October 2007 Document of the World Bank Report No. 41041-AF Afghanistan Public Sector Accounting and Auditing Financial Management Unit South Asia Region A Comparison to International Standards Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
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October 2007
Document of the World BankR
eport No. 41041-A
F A
fghanistan Public Sector A
ccounting and Auditing
Report No. 41041-AF
AfghanistanPublic Sector Accounting and Auditing
Financial Management UnitSouth Asia Region
A Comparison to International StandardsPub
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ABBREVIATIONS AND ACRONYMS
ACCA ARTF ASOSAI CAO CGA CFO CIPFA IAASB IAS IASB IES IFAC IFRS INTOSAI IPSAS ISA PEFA PFEM PFM SA1 SOE SY UNDP
Association of Chartered Certified Accountants, United Kingdom Afghanistan Reconstruction Trust Fund Asian Organization of Supreme Audit Institutions Control and Audit Office Controller General o f Accounts Chief Financial Officer Chartered Institute o f Public Finance and Accountancy, United Kingdom International Auditing and Assurance Standards Board International Accounting Standard International Accounting Standards Board International Education Standards for Professional Accountants International Federation of Accountants International Financial Reporting Standard International Organization of Supreme Audit Institution International Public Sector Accounting Standard (of IFAC) International Standard on Auditing Public Expenditure and Financial Accountability Public Finance and Expenditure Management Public Financial Management Supreme Audit Institution State-Owned Enterprise Solar Year United Nations Development Program
... 111
Ac kn owledg men t s
This assessment o f accounting and auditing standards and practices in a public sector review was carried out in active collaboration with the Government o f Afghanistan and various stakeholders, particularly the offices o f the Auditor General and the Ministry o f Finance, and their advising consultants, Deloittes and Bearing Point. The review was conducted through a participatory process that involved these stakeholders, and an assessment report was provided to the Government.
The responses to issues raised by the diagnostic questionnaires were especially usehl, as were the reports and information available from the advising consultants and recent World Bank assessments o f public financial management. The team o f advisors and development partners also contributed greatly to the early stages o f the concept note and framework development, as well as the drafting o f earlier reports, for this study which covers the countries o f the South Asia Region: Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sr i Lanka.
The Afghanistan report also benefited from the comments o f i t s peer reviewers, Marius Koen, and Irene Ponniah, Senior Financial Management Specialists. Valuable comments were received also from Paul Sisk, Donna Thompson, and Stephane Guimbert. The Task Team was responsible for writing this report with general guidance from the advisors and the development partners who collaborated on this review program.
The draft report after a consultative workshop in Kabul on September 13, 2006 was provided to the Government for comment, and the comments have been considered in this country report.
Task Team P. K. Subramanian, Lead Financial Management Specialist Paul E. Sisk, Sr. Financial Management Specialist Kenneth 0. Okpara, Sr. Financial Management Specialist Manoj Agrawal, Sr. Financial Management Consultant Ronald Points, Lead Consultant, Accounting Michael Jacobs, Lead Consultant, Auditing
Review Program Advisors Simon Bradbury, Loans Department, World Bank David Goldsworthy, International Technical Cooperation Program, UK National
Noel Hepworth, Chartered Institute o f Public Finance and Accountancy, London Abdul Mudabbir Khan, Fiscal Affairs Department, International Monetary Fund Ian Mackintosh, Chairman, UK Accounting Standards Board Paul Sutcliffe, International Public Sector Accounting Standards Board, International
Audit Office
Federation o f Accountants
i v
Development Partner Collaborators David Biggs, UK Department for International Development Kathleen Moktan, Asian Development Bank
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Contents
Executive Summary .......................................................................................................... 1 I . Introduction .................................................................................................................. 1 I1 . Public Sector Accounting ............................................................................................ 3
A . Institutional Framework for Public Sector Accounting ............................................. 3 1 . Accounting Laws and Regulations ...................................................................................... 3 2 . Education and Training ...................................................................................................... 5 3 . Code of Ethics ..................................................................................................................... 6 4 . Public Sector Accountant Arrangements ............................................................................ 6
B . Accounting Standards as Practiced ............................................................................ 6 C . Assessment o f Accounting and Auditing in State-Owned Enterprises ...................... 7
I11 . Public Sector Auditing ............................................................................................... 8 A . Statutory Framework for Public Sector Auditing ...................................................... 8
2 . Setting Auditing Standards .................................................................................................. 9 I . Statutory Framework .......................................................................................................... 8
3 . Ensuring Independence ..................................................................................................... 10 4 . Qualijkations and Skills for the Auditors ........................................................................ 12 5 . Training ............................................................................................................................. 13 6 . Auditor Competence .......................................................................................................... 13 7 . Quality Assurance.. ........................................................................................................... 13
2 . Audit Supervision .............................................................................................................. 14 3 . Reviewing Internal Management Control Procedures ..................................................... 15 4 . Analyzing Financial Statements ....................................................................................... 15 5 . Reporting on Financial Statements ................................................................................... 15 6 . Reporting on Fraud ........................................................................................................... 16 7 . Reporting on Compliance ................................................................................................ 17
IV . Action Plans .............................................................................................................. 18 Annex A . Methodology of the Assessment.. ................................................................. 22
International Public Sector Accounting Standards ...................................................... 25 International Education Standards ............................................................................... 25 International Financial Reporting and International Accounting Standards .............. 26 INTOSAI Code of Ethics and Auditing Standards ........................................................ 27 International Standards on Auditing ............................................................................ 29
. .
B . Auditing Standards as Practiced .............................................................................. 14 1 . Audit Planning .................................................................................................................. 14
Annex B . Accounting and Auditing Standards ........................................................... 24
Annex C . Afghanistan Auditing and Accounting Legislation .................................... 30 Annex D . Benefits of Accrual Accounting ................................................................... 40 Annex E . PFM Reform Agenda .................................................................................... 43
Supplementary Table of Standards and Gaps ....... ; ..................................................... 47
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Executive Summary
1. This assessment o f public sector accounting and auditing i s generally meant to help implement more effective Public Financial Management (PFM) through better quality accounting, reporting and public audit processes in Afghanistan, and to provide greater stimulus for more cost-effective outcomes o f government spending. Annex A explains the methodology used for the assessment. Reporting i s a major outcome o f the public accounting process that provides an important basis for PFM accountability. More specific objectives are (a) to provide the country’s accounting and audit authorities and other interested stakeholders with a common strongly founded knowledge as to where local practices stand against the internationally developed norms o f accounting, financial reporting and auditing; (b) to assess the prevailing variances; (c) to chart paths for improving the accordance with international standards; and (d) to provide a continuing basis for measuring improvements. The adoption o f a firmly based accounting, reporting, and auditing framework i s a solid value proposition; the alternative i s a gross wastage o f public and donor funds. One o f the foremost challenges facing the adoption o f a clear-cut accounting, reporting, and auditing framework, i s the lack o f a program for ensuring sustainable national capacity development in Afghanistan. Unless this happens, Afghanistan w i l l remain excessively dependent on foreign expertise indefinitely, and be highly vulnerable to reductions in aid flows and external technical assistance. Capacity development will also require wider public administration reforms (recruitment, pay, human resources); organizational restructuring and improvements; and training; these are not the specific topics o f this assessment. Better management o f the massive amounts o f external technical assistance currently being injected into Afghanistan, i s also needed to ensure that the technical assistance supports longer-term national capacity development. Adequate implementation o f accounting and auditing, based on international standards i s crucial to underpin these PFM systems. Response by the Treasury on the draft country report found that the accounting aspects o f the Gap Analysis Report are accurate and useful, the options expressed are for the most part practical and can be implemented, and that in some cases the timing o f implementation depends on further development o f the environment in the country. The Auditor General responded that the audit aspects provided a valuable guide for setting the way forward and providing guidance on upgrading the operations o f the CAO to comply appropriately with international practice.
2. The World Bank has developed a general PFM reform agenda; insofar as this covers accounting and audit, it i s summarized in Annex E. This gap analysis report has taken note o f the action plan agreed by the Government o f Afghanistan. This i s especially noted in the continuing severe capacity constraints in the field o f accounting and auditing and the reliance placed on support from foreign consultants and advisors to sustain the existing PFM framework. The report also notes the urgent need for these consultants and advisors to work with Afghan counterparts, to build up their indigenous capacity to take over these functions eventually.
