2.2.1 Section 5.01 of the Protocol of Agreement of the Labor Based Public Works Project

states that “ The Recipient declares its commitment to the objectives of the Project as

set forth in Annex 1 to this Agreement, and to this end shall perform its obligations in

relation thereto with due diligence and efficiency and in conformity with appropriate

administrative and financial standards and practices and shall promptly provide or

cause to be provided as needed the funds, facilities, services and other resources

required for the Project”.



2.2.2.2 Annex 1 of the Protocol of Agreement provides that “The objective of the Project is to

improve capacities for the infrastructure maintenance and local development. The

Project comprises the following components:

Rehabilitation of Socio-Economic Infrastructure;

Capacity Development for Infrastructure Maintenance; and

Project Management”.

2.2.2.3 It was observed during the audit that the Project Financial Statements for the period

under audit revealed that the Statement of Receipts and Payments comprises four (4)

components:

Consulting Service

Works,

Operating Expenses and

Training

2.2.2.4 Contrary to the requirement of Annex 1 of the Protocol of Agreement, it was noted

that components contained in the financial statements did not mirror those in Annex 1

as required.

Risk

2.2.2.5 The failure to produce financial statements which conforms to requirement of the

Protocol of Agreement does not provide assurance that the objectives of the Grant

Agreement were met.

Recommendation

2.2.2.6 The Unit Manager of PFMU should produce financial statements which comply with

section 5.01 of the Protocol of Agreement.


2.2.2.7 It is important to note that even though the components were stated as comprising of

Rehabilitation of Socio-Economic Infrastructure, Capacity Development for

Infrastructure Maintenance, and Project Management, no allocation was made to

various components. As it is impossible to monitor actual expenditure against zero

allocations to respective components, it not prudent to report base on the

components. Given that the grant amount of AU 15.24 million was clearly allocated

among the category of expenditures (Consultancy Service, Works, Operating Expenses

and Training) as per page 17 of the Grant Agreement, it was realistic to report as such

to facilitate monitoring. This reporting format was adopted in providing financial

reports to the donor from project inception to date which were considered satisfactory.


2.2.2.8 Goods, works, services are not components as being described per section 2.2.2.2 of

the Management Letter issued. As explained during the conduct of the audit, the

Project Appraisal Document (PAD) made allocation of project funds based on



categories and not per components (even though components were mentioned in the

PAD). As it was not practicable to track cost per components, the reporting format of

this project were designed based on the PAD (categories). Hope this clarifies.


2.2.2.9 The Project Agreement clearly states that expenditure for the LBPWP should be made

under the three components: Rehabilitation of social-Economic Infrastructure, Capacity

Development for Infrastructure Maintenance, and Project Management. Therefore, we

maintain our recommendation.

2.2.3 Statement of Comparison of Budget VS Actual Amounts

Observation

2.2.3.1 Paragraph 1.9.8C of the IPSAS-Cash Basis of Accounting requires the disclosure by

way of notes, an explanation of material differences between the budget for which the

LBPWP management are held publicly accountable and actual amounts, unless such

explanations are included in other public documents issued in conjunction with the

financial statements, and a cross reference to those documents are made in the notes.

2.2.3.2 It was observed during the audit that there was no Statement of Comparison of

Budget and Actual Amount prepared by the project.

Risk

2.2.3.3 Failure to prepare the Comparison of Budget versus Actual Statement and reasons for

significant variances, if (any), within the LBPWP financial statements could indicate the

existence of irregularities and lack of proper budgetary control. The situation may also

impede management‟s ability to make informed financial decisions.

Recommendation

2.2.3.4 The notes to the LBPWP financial statements should include statement of Budget

versus Actual and explanations for significant variances, if (any), between the budget

and actual amounts to assist users better understand the reason for material

departures from the approved budget. Compliance with this requirement would ensure

that PFMU Management are accountable for their performance against, and

compliance with, relevant approved budget.


2.2.3.5 Chapter 6 (Financial Management) and section 6.5 (Project Financial Statements) of

the AfDB disbursement Handbook requires that the Project Financial Statements

prepared by Project Managements shall include:

Statement of Receipts and Expenditures

Statement of Special Accounts



Notes to the Financial Statements

2.2.3.6 With the provision of the above stated guideline, we confirm that the Financial

Statement submitted to the Audit Team are compliant with the required provisions.

(Please see copy of disbursement guideline attached- see 1.4 above)


2.2.3.7 The Project Terms of Reference requires the Management of the PFMU to prepare

LBPWP Financial Statements using the IPSAS Cash Basis of Accounting. The IPSAS

Cash Basis of Accounting requires the preparation of the Statement of Cash Receipts

and Payments, Statement of Comparison of Budget and Actual either as a separate

additional financial statement or as a budget column in the Statement Cash Receipts

and Payments and Accounting policies and explanatory notes. Therefore, we maintain

our recommendation.

2.2.4 Chart of Account Code

Observation

2.2.4.1 The PFMU Financial Procedure Manual section 8.5.2 states that “For the projects, the

PFMU shall design a „project-focused‟ chart of accounts that will facilitate:

reporting on receipts and expenditure of Project funds;

Monitoring of project / program activities

Provide detail or summary financial management information reports to

several levels;

Compliance with external reporting requirements;

Reporting on categories of expenditure

Budget reports”.

2.2.4.2 Furthermore, section 8.5.3 also states that “Most of the financial packages available

today have analytical tools for multiple reports from the same database of financial

data. Thus, the structure of the Chart of Accounts for the Projects will comprise two

main categories of classification of accounts: Analysis Codes and General Ledger

codes. Whilst the General Ledger codes will assist in classifying the financial

transactions under the main account types (assets, liabilities, revenue or expenditure),

the analysis codes will assist in classifying the data according to functions, activities or

objectives”.

2.2.4.3 During the audit, it was observed that the Project Focused chart of account codes did

not reflect the category of expenditure contained in the project agreement. We did not

find evidence that the payment voucher, general ledger and budget relating to the

period under audit contained the chart of account codes.



Risk

2.2.4.4 The failure by the Management at the PFMU to code transaction in the general ledger,

budget and payment voucher may lead to improper classification of transaction,

inadequate records and budget reports.

Recommendation

2.2.4.5 The Senior Project Accountant should institute the use of Project Focused Chart of

Account as prescribed by section 5.3.2 and 5.3.3 of the Financial Procedure Manual

Management.

2.2.4.6 The Senior Project Accountant should ensure that the Chart of Account codes

developed for the LBPWP is distributed to the Assistant Project Accountant and the

Senior Assistant Internal Auditor assigned to the Project.


2.2.4.7 PFMU currently manages over eighty projects for which LBPWP is a part. During the

Audit, a comprehensive Chart of Accounts presented in the TRIAL BALANCE and the

General Ledger were presented to the audit team. The Charts of Accounts which

contain expenditure code for each transaction form the basis of generating our reports.

Our reports have been consistent with the project grant agreement and acceptable to

the donors. It would never have been possible to generate these reports from the

system without Chart of Accounts (see Chart of Accounts attached which is Labor

Based Project focused with relevant analysis codes)


2.2.4.8 We received several documents including budget reports, general ledgers and payment

vouchers as well as payment request. Review of the documents show that no Project

Focused Chart of Account codes were quoted on them. In the absence of coding and

classifying transactions using the Project Focused Chart of Account Code as required

by section 5.3.2 and 5.3.3 of the Financial Procedure Manual Management, we

maintain our recommendation.

2.2.5 Financial ledger

Observation

2.2.5.1 Section 8.1.1(f) of the PFMU‟s Financial Procedure Manual in part states that “The

PFMU has installed Sun Financial Management Software to record the financial

transactions of the Projects / Programs. The Ledger accounting and fixed assets

module have facilities for maintaining cash transactions, creditors and debtors records,

general ledger, and fixed assets register. The software must be updated with the

Projects‟ financial transactions on daily basis to ensure that all Project financial

transactions are promptly recorded. Database of the financial transactions shall be

maintained separately for each Project. Thus, the accounting records at the PFMU

should include:



(f) General Ledger in the software containing separate accounts for major

expenditure items under each of the categories in the Grant Agreements. A

Trial Balance report will be generated monthly”.