3. Adoption o f international standards for accounting and auditing provides the basis for competent financial reporting and transparency. The International Public Sector
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Accounting Standards Board (IPSASB) o f the International Federation o f Accountants (IFAC) has developed a core set o f accrual-based International Public Sector Accounting Standards (IPSAS) and also a comprehensive IPSAS on the cash basis o f accounting. These IPSAS establish an authoritative set o f independent international financial reporting standards for governments and others in public sector organizations. The study has taken the international standards as axiomatic with any acceptable options incorporated in the standards. The study has not assessed whether the country should adopt a limited version o f the standards, as the processes o f developing the standards have already considered any acceptable options that can be incorporated into the text o f the standards, but they do not override authoritative national standards issued by governments, regulatory or professional accounting bodies. Application o f IPSAS by national authorities will support developments in public sector financial reporting directed at improving decision making, financial management, and accountability and it wi l l be an integral element o f reforms directed at promoting social and economic development. The IPSASB has also developed guidance on the transition from cash- to accrual-based reporting. The traditional emphasis on cash accounting has been found inadequate through failure to recognize true costs, and all assets and liabilities. Cash accounting can too easily neglect asset management, accumulating arrears, future liabilities (e.g., pensions), and contingent liabilities (e.g., guarantees).
4. The desired actions indicated by the gap analysis assessment are summarized below.
5. Adopt International Public Sector Accounting Standards starting with the Cash Basis IPSAS as the basis for building in-country public sector financial management capacity expertise. With the adoption o f International Public Sector Accounting Standards (IPSAS), the Cash Basis IPSAS should be applied first with a longer-term program for subsequent implementation o f Accrual Basis IPSAS. The International Federation o f Accountants (IFAC) issues IPSAS. Annex B gives a general description o f IFAC and a listing o f the IPSAS. At the present time, Afghanistan does not comply with the Cash Basis IPSAS, Part 1, in i t s annual accounts. The Government o f Afghanistan should reformat the present cash basis o f reporting to conform to the Cash Basis IPSAS. Annex C gives current Afghanistan auditing and accounting legislations. Benefits from eventually adopting accrual reporting are set out in Annex D. In i ts response to the draft country paper, the Treasury noted that that the PFEM law specifically requires the application o f international accepted standards and principles but does not specify which standards are to be followed. The intentions o f the Treasury as the organization given the responsibility for information and reporting, i s to report Solar Year (SY)1385 (2006) and S Y 1386 (2007) on a cash basis according to Cash Basis IPSAS with the required supplemental schedules as well as other schedules as needed. The PFEML also requires the Ministry to provide a full accounting (auditable) o f all assets held by the State at the end o f the fiscal year. At this stage, an accounting o f identifiable assets with supportable values will be provided as a supplementary schedule. Considering the environment in Afghanistan, it will be several years before reliable information about State assets wi l l be available.
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6. Take steps to more effectively, involve local staff in the accounting and reporting processes, modernize reporting, and strengthen legislation. Computerization i s proceeding under the broad Public Administration and Capacity Building Program. The accounting advising consultant, Bearing Point, i s preparing most o f the financial reports and annual financial statements, but localization i s needed for sustainability. The Public Finance and Expenditure Management (PFEM) Law needs strong accountability arrangements, including the implementation o f a chief financial officer function. There i s a severe human resource constraint in accounting in Afghanistan. The Government needs to lead in developing a government accounting cadre from a critical mass o f professional accountants in Afghanistan.
Action needed to move towards international standards Standard Current starus
1. Does the Public Sector Accounting Law adopt IPSAS? 2. Does accounting education and training accord with IES?
3. Does the Code o f Ethics match
Yes.
No. The assistance from a professional distance-learning institution may be taken to build local training Relevant parts o f the IFAC Code No.
7. Increase efforts for bringing in professional accounting and auditing training to Afghanistan. As part o f the Public Administration and Capacity-Building Program, a training facility i s being created for accountants and auditors from the Ministry o f Finance and the Control and Audit Office under the Auditor General. These accountants and auditors are expected to undergo dedicated full-time basic accounting and auditing training followed by examination and certification. The Ministry o f Finance and the Auditor General should establish staff qualification requirements and make use o f these facilities by developing separate professionally qualified accountancy and auditing cadres. In response to the draft report, the Treasury advised that it i s planning to put into place in SY1386 (2007) an extensive staff and hiring program with educational and training standards for government accountants, and that the UK Association o f Chartered Certified Accountants program will be a valuable asset in training accountants who would be able to serve in the government as well as in private industry. The Treasury also advised that it i s essential that a professional accounting organization be formed by members o f the profession and supported by the Ministry o f Finance. This i s a longer term responsibility that should be coordinated with academic, professional and governmental individuals and supported by professional dues, governments and private enterprises.
8. Monitor more adequately the reporting for state-owned enterprises. Only a few state-owned enterprises produce annual accounts for audit. Regulation arrangements are needed for reporting for all f i r m s with some public ownership.
9. The Supplementary Table o f Standards and Gaps at the end o f this report provides a matrix detailing the accounting standards, the present position, and options for improvement. A summary o f the key accounting standards issues i s shown in Table ES 1.
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Standard
international standards? 4. I s there a body to prescribe public sector accounting standards?
5. Are the financial statements in accord with the IPSAS standard? 6. I s the statement o f cash receipts and payments in IPSAS form? 7. Are accounting policies and explanatory notes required? 8. Are other disclosures in accord with IPSAS? 9. Does the government issue a consolidated financial statement which consolidates al l controlled entities?
10. Adopt the IFAC-issued International Standards on Auditing (ISA) and the International Organization o f Supreme Audit Institutions (INTOSAI) Auditing Standards. The Control and Audit Office (CAO) o f Afghanistan has planned to adopt auditing standards that are developed on the basis o f the INTOSAI Auditing Standards. Implementation o f the CAO standards needs improvement. The application o f international standards on auditing would be improved by the preparation o f a more modem audit manual. This manual, which will be based on INTOSAI Auditing Standards, i s in the CAO development program. The application o f these standards requires adequate professional competence, organizational independence, and adequate resources and systems. The weak areas need the investment o f financial and human resources if staff ski l ls are to meet the required standards. (See Annex B for a general description o f INTOSAI and IFAC and a listing o f their respective auditing standards).
Action needed to move towards international standards Current status
should be adopted. Law specifies international standards.
No.
No.
No.
No.
No.
Use the IPSAS reporting format.
Use the IPSAS reporting format.
Use the IPSAS reporting format.
U s e the IPSAS reporting format.
Not feasible in the short term.
11. Institute a new National Audit Act. A new National Audit Act supported by the Constitution i s needed to support an independent audit office. A new National Audit Act i s needed to provide greater discretion to the Control and Audit Office in the areas o f financing and personnel policies. Audit recommendations and observations go unheeded in too many instances. The application o f audit findings needs to be greatly improved through a mix o f strategies. Greater transparency through more interaction with the media, along with more focused and effective report writing and report follow-up processes would increase the incentives for auditees to take action on audit findings. The long-standing Control and Audit Law provides for an Audit and Control Department (more generally called the Control and Audit Office) to organize the audit and control affairs o f public properties. An adequate audit law should remove the control elements o f the current laws as they are inconsistent with the role o f a modern audit office. This would mean properly establishing the position o f Auditor General and i ts office thus allowing it to carry out a full range o f audits, including the audit o f the performance o f the budget and the annual accounts o f all
There i s a need to improve audit impact.
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levels o f government and state-owned enterprises. A change to the Constitution should include establishing the Auditor General as a constitutional office.
12. Implement the 2004-2009 Strategic Development Plan. The Strategic Development Plan provides an effective development path and an in-house method o f monitoring progress. The Auditor General has been allocated an advisor who should be entrusted with developing an appropriate program for implementing the Auditor General's Strategic Development Plan and fulfill further development needs. For example, the Control and Audit Office should contract with private sector auditors who could concentrate on conducting the audits o f World Bank projects and funds, which would improve government audits.
13. The Supplementary Table o f Standards and Gaps at the end o f this report shows the present position for each component o f the standards, and the options for improvements that would bring Afghanistan into closer conformance with the international standards. A summary o f auditing standards issues i s shown in Table ES2 below.
14. Monitor accounting and audit impact under current programs. The use o f PFM- indicators surveys, suitably extended in detail, would provide a comprehensive basis for monitoring progress in adopting and applying international standards in accounting and auditing. In the absence of, or the delay in preparing, such a survey, improvements in accounting and audit impact should be measured over the next few years by monitoring the progress o f strengthening current programs for the Ministry o f Finance and the Office o f the Auditor General.