2.2.5.2 Annex 1 of the Protocol of Agreement provides that “The objective of the Project is to

improve capacities for the infrastructure maintenance and local development.

The Project comprises the following components:

Rehabilitation of Socio-Economic Infrastructure;

Capacity Development for Infrastructure Maintenance; and

Project Management”.

2.2.5.3 An examination of general ledgers accounts for the period under audit revealed that

categories of expenditure of the general ledger submitted by the PFMU did not match

categories of expenditure prescribed in the Grant Agreement. The general ledgers

used in the preparation of the financial statements contained the names of individual

and vendor to whom expenditure were made.

Risk

2.2.5.4 The preparation of general ledger for the LBPWP financial transactions which did not

match major categories of expenditure under the Grant Agreement may lead to

improper disclosure of financial information. The situation may not provide assurance

to the stakeholders that the project objective is being met.

Recommendation

2.2.5.5 The PFMU Management should subscribe to the provision of section 8.1.1 (f) for the

preparation of general ledger accounts.


2.2.5.6 The general ledgers submitted to the audit team truly reflects the categories of

expenditure as enshrined in the page 17 project grant agreement (Please see copy of

TRIAL BALANCE attached which contains).


2.2.5.7 We reviewed the trail balance and general ledger submitted by the Management of

PFMU and noted that it did not reflect the three major components of the LBPWP.

Therefore, we maintain our recommendation.

2.2.6 Annual Statement of Expenditure

Observation

2.2.6.1 Section 8.2.1 of the PFMU Financial Procedure Manual states that “at the end of every

month and quarter, the following statements and schedules will be prepared for each

Project / Program:

Cash Flow Statements or Summary of Sources and Uses of Funds



Uses of funds by Project component and activity within component

Funds Disbursement Status

Commitment Schedule

Designated Account Reconciliation Statement

Withdrawal Application Schedule”.

2.2.6.2 Additionally, section 8.2.2 of the Financial Procedure Manual states that “at the end of

the fiscal year, similar statement as shown for quarterly reports will be prepared. In

addition the following schedules and statements will be prepared for annual accounts:

Schedule of advances,

Schedule of cash and bank balances,

Schedule of funds received from IDA / AfDB / Education Pooled Fund,

Schedule of fixed assets; and

Statement of expenditure and financing”.

2.2.6.3 The audit team found no evidence that the PFMU Management prepared Annual

Statement of Expenditure for the fiscal period under audit. The Management at PFMU

and PIU at MPW in an interview stated that the reporting framework under the Labor

Based project did not require the preparation of Annual Statement of Expenditure.

Risk

2.2.6.4 Failure to prepare the Annual Statement of Expenditure for the period under audit may

not provide assurance that expenditure incurred were in line with the components

prescribed by the Project Agreement.

Recommendation

2.2.6.5 The Management at the PFMU and PIU at the MPW should subscribe to sections 8.2.1

and 8.2.2 of the Financial Procedure Manual in the preparation of Annual Statement of

Expenditure.


2.2.6.6 Chapter 6 (Financial Management) and section 6.5 (Project Financial Statements) of

the AfDB disbursement Handbook requires that the Project Financial Statements

prepared by Project Managements shall include:

Statement of Receipts and Expenditures

Statement of Special Accounts

Notes to the Financial Statements

2.2.6.7 With the provision of the above stated guideline, we confirm that the Financial

Statements submitted to the Audit Team are compliant with the required provisions

(see attached –same document as 1.4 above).




2.2.6.8 The PFMU Financial Procedure Manual states that in addition to the above mentioned

statements the PFMU should also prepare Statement of Expenditure and Financing for

all projects including LBPWP. Furthermore, the engagement Term of Reference clearly

states that the PFMU is responsible for the preparation of the Statement of

Expenditure for the LBPWP. Therefore, we maintain our recommendation.

2.3 Internal Control Issues

2.3.1 Third Party Payment

Observation

2.3.1.1 Section 6.4.1 of the PFMU Financial Procedures Manual states that “All payment

vouchers and Checks shall be written in the name of the beneficiary that appears on

the supporting documents”.

2.3.1.2 We noted during the audit that two (2) third party payments were made through the

PIU‟s staff; Mr. Sekou Kamara amounting US$ 1,855.00 for various expense for the

PIU office and to Alex N. Delaw Smith, VP for Administration of the Barack Young

Controller Football Club, for Vehicle registration. See Table below:

Table II: Third Party Payments

Date Payment Description Voucher No. Amount

In US$

01/05/2013 Payment to Sekou Kamara for communication,

sundry and stationery expenses

2013/02

1,425.00

18/06/2013 Payment to Alex Smith for vehicle registration 2013/021 430.00

1,855.00

Risk

2.3.1.3 The third party payments through staff of PIU instead of the actual payee as reflected

in supporting document could provide an opportunity for misappropriation.

Recommendation

2.3.1.4 The Management of PFMU should ensure full compliance with the requirements of

Section 6.4.1 of the PFMU Financial Procedures Manual effecting payments.


2.3.1.5 Audit Recommendation noted


2.3.1.6 PFMU provided documentation on these payments to the team in question but we are

very much surprise to see them appearing as unresolved. Payment to Sekou Kamara

(the Labor Based Office and Administrative Assistant) was for various miscellaneous



items for which all supporting receipts were attached (Please see attached the same

which you reviewed and accepted as satisfactory (see Exh 2a).

2.3.1.7 Also Alex N. Delaw is an employee of the Ministry of Transport and was contacted by

the project to expedite the registration of the Project vehicle which he fully accounted

for the entire amount in question. He presented two ID cards to receive this payment

but GAC only pick up the Barrack Young Controller VP ID as exhibit and not the the

Ministry of Transport ID (which were photocopied on the same page). See Exh 2b

attached


2.3.1.8 You accepted our recommendation on this issue in your first response dated April 8,

2015. Please note that payments for vehicle registration, communication, sundry and

stationery expenses to individuals other than the vendors are clearly third party

payments that do not support Section 6.4.1 of the PFMU Financial Procedures Manual.

Therefore, we maintain our recommendation.

2.3.2 Fixed Asset/Other Registers

Observation

2.3.2.1 Section 8.2.3 of the PFMU Financial Procedure Manual states that “at the implementing

units or agencies the following books shall be kept:

Petty Cash or Operating Funds books and vouchers;

Contracts Register which should be updated with contracts entered into,

consultants‟ certificates, and progress payments made by the PFMU.

Procurement and Order processing records tracking the stages of approval and

authorizations in procurement and entering into commitments.

Fixed Assets Register for the Implementing unit”.

2.3.2.2 Section 9.4.2 of the PFMU Financial Procedure Manual also stipulates that “for

maintenance of Fixed Assets Register

A FAR shall be maintained for recording all fixed assets procured or

constructed from each project / program fund or donated by any other body.

The register shall contain detailed information concerning each asset as

contained in the sample FAR.

The assets shall be code-numbered for proper identification as to categories

and location.

The assets register shall be designed to accommodate the additions and



disposals of asset entries and update.

A summary of fixed assets shall be extracted from the FAR and form part of

the project management report and financial statements.

All movable fixed assets such as vehicles will carry the imprint of the project

name”.

2.3.2.3 Furthermore, section 9.4.3 of the Financial Procedure Manual stipulates that “for

Maintenance of Fixed Asset Register

The Assistant Project Accountant (APA) shall scrutinize the PV files and extract

details relating to the purchase or acquisition of assets.

The invoiced value of the fixed asset item shall be compared with the contract

documents to ensure that they are in accordance there with.

Cost associated with fixed assets shall be collated using a worksheet

Where joint costs are incurred, the APA shall apportion them to the specific

assets acquired. Such costs are: transit insurance, clearing agent cost etc.

The APA shall obtain the distribution or location list of the assets from the

store records.

He / she shall review the total cost of the assets and ensure that appropriate

entries are made in the Fixed Asset Register. The worksheet shall be

maintained in a separate file (Fixed Asset File)”.

2.3.2.4 Contrary to the above, an analysis of Fixed Asset Register revealed the followings:

There exist no evidence that the fixed assets procured under the two (2)

projects (Labor Based Public Works Project-Initial and Supplementary Grants)

were delineated.

There exist no evidence that extract of the Fixed Asset Register for part of the

financial statement of the projects.