Table ES2.
standards been adopted?
' Guidance i s provided by two model laws: (1) a general prescription o f a Model Law developed by the UNDP Program for Accountability and Transparency (PACT) and (2) A Model National Audit Ofice Act, The Association o f Chartered Certified Accountants, UK, 2004
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Standard
auditors conform to INTOSAI and IES?
Action needed to move towards international standards
distance-learning institution may be taken
Current status
8. I s the SA1 equipped with the audit methods and technologies to meet the INTOSAI standards? 9. Does the SA1 have the quality
Yes.
to build local training. The Strategic Development Plan w i l l be o f assistance, but additional resources w i l l be needed. The Strategic Development Plan w i l l
No.
No.
No.
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introduce the process:
A new manual o f audit procedures and
- complied with? 12 Does the auditor prepare an audit opinion on the financial statements in a form that matches international standards? 13. Does the consideration o f fi-aud and error in an audit o f financial statements accord wi th international standards? 14. A r e the Auditor General’s reports made public? 15. I s the process for taking action on audit recommendations sufficiently inadequate. effective to meet international standards?
Yes.
Yes.
No.
Follow up i s
The Audit Law should arrange for reports to be tabled and made public when tabled. Stronger scrutiny processes are needed.
1. Introduction
1. This assessment o f public sector accounting and auditing i s generally meant to help implement more effective public financial management (PFM) through better quality accounting and public audit processes in Afghanistan and to provide greater stimulus for more cost-effective outcomes o f government spending. More specific objectives are (a) to provide the country’s accounting and audit authorities and other interested stakeholders with a common firmly based knowledge as to where local practices stand in accordance with international standards o f financial reporting and auditing; (b) to assess the prevailing variances; (c) to chart paths for improving the accordance with international standards; and (d) to provide a continuing basis for measuring improvements.
2. As part o f the general support program in South Asia for assessment and improvement o f public sector accounting and auditing, the World Bank, with the cooperation o f member governments, i s conducting a Review o f Public Sector Accounting and Auditing Practices in member countries. In conducting this assessment, a set o f diagnostic questionnaires [developed to be consistent with the context o f the PFM Performance Measurement Framework’ used by the Public Expenditure and Financial Accountability (PEFA) Program3] was used to gather substantial insight into country performance with regard to the PFM indicators relating to external auditing and financial statement reporting. Annex A discusses the methodology used for conducting the assessment in this report.
3. The diagnostic questionnaires were used to gather information on the prevalent national standards and practices for accounting, financial reporting, and auditing in the general government sector and in the state-owned enterprise (SOE) sector. Conducted in cooperation with country authorities, the diagnostic questionnaires incorporate the principles contained in the public sector accounting and auditing standards promulgated by International Organization o f Supreme Audit Institutions (INTOSAI) and International Federation o f Accountants (IFAC). Annex B summarizes the international frameworks that were used in this assessment. The responses to these questionnaires stimulated further discussions among the World Bank team and country authorities. These discussions examined accounts, financial statements, audit reports, and working papers as a means to explore the quality o f processes and products.
‘ The PFM Performance Measurement Framework has been developed as a contribution to the collective efforts o f many stakeholders to assess and develop essential PFM systems, by providing a common pool of information for measurement and monitoring of PFM performance progress, and a common platform for dialogue. The PEFA Program i s a partnership among the World Bank, the European Commission, the UK Department for International Development, the Swiss State Secretariat for Economic Affairs, the French Ministry of Foreign Affairs, the Royal Norwegian Ministry o f Foreign Affairs, the International Monetary Fund, and the Strategic Partnership with Africa. A Steering Committee, comprising members of these agencies, manages the Program. A Secretariat i s located at the World Bank in Washington, DC.
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4. The Emergency Public Administration Project, established in 2002 with the World Bank, provided support to Afghanistan while degraded financial management institutions were reconstructed. An advising consultant assisted the Control and Audit Office to audit the budgets from Solar Year (SY) 1381 (2002) and the donor funds. Another advising consultant helped to set up and operate the accounting and reporting system in cooperation with the Ministry o f Finance.
5. With redeveloped capacities and reformed institutions, attention should turn to more focused capacity building and localization o f core government functions. The basic needs for supplies, equipment, and salaries require continued attention in the accounting and auditing institutions. Added to the l i s t i s the provision o f expert technical assistance for training and support in adopting modern accounting and auditing methods. With the assistance o f long-term consultancies and in association with donor agencies, Afghanistan continues to address reforms in the accounting and auditing fields.
6. The World Bank has been assisting Afghanistan in adopting IFAC-issued International Public Sector Accounting Standards (IPSAS) and INTOSAI Auditing Standards in the following ways:
Financial management reporting capacity i s being strengthened in l ine ministries and the Ministry o f Finance, but currently with very extensive support from consulting f i rms. A computerized accounting system has been implemented to assist with financial reporting in conformity with international standards and i s being progressively extended. Audit work has been re-ordered around evidence-based opinions in l ine with INTOSAI Auditing Standards but with extensive support from advising consulting f i r m s for the audit o f the Afghanistan Reconstruction Trust Fund (ARTF) and various World Bank projects. The Auditor General has been auditing ministries as entities and expressing an audit disclaimer opinion on the annual State accounts because o f major reconciliation and records deficiencies. Further development i s needed for this to be conducted as required by the INTOSAI Auditing Standards. A systems and risk-based audit manual needs to be developed that wi l l enable the Control and Audit Office to audit more effectively.
7. There needs to be a more comprehensive plan for Afghanistan to adopt the Cash Basis IPSAS in the short- to medium-term as part o f a long-term program to adopt accrual-based IPSAS reporting for each government entity. There needs to be a plan for the Control and Audit Office to adopt the IFAC-issued International Standards on Auditing (ISA), as well as the higher-level INTOSAI Auditing Standards in i t s day-to- day auditing work.
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II. Public Sector Accounting
A. Institutional Framework for Public Sector Accounting
8. The institutional framework should include adherence to international accounting standards and use o f qualified accounting staff to provide timely, relevant, and reliable financial information that i s needed to support all fiscal and budget management, decision-making, and reporting processes. The diagnostic questionnaires that were used in this assessment have collected information on the current arrangements and the apparent gaps in Afghanistan for accounting laws and regulations; education and training o f public sector accountants; application o f a code o f conduct; and numbers and characteristics o f public sector accountants.
1. Accounting Laws and Regulations
9. Afghanistan accounting laws and regulations should endorse the specific use o f international accounting standards. Satisfactory legislative arrangements are in place with respect to accounting and the use o f international accounting standards. Implementation o f a new finance law i s underway. The 2005 Public Finance and Expenditure Management (PFEM) Law i s based on Art icle 75, paragraph 4, o f the Constitution. The PFEM Law covers the management o f financial affairs; protection o f public assets; preparation o f budget; and the management of, and reporting on, public expenditure o f the state administrations inside and outside Afghanistan. Under the Law, transactions are to be recorded according to budget classification and accounting rules compliant with internationally accepted standards and principles. The regulations should do more to identify the specific standards.
10. The integrated financial management system should be run by the Ministry of Finance with the assistance of consultancies. Computerization i s proceeding under the broad Public Administration and Capacity Building Program; the advising consulting firm i s doing most o f the reporting work within the Treasury located in the Ministry o f Finance. The accounting package and systems in place are to be enhanced to provide the functionality and geographic spread required to meet the needs o f the PFEM Law. There needs to be a concurrent program to strengthen the capacity o f the Ministry o f Finance staff to run the system and prepare the accounts and reports.
11. Afghanistan should adopt the Cash Basis IPSAS. The IFAC Public Sector Committee recognizes the right o f governments and national standard-setters to establish guidelines and accounting standards for financial reporting. The Public Sector Committee considers the Cash Basis IPSAS to be an important step forward in improving the consistency and comparability o f financial reporting and encourages i t s adoption. The PFEM Law i s not explicit about the application o f IPSAS but i s explicit about the use o f international accounting standards. Various articles o f the
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PFEM L a w refer to revenue and expenditure, and assets and liabilities items that should be accounted. The Treasury staff and consulting advisors, Bearing Point, consider that presentation o f accounts in accordance with Cash Basis IPSAS could be achieved with current systems. I t i s recommended that this be done. To enhance this, notes should be used for those accrual requirements o f the PFEM Law where accounting information i s available. As the functionality o f the accounting system i s rolled out, elements o f accrual basis o f reporting can be considered.
Requirements
Financial statements presented in the IPSAS
Statement o f cash receipts and payments
Accounting policies and explanatory notes
General considerations
12. Table 1 identifies the current position and the steps required if the Cash Basis IPSAS are to be adopted.
Current Activity required to adopt position Cash Basis IPSAS
No Format can be followed
Yes
N o Can be supplied
N o Can be supplied
Correction o f errors disclosed No
Reporting period Adequacy o f information about the entity
Can be supplied
l l
Comparative information restated
Consolidated financial statements
Treatment o f foreign currency cash receipts, payments, and balances in compliance with IPSAS
I Presentation o f comparative information I I I
N o
N o
Not practical in the short-term
Not practical in the short-term
0 Nature o f error 0 Amount o f correction I I
13. T o enhance the reliability of annual accounts within the government, accounting, reporting systems, and staffing need to be improved. For the last two years, the Control and Audit Office conducted audits o f annual government accounts. The audit opinions have been disclaimed because the auditors were dissatisfied with the degree o f consistency o f the annual accounts with other records. Ministries do not have the capacity to accept responsibility and enforce accountability on accounting matters. This capacity is important for budget execution and for general accountability arrangements. The accountability chain must be clear; designated individuals must hold positions o f responsibility for the internal control system. The PFEM L a w provides for this action to become effective if enforced by Ministry o f Finance.
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14. In the longer term, the Government o f Afghanistan can be assisted in the transition from Cash Basis IPSAS to the Accrual-based IPSAS by utilizing IFAC g~idance.~ The guide has four main parts:
0 Introduction. Chapters 1-3 address general planning and project management issues. General Financial Reporting Issues. Chapters 4 and 5 deal with the selection, development, and approval o f accounting policies and issues associated with the definition and identification o f reporting entities. Financial Elements. Chapters 6-8 outline the broad steps required for the identification, recognition, measurement, and disclosure o f assets, liabilities, revenues, and expenses. The broad approaches discussed could be adapted and applied to particular items.
0 Specific Topics. Chapters 9- 15 highlight implementation issues associated with four specific accrual IPSAS, and provide guidance in relation to a selection o f topics not addressed, or only partially addressed, by existing IPSAS.
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2. Education and Training
15. Current recruitment and training of government accountants does not provide satisfactory s k i l l s and the necessary professional accounting cadre. There i s an urgent need to develop a critical mass o f professional accountants in Afghanistan. The Government o f Afghanistan must take the lead with i t s own accounting service. I t i s important that accounting staff be adequately skilled at their work. The recruitment and training arrangements should provide for this in the most efficient and effective manner. Accounting and audit specialist recruitment should require more relevant academic training and practical experience. The Auditor General recognizes that training needs to be better coordinated to meet the needs o f government accountants. As part o f the Public Administration and Capacity Building Program, a training facility i s being created for accountants and auditors from the Ministry o f Finance and the Control and Audit Office. These accountants and auditors are expected to undergo dedicated full-time basic accounting and auditing training followed by examination and certification. This i s a realistic initiative and the Ministry o f Finance should establish educational and training standards for government accountants; similarly the Auditor General should do this for auditors.
16. A phased and progressive education and training program combined with practical experience i s needed. A sustainable and effective system o f public financial management and public audit can only be brought about by developing and promoting an accounting culture, which can receive impetus by the creation and promotion o f a critical mass o f accounting professionals in Afghanistan. As part o f the curricula for the training facility planned under the
Transition to the Accrual Basis o f Accounting: Guidance for Governments and Government Entities, International Federation o f Accountants, Public Sector Committee Study 14, December 2003.
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Public Administration and Capacity Building Program, the Ministry o f Finance and the Auditor General should establish training requirements and training programs for their respective accounting and auditing staff. The training facility also provides a recognized institution where existing accounting and auditing staff can come together for networking and continued professional development. New graduates can be inducted and provided formal accountancy education at both technical and professional levels. In due course, a body o f continuously well- trained professionals will provide service to various government agencies in al l facets o f accounting and auditing. For longer-term, high-level support for the proposed government accounting training, distance-learning programs could be used. Two distance-learning programs from the United Kingdom are offered by the Association o f Chartered Certified Accountants (ACCA) and the Chartered Institute o f Public Finance and Accountancy (CIPFA).
3. Code of Ethics
17. A code of ethics based on the IFAC Code of Ethics for Professional Accountants i s needed. A code o f ethics for accountants based on the fundamental principles o f the IFAC-issued Code o f Ethics for Professional Accounts should be implemented and observed. There should be arrangements to ensure that accountants confirm on a regular basis that they are operating in accordance with the code. The Control and Audit Office has already adopted such a code. The Treasury indicated that the requirement o f adherence to a professional code o f ethnics for public and private sector accountants should primarily be promulgated by a professional accounting and auditing organization whose principles are adopted or agreed to by the Ministry o f Finance.
4. Public Sector Accountant Arrangements
18. The Chief Financial Officer (CFO) function needs development. For each public sector body that prepares annual accounts, there should be a responsible CFO function for maintaining systems o f internal financial controls that manage risks and for preparing the accounts for signature by the chief accounting officer. Ar t ic le 7 o f the PFEM Law gives the Treasury o f the Ministry o f Finance broad treasury and accounting responsibilities and authority, but it does not provide for a CFO function.The Ministry o f Finance should establish regulations for CFO functions in the executive government departments. It i s important that proper segregation o f duties i s incorporated in the design and evolution o f the PFM systems. The Treasury agreed with the proposals in this report noting that implementation o f this program wi l l be a longer term objective given the present environment in Afghanistan.
B. Accounting Standards as Practiced
19. The diagnostic questionnaires collected information on the current arrangements and the apparent gaps in Afghanistan for setting public sector
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accounting standards and for presenting financial reports. Out o f this exercise came recommended activities that will help to bring local current standarddpractices in l ine with international standards.
20. Adequate implementation arrangements are needed for setting accounting standards for the public sector. The PFEM Law requires the use o f international standards and gives responsibility to the Ministry o f Finance. Under PFEM Law, Article 7, the Treasury o f the Ministry o f Finance maintains its general-ledger by recording transactions according to budget classifications and accounting rules which are compliant with internationally accepted standards and principles. The Ministry also publishes a final budget reconciliation report and a set o f audited financial statements covering revenue, expenditure, assets, and liabilities in accordance with international standards. There is a need to create a regulatory body for dealing with interpretation and monitoring o f the application o f accounting and auditing standards for the public and private sectors. This i s a longer-term prospect in Afghanistan, but the Ministry o f Finance should be the body responsible for making the arrangements when conditions allow and in the interim should undertake the function itself.
c. Assessment of Accounting and Auditing in State-Owned Enterprises
21. The State-Owned Enterprises (SOE) Law provides for audit by the Ministry of Finance and for annual balance reports. There are about 100 state-owned enterprises in existence in Afghanistan, but many are not functioning at all, or not functioning in the way intended. The Control and Audit Office carries out transaction checks on the budget expenditures o f the state-owned enterprises and also audits the annual accounts. Only a few state- owned enterprises produce annual income and expenditure accounts and balance sheets accounts for audit. A more rigorous review o f the desirable reporting and monitoring processes for the state-owned enterprises and an updating o f the SOE L a w i s needed so that state-owned enterprises report according to international reporting standards.
22. A Financial Reporting Council should be established to regulate commercial government authorities. Action is needed to require state- owned enterprises to amend their accounts in accordance with audit findings, so that true and fair accounts may be issued for general public scrutiny within a stipulated period, consistent with that o f listed enterprises. One approach would be to establish a Financial Reporting Council that would be responsible for adoption, monitoring, and enforcement o f international accounting and auditing standards with respect to financial reporting by the public interest entities.