There exist no evidence that the Fixed Asset Register had been reviewed by

the Project Accountant.

Verification exercise shows no evidence that assets amounting to US$

217,905.00 recorded in the FAR had Serial Numbers. See table below.

Fixed assets amounting to US$ 3,275.00 were not found during verification.



The verification exercise also revealed that assets procured under the project

were found to be distributed to staff, however, fixed asset amounting to US$

2,800.00 were not coded. See Tables Below

Table IV: Assets without serial number

NO. DATE DESCRIPTION Amount In US$ SERIAL NO.

1. 06/02/2014 2 Toshiba satellite P50- ABT3N22

laptop intel i5 core processor 2,600.00

N/A

2. 06/02/2014 1 Toshiba NPR1520 i3 core processor 1,300.00 N/A

3. 06/02/2014 1 dell 23ostro desktop i5 core

processor 1,050.00

N/A

4. 04/07/2013 1 Toyota Land Cruiser 51,291.00 N/A



7. 09/04/2014 1 Toyota Prado 57,282.00 N/A

8. 11/07/2013 2 Tiger Generator 500.00 N/A

9. 03/02/2014 1 generator ( KAMA 5KVA ) 1,300.00 N/A

Total 217,905.00

Table V: Assets not found

NO. DATE DESCRIPTION Amount In US$

1. 11/07/2013 2 Tiger Generator 500.00

2. 11/07/2013 2 Dell Inspiron 15 R Laptop 1,800.00

3. 11/07/2013 2 Canon Printer 750.00

4. 31/10/2013 1 Camera 225.00

Total 3,275.00

Table VI: Assets not coded

NO. DATE DESCRIPTION Amount In US$ CODE

1. 20/06/2013 1 Lockable glass

cabinet 525.00

N/A

2. 31/10/2013 1 Lenova Laptop 1,060.00 N/A

3. 31/10/2013 1 Camera 225.00 N/A

4. 06/02/2014 2 Ubiquiti

Pickostation 240.00

N/A

5. 06/02/2014 3 miktrotik SXT 5

HN 750.00

N/A

Total 2,800.00

2.3.2.5 Section 4.5.11 of the appraisal report of the Labor Based Public Works Project provides

that ten (10) set of labor based equipment comprising of 10 trailers, 10 pedestrian

rollers, 10 tractors and 12 tow graders be deliver by ILO to the Ministry of Public

Works. The PIU at the Ministry of Public Works presented the audit team a list of 10

pedestrian rollers, 5 tractors and 5 trailers leased out to contractors, however, the

audit team could not obtain any evidence that said assets were recorded in the Fixed

Asset Register. See table below



Table VII: Leased Equipment

Contractor Equipment

Description Serial No. QTY

Contract No, Road &

Location Duration Cost

Wonder

Incorporated

Roller

Compactor

Serial No.

110161204037

3 LBPWP 008

1 MPW/ADB/ADF/LBPWP/

RRLBM/LOT 1

Maryland County,

Boniken and Happer

Fishtown Road

( 2 Mths) April 16,

2014 to June 16,

2014

N/A

Salinco

Incorporated

Roller

Compactor

Agriculture

Tractor

Agriculture

trailer

Serial No.