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111. Public Sector Auditing
A. Statutory Framework for Public Sector Auditing
23. Effective scrutiny by the legislature to ensure efficient implementation o f fiscal and expenditure policies should comprise comprehensive, competent, external audits that are underpinned by international standards on a ~ d i t i n g . ~ The environment for an effective Supreme Audit Institution (SAI) requires a comprehensive approach to public financial management (PFM). Supreme audit institutions are not stand-alone institutions. They are part o f a P F M architecture that includes budgeting, accounting, internal control, audit and legislative oversight, and government response. Improving the way the supreme audit institution functions i s integral to providing information for improving the overall P F M system. But the action must be within the executive branch, yet under the watchful eyes o f the legislature and the public. A strong demand for good public sector external auditing i s necessary, for the supreme audit institution to be able to make an impact. This requires willingness o n the part o f the executive branch, to accept and respond to external scrutiny over its management o f funds, and to ensure that corrective action i s taken. It also requires public presentation o f the audit reports to secure public support for effective action. All o f these requirements are covered by the I N T O S A I and I F A C standards. These international auditing standards should be adopted by the Auditor General.
24. The diagnostic questionnaires facilitated the collection o f information describing current arrangements and the apparent gaps in the country in the fol lowing areas:
Institutional framework for the supreme audit institution, Process for setting auditing standards, Use o f code o f ethics or conduct, Arrangements to ensure accountability in the supreme audit institution, Arrangements to ensure independence, Arrangements to ensure adequate sk i l ls and qualifications o f the auditors, Arrangement for providing training, Arrangements to ensure auditor competence, Arrangements for quality assurance.
Those areas with significant scope for improvement are discussed below.
1. Statutory Framework
25. The draft National Audit Act should be finalized and legislated. A draft National Audit Act has been under preparation in the Control and Audit Office for some time. The new National Audit A c t will in effect include the following actions: removing the control
~~
Scope, qualify, andfollow-up of external audit i s performance indicator No. 26 in the PFM performance measurement framework supported by the Bank and other development agencies.
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elements o f the current laws; properly establishing the Auditor General and hisher office; and requiring the audit office to carry out a full range o f audits, including the audit o f the performance o f the budget and the annual accounts o f all levels o f government and the state-owned enterprises. The Auditor General advised in July 2007 that after consultation, final changes to the draft had been provided to the legislation directorate o f the Ministry o f Justice for further process.
26. The new National Audit Act, which provides for a modern audit function, should be supported by the Constitution. Simultaneously with the enactment o f the new National Audit Act, a Constitutional amendment should be made to ensure the statutory independence o f the Auditor General. The Constitution should include clauses establishing an Auditor General. The long-standing Control and Audit Law (Annex C) provides for the General Department o f Audit and Control to organize the audit and control affairs o f public properties. This Department has been administratively converted into the Control and Audit Office headed by the Auditor General. The Auditor General i s appointed by Presidential Decree. The PFEM Law governs certification audit o f the annual government accounts but does not specifically name the Auditor General as the auditor. The Auditor General noted that he i s not able to sponsor a change to the constitution at this stage. The Action Plan in Part IV notes that i t i s important that this be done when practicable.
27. The Control and Audit Office should contract the audits of World Bank projects and funds to private sector auditors and disengage from control work. Current audit agent arrangements should be refined so that agents conduct non-governmental audits and the Auditor General conducts a full range o f government audits. The control work should be the responsibility o f internal audit. The current CAO role in managing domestic auditors should be transferred to the internal audit regime. The Auditor General has been allocated an advisor who should be given the task o f developing an appropriate program to implement the Auditor General’s Strategic Development Plan. The CAO noted the training value provided by the World Bank audits and that some policy analysis i s required in conjunction with other agencies to realign or affirm roles in respect o f control work. In respect o f the loss o f training opportunities afforded by the World Bank projects, the Strategic Development Plan for the Control and Audit Office at paragraph 38 i s to include a proposed training program, which would take into consideration any necessary alternatives.
2. Setting Auditing Standards
28. The new National Audit Act should adopt International Standards on Auditing. The Control and Audit Office has adopted INTOSAI Auditing Standards. However, these standards are too general for adequate guidance. The IFAC-issued International Standards on Auditing are needed for providing effective guidance to improve the audit work by the staff. The International Audit and Assurance Standards Board (IAASB), part o f IFAC, i s progressively rolling out International Standards on Auditing. The INTOSAI i s moving from maintaining i t s own auditing standards toward supporting IAASB in the development o f i t s auditing standards, in particular, so that the IFAC/IAASB International Standards on Auditing appropriately reflect the interests o f the international
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public sector audit community. The C A O noted that the revision to the audit act will aff irm the adoption o f International Standards for Auditing. It i s already affirmed in the Strategic Development Plan for the CAO.
29. The I F A U I A A S B International Standards o n Auditing represent best international practices for the auditing profession, particularly in areas o f fundamental auditing practice such as:
audit evidence, documentation, audit materiality, fraud, audit errors, audit opinions, audit planning, control environment assessments, and supervising the work o f audit staff.
30. Afghanistan will benefit from the adoption of the more comprehensive International Standards on Auditing issued by the IAASB to supplement the INTOSAI Auditing Standards. With this in mind, it i s generally recognized that INTOSAI Auditing Standards need the underpinning support o f the more detailed IFACAAASB International Standards on Auditing. With the decision by INTOSAI to adopt IFAC/IAASB standards and to prepare public sector practice notes, where necessary, to support each o f these standards, the way i s open for Afghanistan to use the more comprehensive I F A U I A A S B International Standards on Auditing to guide its work. This move i s quite appropriate as Afghanistan i s a member o f INTOSAI and i t s regional group, the Asian Organization o f Supreme Audit Institutions (ASOSAI).
3. Ensuring Independence
3 1. The new National Audit Act i s needed to provide effective independence. All o f the core principles o f SA1 independence that were set out by INTOSAI are only partially, if at all, met by the current legislative and administrative framework. These principles include:
unrestricted access to information;
the existence and de facto application o f an appropriate and effective constitutional and legal framework; the independence o f the SA1 Head, including security o f tenure and legal immunity in the normal discharge o f duties; a sufficiently broad mandate and full discretion in the discharge o f SA1 functions;
the obligation to report to the legislature on their work;
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0 financial and managerial autonomy and the availability o f appropriate human, material, and monetary resources;
0 the freedom to decide on the content and timing o f their reports and to publish and disseminate them; and
0 existence o f effective follow-up mechanisms on SA1 recommendations.
32. M o r e statutorily independent arrangements for staffing and for establishing the budget should be legislated. The CAO officers and staff are under the administrative control o f the Finance Division o f the Ministry o f Finance, which controls the appointment, promotion, and disciplinary action for CAO employees.The CAO independence, as upheld in the Constitution, has been jeopardized by this administrative practice. The Control and Audit Office should be separated from the executive branch o f the Government and connected with the Parliament. The Auditor General should be vested with more financial powers. Also, as practiced in other ministries, the annual budget o f the Control and Audit Office needs to be considered and approved by the Ministry o f Finance. The more preferable arrangements would be for a Parliamentary Committee to consider the CAO budget and audit plans prior to approval by the Parliament. In response to the draft report the Auditor General advised that CAO i s now an independent budgetary unit and i s responsible for i t s own staffing arrangements. This will be reinforced by the proposed legislative changes.
33. Implementation of the new National Audit Act should give the Control and Audit Office the independence, mandate, powers, protections, scrutiny, support, and organizational arrangements of a modern supreme audit institution. To achieve this institutional quality, there i s a need to ensure: (a) the supply o f equipment and facilities for operating in accordance with a modern audit manual; (b) the continued development o f CAO auditing capacities o f financial statements; (c) the re-design o f audit approaches for CAO regularity auditing o f the implementation o f the budget; (d) the introduction o f performance auditing to improve the efficiency and client service o f government programs; (e) training o f CAO staff in audit techniques; (f) modification o f CAO management procedures to ensure accountable performance by i t s staff and i t s managers; and (g) the re-development o f the audit review processes by ministries and by committees o f the new Assembly.
34. Legislation should provide an environment in which the quantity and quality of resources, including staff salaries, are adequate for the usual SA1 regularity and performance audit mandate. The Control and Audit Office i s included in the Priority Reform and Restructuring Program within the framework o f salary restructuring already granted by the President to the Control and Audit Office. The Control and Audit Office should have i t s own budget separate from the Department o f Administrative Affairs. The budget has to be adequate for the Control and Audit Office to do the job that it has been given. Currently the scope o f the CAO audit i s narrowly focused. Supreme audit institutions normally conduct performance audits on overall financial management performance issues o f state bodies; this i s an important type o f audit for the development o f Afghanistan and it i s not being serviced.
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35. Legislation should provide an environment in which the Auditor General i s free to arrange for appropriate involvement with the media on audit reports. The audit reports should be discussed with the media to ensure that audit findings are not misunderstood. The C A O noted that it will have the authority to brief the media on the results o f audits once they have been appropriately referred to a parliamentary commission for consideration.
36. Improved Public Accounts Committees and departmental administrative processes are needed for following up audit reports.6 Article 60 o f the PFEM Law provides that the Government shall report to the National Assembly o n decisions taken pursuant to the audit and control report. The Control and Audit Office noted in the report on the SY1383 (2004) accounts that there were substantial pending issues from the previous SY1382 (2003) and SY1381 (2002) audit reports. Fol low up has been inadequate, and the Public Accounts Committee (or Commission) needs to give close attention to ensuring that the issues raised by audit reports are dealt with properly. The C A O advised in response to the draft report that the National Assembly has appointed a commission under the name o f financial and budget commission. Presentations have been made through the Parliamentary Affairs Ministry to the Parliament and to members o f the Finance and Budget Commission. Material has been prepared on training the members o f the Commission and its support staff. The PFEM L a w provides for the Auditor General to recommend fines. To some degree, improved audit methodology and report writing skills will help, but the fundamental processes for scrutiny need reform. In the longer term, Audit Committees and corporate governance arrangements for departments and agencies need to be reformed along with improvements to the audit processes. Better protocols may be useful between the Auditor General and departments to ensure access, and minimize disruption in the functioning o f the departments. In addition, better protocols would help ensure that draft audit reports are reviewed quickly by departments for accuracy and fairness. The protocols also would ensure that the Control and Audit Office and departments, as far as possible, reach an agreement on reports before they are made public. Similar protocols are needed between Parliament and the Control and Audit Office covering, for example, how audit reports will be handled.
4. Qualifications and Skills for the Auditors
37. When being recruited for the Control and Audit Office, qualified candidates should preferably (and where practicable) have an accounting degree. The current recruitment criteria for C A O financial auditors give attention to accounting qualifications. Graduates with modern accounting educational backgrounds are generally unavailable in the Control and Audit Office. Many new recruits have law or political science degrees and require additional professional training if expected to undertake certification audits, an unnecessary step if accounting graduates with proper training could have been hired from the start. The current C A O staff members are not
Legislative scrutiny of external audit reports i s performance indicator No. 28 in the PFM performance measurement framework supported by the World Bank and other development agencies
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well-qualified in accounting and need to be provided with audit, legal, book-keeping, and accounting training. The Control and Audit Office should be able to set up a modern audit methodology with associated audit manuals, rules, regulations, working practices, and procedures. This l ist should be included in the assistance over the next few years as part o f the overall C A O Strategic Development Plan. In response to the draft report the C A O agreed with the recommendations, but accounting and auditing training needs to be carried out in-house until USAID and other initiatives produce a range o f suitable candidates.
5. Training
38. The Control and Audit Office should operate a continuing professional development program for accounting and audit staff. The Strategic Development Plan for the Control and Audit Office includes a proposed training program which needs to be well-implemented.
6. Auditor Competence
39. I t i s necessary to strengthen the technical and professional competence of the Control and Audit Office and improve its operational capacity to produce and disseminate quality audit reports that meet international standards and serve the needs of the stakeholders. The Control and Audit Office has historically concentrated on the compliance audits needed to support proper execution o f the budget. It now needs to improve resources and training to build in-house capacity for financial, performance, forensic, environmental, and information technology audits. I t is not sensible to offer the excuse that Afghanistan i s short o f expertise and deny the Control and Audit Office the opportunity to build these needed skills and functions. The Control and Audit Office needs to create a core group o f professional accountants for the certification o f public accounts. Substantially enhanced technology support i s needed, both in hardware and software. Additional computers will be useful for improved audit working papers, audit analysis, and reporting as computer-technology training develops staff competence. Resources for field-work are l imited and a development program needs to consider the needs. The Strategic Development Plan includes major elements that will strengthen competence but not increase the resources available.
7. Quality Assurance
40. Improved structures and indexing o f more comprehensive audit working papers would help audit supervisors to ensure that audits meet specified standards of quality. A robust quality assurance regime needs to be in place and operating effectively. Such a process should ensure that audit reports are systematically reviewed for quality by l ine managers before being released. There should be a subsequent internal independent review process-operating on a sample basis-to ensure that the work o f a l l auditors i s reviewed regularly. Such a system can be further enhanced through the use o f external reviewers. The Strategic Development Plan provides for developing a more formal process o f quality assurance within the structure o f revised audit methodologies.
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B. Auditing Standards as Practiced
41. The diagnostic questionnaires facilitated the collection o f information about the current arrangements for the audit methodology and the apparent gaps in the country in the following areas:
audit planning, audit supervision, reviewing internal controls, reviewing compliance with laws, ensuring adequate audit evidence i s collected, analyzing whether the financial statements accord with accounting standards, preparing audit opinions, reporting on fraud, and reporting on compliance.
Out o f this exercise came recommended activities that will help bring local standards in l ine with international standards.
7. Audit Planning
42. The new audit methodology should introduce more comprehensive planning requirements. The 2004-2009 Strategic Development Plan includes a technical assistance project which needs to be staged in accordance with absorptive capacity and priorities for feasible audit programs. An overall audit work program needs to be developed in accordance with the control risks and weak capacities. The Strategic Development Plan states the following:
We aim to provide Parliament, Government, Afghan society, and, where necessary, the international community, with good quality information and assurance on the financial control o f State resources and the activities o f public administration. This will build confidence in the controls over public money, financial accountability, and safeguarding public assets by making the management o f public money more transparent for citizens and, ultimately, the Parliament o f Afghanistan.
The overall audit work program must be directed to achieving these aims.
2. Audit Supervision
43. A more comprehensively structured working paper system i s needed to attain the normal audit objectives regarding the validity of transactions. Current supervision i s hampered by inadequate working paper systems and an outdated audit methodology. A training course for 50 staff members over the period April to August 2003, covering INTOSAI Auditing Standards, was intended to lead to the designing o f new audit methodologies and practices, based on the Audit Implementing Guidelines prepared by INTOSAI. The new audit methodologies and practices, including
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.
appropriate supervision arrangements, should be included in a new modern audit methodology manual.
3. Reviewing Internal Management Control Procedures
44. Introduce a modern audit methodology manual that includes an audit risk model. Current control audits are strongly linked to examine accordance with regulations. Few certification audits are undertaken. For the audit o f the annual accounts required by the PFEM Law, certification audit procedures should be included in a new manual o f audit methodology. In addition, the audit methodology manual should clearly outline the following points:
audit confidence level; requirements for audit planning, audit work papers, and audit reporting; how audit materiality i s determined and what i s an acceptable level o f audit risk and confidence; and how to develop an appropriate mix o f audit work to address the audit risks.
The audit should be completed by a process which covers how audit errors are summarized and evaluated against audit materiality.
4. Analyzing Financial Statements
45. Auditors need to be able to rely on better accounting data and systems so as to be able to form a reliable audit opinion. The accounting data for the annual government accounts i s inadequate for producing a valid audit. There are too many scope limitations because o f inadequate records and security barriers to access by auditors (most provinces cannot be visited). Similarly there have been limitations on the testing that the advising consulting firm, Deloittes, has done for the donor funds.
5. Reporting on Financial Statements
46. Auditors need to improve reporting by using opinions expressed in terms of international standards on auditing. The infrastructure for financial reporting on the budget and review o f audit reports has not yet been fully established. Government accounts for SY1383 (2004) were audited by the Control and Audit Office. The advising consulting firm to the Control and Audit Office did not assist with this audit, apparently because the accounting records were in the local language. The Control and Audit Office was concerned that there were large discrepancies between the accounts and other records, and thus provided a disclaimer on the audit opinion. The audits o f the ARTF and the World Bank projects for SY1383 (2004) were assisted substantially by the advising consulting firm. For all intents and purposes the audit was conducted by the Advising Consulting firm with the assistance o f CAO staff for some testing purposes. The audits however tended to check accounting aggregations rather than a complete test o f the accounting assertions normally carried in an audit opinion. So these audit opinions have
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substantial scope limitations on the adequacy o f the testing. A true and fair opinion i s not provided; rather the audit provides an assessment of the (a) adequacy o f the accounting and internal control systems, (b) the ability to maintain adequate documentation o f transactions, and (c) the eligibility o f incurred expenses for IDA financing.