110161204037

3 LBPWP 007

Serial No

31202173

LBPWP 007

N/A


RRLBM/LOT 1B

( 2 mths ) April

16, 2014 to June

16, 2014

N/A

EADECON

Liberia

Incorporated

Roller

compactor

Serial No

110161204037

9 LBPWP 007


RRLBM/LOT 1B

April 10, 2014 to

May 10 ,2014

N/A

Ma Mary &

Son

Construction

Company

Roller

Compactor

Serial No

110161204037

1 LBPWP 006


RRLBM/LOT 4B

April 10, 2014 to

May 10, 2014

N/A

WARNDEH

Inv estment

Corporation

Roller

compactor

Serial No

110161204037

9 LBPWP 001


RRLBM/LOT 1A

April 10 ,2014 to

June 10, 2014

N/A

Graceval

Construction

and

Associates

Incorporation

Roller

Compactor

Agriculture

Trailer

Agriculture

Tractor

Serial No

110161204037

9 LBPWP 001

Serial No

31202173

LBPWP 001


RRLBM/LOT 2A

(2 mths ) April 10,

2014 to June 10,

2014

N/A

Sustainable

Agriculture

Program for

Liberia

Roller

Compactor

Agriculture

Trailer

Agriculture

Tractor

Serial No

110161204037

3 LBPWP 001


RRLBM/LOT 4A Geeken

River Gee County

April 23,2014 to

May 23, 2014

N/A

Liberia peace

&

Development

Initiative

Roller

Compactor

Agriculture

Serial No

110161204037

8


RRLBM/LOT 2A

April 23, 2014 to

May 23, 2014

N/A



Contractor Equipment

Description Serial No. QTY

Contract No, Road &

Location Duration Cost

Trailer

Agriculture

Tractor

St Umah

International

services

company

(SUISCO )

Roller

Compactor

Agriculture

trailer

Agriculture

Tractor

Serial No

110161204037

9 LBPWP 004


RRLBM/LOT 3B

April 16, 2014 to

May 16, 2014

N/A

TECURD Roller

Compactor

1 N/A N/A N/A

Risk

2.3.2.6 Failure to properly maintain a Fixed Asset Register (FAR) may lead to the following:

Inconsistent procedures for fixed asset accounting, management, control and

accountability

No assurance that the PIU Management had adequately minimized risk to

asset through internal controls

No assurance for proper financial accounting and reporting in accordance with

the PFMU Financial Procedure Manual

Assets may be subservient to thief

2.3.2.7 Failure by the Assistant Project Accountant to review the accounting and maintenance

of the FAR may lead to:

The asset register may not be updated regularly.

Assets acquisition may not be recorded.

Fixed assets may be under or overstated.

Recommendation

2.3.2.8 The Head of the PFMU and the LBPWP Project Coordinator should ensure that the

PFMU Assistant Project Accountant (APA) and the responsible fixed assets clerk at the

project office adhere to the dictates of sections 8.2.3, 9.4.2 and 9.4.3 of the Financial

Procedure Manual in the accounting for fixed assets and the maintenance of the Fixed

Assets Register.

2.3.2.9 The PFMU Assistant Project Accountant and the responsible fixed assets clerk at the

project office must update the FAR to reflect the current balance of fixed assets of the

project.



2.3.2.10 The Senior Project Accountant should ensure that an extract of the fixed asset register

is attached to the annual financial statement of the project.

2.3.2.11 The APA should regularly review the FAR monthly or quarterly, which is more

convenient. The APA along with the fixed assets clerk should sign a hard copy of the

register printed on a ledger paper type.

2.3.2.12 The Senior Assistant Internal Auditor should investigate reason why assets recorded in

the Fixed Assets Register were not found.


2.3.2.13 Over the period, PFMU has ensured that Fixed Assets Register are maintained for

every project. Please see attached the Fixed Assets Register.


2.3.2.14 PFMU regularly carries out its review of Fixed Assets for each and every project as per

the Financial Procedures Manual. All Quarterly IFRs prepared for all Projects have Fixed

Assets per register. The Assets as mentioned not found are all still with the Project and

available for review. These Assets have already been turned over to the Ministry of

Public Works as agreed in the project document.

2.3.2.15 Also, PFMU will work with the Ministry of Public Works to ensure that all the assets

mentioned above are properly coded.


2.3.2.16 The physical verification exercise conducted by the GAC on October 9, 2015 revealed

that none of the assets mentioned above were coded. In the absence of assets being

coded by the project, it becomes challenging to prove ownership.

2.3.2.17 Also, the issue raised by the GAC was not the lack of a fixed asset register, but rather

deficiencies noted from the review of the fixed asset register in line with the PFMU

Financial Procedure Manual. Therefore, we maintain our recommendations.

APPRECIATION

2.3.2.18 We would like to express our appreciation for the courtesy accorded and assistance

rendered by the staff of the PIU at the MPW and PFMU during the audit.

Date post:	27-May-2020
Category:	Documents
Upload:	others
View:	3 times
Download:	0 times

Management Letter On the Labor Based Public …...2.1.2.2 During the conduct of the audit, the PFMU...

Documents