47. Future ARTF and World Bank project audits should be conducted in accordance with IFACAAASB International Standards on Auditing, and signed off by advising consulting firms selected by the Auditor General (subject to no objection by the World Bank). The terms o f reference for the audit o f ARTF and World Bank projects refer to INTOSAI Auditing Standards. The advising consulting firm advised that the audits on these projects were conducted according to these standards rather than the IAASB International Standards on Auditing. The report on the accounts states that both INTOSAI and IAASB auditing standards were applied. In contrast to the TORS, the usual international practice i s for IAASB International Standards on Auditing to be applied as per the routine practices o f international accounting f i rms. With i t s core role o f reporting on the accounts o f the Government o f Afghanistan, the Control and Audit Office does not have sufficient capacity to provide an opinion according to international standards on the ARTF and the World Bank projects. Under the current contract, the advising consulting firm i s obligated to assist with the audit o f all these accounts. In practice the advising consulting firm provides l i t t le or no assistance with the Government o f Afghanistan accounts; rather, it provides at least 80 percent o f the effort on the ARTF and the World Bank projects. The CAO contribution, under the direction o f the advising consulting firm, i s at the lower levels o f the audit. This i s a poor and ineffective use o f CAO resources, even for training and familiarization purposes. Following this current practice, the Auditor General signs the accounts, e.g. for the ARTF, although the advising consulting firm does all o f the higher-level assessment work in the audit. This process does not properly place the responsibility for signing the opinion on the accounts. As a result, confidence in the audit opinion on these accounts i s less than desirable. The audit process should be improved by having the advising consulting firm sign, and take responsibility for the accounts; and conduct the audit in accordance with international auditing standards. The Auditor General should continue to play a part in the review o f the consulting f i rm’s work.
48. The Auditor General should receive the reports o f the auditors for his use in the audit of the annual accounts of the Government of Afghanistan. The Control and Audit Office should conduct the audit o f the accounts o f the Government o f Afghanistan, as i s the current practice. The work of the advising consulting audit firm on the ARTF and other donor expenditures that make up part o f the Government o f Afghanistan accounts can be relied upon as appropriate by the Control and Audit Office in i t s audit o f these accounts.
6. Reporting on Fraud
49. The audit reporting and follow-up systems need to be reviewed. There could be a survey o f ministries to establish the actions taken on findings reported since the establishment o f the Afghanistan Interim Administration and develop options for improving reporting and response, based on international practice. In the longer term,
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statutory deadlines for response to audit queries and management letters and the crucial role o f a Public Accounts Committee might be effective in encouraging adequate response to audit findings. This is likely to take at least five years, since there i s no previous experience o f these processes in Afghanistan.
7. Reporting on Compliance
50. Improve the effectiveness of the audit report by more efficient review action through the Public Accounts Committee and agency audit committees. There are no institutional arrangements for review o f reports by the Auditor General.
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Annex A. Methodology of the Assessment
As part o f the general support program in South Asia for assessment and improvement o f public sector accounting and auditing against international standards, the World Bank, with the cooperation o f member governments, i s conducting the Review o f Public Sector Accounting and Auditing Practices in member countries. The development o f the Public Financial Management (PFM) Performance Measurement Framework' by the Public Expenditure and Financial Accountability (PEFA) Program' has opened the way for a diagnostic tool to be developed that i s referenced to the accounting and auditing standards o f International Federation o f Accountants (WAC) and International Organization o f Supreme Audit Institutions (INTOSAI), and other relevant international benchmarks.
I The Performance Measurement Framework has an indicator on public access to key fiscal information that considers the following as essential:
Year-end financial statements: The statements are made available to the public through appropriate means within six months o f completed audit. External audit reports: All reports on central government consolidated operations are made available to the public through appropriate means within six months o f completed audit.
The Framework has an indicator on the quality and timeliness o f annual financial statements, which are considered to be critical for transparency in the P F M system. To be complete in all respects, the financial statements must be based on details for all ministries, independent departments and other state-owned units. It has an indicator on the scope, nature and follow-up o f external audit. For this indicator the Framework considers the key elements o f the quality o f actual external audit to comprise the scope/ coverage o f the audit, adherence to appropriate auditing standards, including independence o f the external audit institution (ref. INTOSAI and IFAC/IAASB), focus on significant and systemic PFM issues in i t s reports, and performance o f the full range o f financial audit such as reliability o f financial statements, regularity o f transactions and functioning o f internal control and procurement systems. Inclusion o f some aspects o f performance audit (e.g. value for money in major infrastructure contracts) would also be expected o f a high quality audit function.
This exercise provides substantial insight into country performance with regard to the external auditing and financial statement reporting PFM indicators.
A set o f 6 questionnaires i s used in the survey conducted by this study to collect relevant information on country practices:
' The PFM Performance Measurement Framework has been developed as a contribution to the collective efforts of many stakeholders to assess and develop essential PFM systems, by providing a common pool o f information for measurement and monitoring o f PFM performance progress, and a common platform for dialogue. The PEFA Program i s a partnership among the World Bank, the European Commission, the UKs Department for International Development, the Swiss State Secretariat for Economic Affairs, the French Ministry of Foreign Affairs, the Royal Norwegian Ministry of Foreign Affairs, the International Monetary Fund and the Strategic Partnership with Africa. A Steering Committee, comprising members o f these agencies, manages the Program. A Secretariat i s located in the World Bank in Washington, DC.
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Annex A
The public sector accounting environment-collecting basic information about financial laws and standards-setting arrangements, educational requirements for accountants compared with IFAC International Education Standards (IES), ethical requirements compared with the IFAC Code o f Ethics for Professional Accountants.
Public sector accounting practices fo r the general budget sector if using the cash basis o f accounting - compared with the requirements o f the Cash Basis International Public Sector Accounting Standards (IPSAS).
Public sector accounting practices fo r the general budget sector if using the accrual basis o f accounting-compared with the IPSAS requirements that govern accrual reporting for the public sector.
Public sector auditing environment-compared with the provisions o f the INTOSAI Code o f Ethics and the INTOSAI general standards.
Public sector auditing practices-compared to the requirements o f the INTOSAI field standards and reporting standards, and the IFAC International Standards on Auditing (ISA).
Accounting and auditing practices for state-owned enterprises-compared with the requirements o f the International Financial Reporting Standards (IFRS) and International Standards on Auditing that govern commercial reporting.
The responses to the diagnostic questionnaires, prepared by the relevant country authorities with the help o f in-country experts retained by the World Bank, are supplemented by a due diligence review conducted by members o f a World Bank task team.
Various documents are examined as part o f the review, including relevant laws, codes o f conduct, national accounting and auditing standards, accountant selection and promotion processes, training needs assessments, accountancy training course outlines, curricula and accreditation methods, sample accounts and sample audit reports, and working paper sets.
A country report on the assessment i s prepared for each country and reviewed by a panel o f expert advisors, before examination by the World Bank country team. The draft i s then shared with the Government for response before finalization. Discussions are also held with the relevant stakeholders to devise an implementation plan to address the way forward with a view to minimizing deviations from international standards.
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Annex B
Annex B. Accounting and Auditing Standards
This annex contains a summary o f the frameworks that have been used for the public sector accounting and auditing assessment
The International Accounting Standards Board (IASB),the International Federation o f Accountants (IFAC) and the International Organization o f Supreme Audit Institutions (INTOSAI) are cooperating in setting international standards for accounting and auditing.
The IASB i s an independent, privately funded accounting standard-setter based in London, UK. The IASB members come from nine countries and have a variety o f functional backgrounds. In the public interest, IASB i s committed to developing a set o f high-quality, understandable, and enforceable global accounting standards that require transparent and comparable information in general purpose financial statements. In addition, the IASB co- operates with national accounting standard-setters to achieve convergence in accounting standards around the world. The IASB-issued International Accounting Standards (IAS) from 1973 to 2000. Since 2000, they have issued International Financial Reporting Standards (IFRS).
The IFAC has i ts headquarters in New York, USA, and comprises 163 member bodies, mainly the national professional accountancy bodies o f most countries around the world. The IFAC Board established the International Public Sector Accounting Standards Board (IPSASB) to develop high-quality accounting standards for use by public sector entities around the world in the preparation o f general purpose financial statements. These are the International Public Sector Accounting Standards (IPSAS). The full text o f Standards and Exposure Drafts currently on issue i s available at http://www.ifac.org/publicsector. The f i rst 20 IPSAS are based on IASB-issued International Accounting Standards to the extent appropriate for the public sector. IFAC also has established the International Auditing and Assurance Standards Board (IAASB) to prepare and promulgate International Standards on Auditing (ISA) and i s now working in cooperation with INTOSAI on preparing public sector guidance on the use o f ISA.
The INTOSAI includes the Auditors General from almost all national government audit departments around the world and has i ts Secretariat in the Vienna offices o f the Auditor General o f Austria. I t s Auditing Standards Committee, chaired by the Auditor General o f Sweden, produces the INTOSAI Code o f Ethics and Auditing Standards, a set o f standards at a higher and more generic level than the IFAC-issued International Standards on Auditing. The Auditing Standards Committee i s working with the IAASB to prepare practice notes explaining the application o f each ISA in the public sector.’
The various standards are listed on the following pages.
“Working Group on Financial Audit Guidelines,” INTOSAI Auditing Standards Committee, Swedish National Audit Office, 2004.
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ANNEX B
International Public Sector Accounting Standards
IPSAS 1 , Presentation of Financial Statements IPSAS 2, Cash Flow Statements IPSAS 3,Net Surplus or Dejcit for the Period, Fundamental Errors and Changes in
IPSAS 4, The Effects of Changes in Foreign Exchange Rates IPSAS 5, Borrowing Costs IPSAS 6, Consolidated Financial Statements and Accounting for Controlled Entities IPSAS 7, Accounting for Investments in Associates IPSAS 8, Financial Reporting of Interests in Joint Ventures IPSAS 9, RevenueJi.om Exchange Transactions IPSAS 10, Financial Reporting in Hyperinflationary Economies IPSAS 1 1 , Construction Contracts IPSAS 12, Inventories IPSAS 13, Leases IPSAS 14, Events after the Reporting Date IPSAS 15, Financial Instruments: Disclosure and Presentation IPSAS 16, Investment Property IPSAS 17, Property, Plant and Equipment IPSAS 18, Segment Reporting IPSAS 19, Provisions, Contingent Liabilities and Assets IPSAS 20, Related Party Disclosures IPSAS 2 1 , Impairment of Non-cash Generating Assets Cash Basis IPSAS , Financial Reporting under the Cash Basis of Accounting
Accounting Policies
International Education Standards
IES 1 , Entry Requirements to a Program of Professional Accounting Education IES 2, Content of Professional Accounting Education Programs IES 3 , Professional Skills IES 4, Professional Values, Ethics and Attitudes IES 5, Practical Experience Requirements IES 6, Assessment of Professional Capabilities and Competence IES 7, Continuing Professional Development IES 8, Competence Requirements for Audit Professionals
25
ANNEX B
International Financial Reporting and International Accounting Standards
IFRS 1, First-time Adoption of International Financial Reporting Standards IFRS 2, Share-based Payment IFRS 3, Business Combinations IFRS 4, Insurance Contracts IFRS 5, Non-current Assets Held for Sale and Discontinued Operations
IAS 1, Presentation of Financial Statements IAS 2, Inventories IAS 7, Cash Flow Statements IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors IAS 10, Events after the Balance Sheet Date IAS 1 1, Construction Contracts IAS 12, Income Taxes IAS 14, Segment Reporting IAS 16, Property, Plant and Equipment IAS 17, Leases IAS 18, Revenue IAS 19, Employee Benefits IAS 20, Accounting for Government Grants and Disclosure of Government Assistance IAS 2 1, The Effects of Changes in Foreign Exchange Rates IAS 23, Borrowing Costs IAS 24, Related Party Disclosures IAS 26, Accounting and Reporting by Retirement Benefit Plans IAS 27, Consolidated and Separate Financial Statements IAS 28, Investments in Associates IAS 29, Financial Reporting in Hyperinflationary Economies IAS 30, Disclosures in the Financial Statements of Banks and Similar Financial Institutions IAS 3 1, Interests in Joint Ventures IAS 32, Financial Instruments: Disclosure and Presentation IAS 3 3, Earnings per Share IAS 34, Interim Financial Reporting IAS 36, Impairment of Assets IAS 37, Provisions, Contingent Liabilities and Contingent Assets IAS 38, Intangible Assets IAS 39, Financial Instruments: Recognition and Measurement IAS 40, Investment Property IAS 41, Agriculture
26
ANNEX B
INTOSAI Code of Ethics and Auditing Standards
Code of ethics Integrity. Auditors have a duty to adhere to high standards o f behavior (e.g. honesty and candidness) in the course o f their work and in their relationships with the staff o f audited entities.
Independence, objectivity and impartiality. The independence o f auditors should not be impaired by personal or external interests. There i s a need for objectivity and impartiality in the work and the reports, which should be accurate and objective. Conclusions in opinions and reports should be based exclusively on evidence obtained and assembled in accordance with the SAI's auditing standards.
Professional secrecy. Auditors should not disclose information obtained in the auditing process to third parties except for the purposes o f meeting the SAI's statutory responsibilities.
Competence. Auditors must not undertake work which they are not competent to perform. Basic postulates for the auditing standards (a) The SA1 should consider compliance with the INTOSAI auditing standards in al l matters that are
deemed material. Certain standards may not be applicable to some o f the work done by SAIs, including those organized as Courts o f Account, nor to the non-audit work conducted by the SAL The SA1 should determine the applicable standards for such work to ensure that it i s o f consistently high quality.
(b) The SA1 should apply its own judgment to the diverse situations that arise in the course o f government auditing.
(c) With increased public consciousness, the demand for public accountability o f persons or entities managing public resources has become increasingly evident so that there i s a need for the accountability process to be in place and operating effectively.
government w i l l facilitate the accountability process. Management i s responsible for correctness and sufficiency o f the form and content o f the financial reports and other information.
reporting and disclosure relevant to the needs o f the government, and audited entities should develop specific and measurable objectives and performance targets.
( f ) Consistent application o f acceptable accounting standards should result in the fair presentation o f the financial position and the results o f operations.
(g) The existence o f an adequate system o f internal control minimizes the risk o f errors and irregularities. It i s the responsibility o f the audited entity to develop adequate internal control systems to protect its resources. It i s also the obligation o f the audited entity to ensure that controls are in place and functioning to help ensure that applicable statutes and regulations are complied with, and that probity and propriety are observed in decision making. The auditor should submit proposals and recommendations where controls are found to be inadequate or missing.
access to al l relevant data necessary for a comprehensive assessment o f the activities under audit.
(d) Development o f adequate information, control, evaluation and reporting systems within the
(e) Appropriate authorities should ensure the promulgation o f acceptable accounting standards for fmancial
(h) Legislative enactments would facilitate the co-operation o f audited entities in maintaining and providing
(i) All audit activities should be within the SAI's audit mandate." u) Legislative enactments would facilitate the co-operation o f audited entities in maintaining and
providing access to al l relevant data necessary for a comprehensive assessment o f the activities under audit.
[k) SAIs should work toward improving techniques for auditing the validity o f performance measures. [l) SAIs should avoid conflict o f interest between the auditor and the audited entity.
* The full scope o f government auditing includes regularity and performance audit. Regularity audit embraces: . Attestation o f financial accountability o f accountable entities, involving examination and
evaluation o f financial records and expression o f opinions on fmancial statements; Attestation o f financial accountability o f the government administration as a whole; Audit o f financial systems and transactions including an evaluation o f compliance with applicable statutes and regulations; Audit o f internal control and internal audit functions:
. . 27
ANNEX B
I Audit of the probity and propriety o f administrative decisions taken within the audited entity; and Reporting o f any other matters arising from or relating to the audit that the SA1 considers should be disclosed.
Performance audit entails the audit of economy, efficiency and effectiveness and embraces: I Audit o f the economy o f administrative activities in accordance with sound administrative
principles and practices, and management policies; 1 Audit o f the efficiency o f utilization o f human, financial and other resources, including
examination o f information systems, performance measures and monitoring arrangements, and procedures followed by audited entities for remedying identified deficiencies; and Audit o f the effectiveness o f performance in relation to the achievement o f the objectives o f the audited entity, and audit o f the actual impact o f activities compared with the intended impact.
1
General auditing standards The auditor and the SA1 must be independent. The auditor and the SA1 must possess the required competence. The auditor and the SA1 must exercise due care and concern in complying with the INTOSAI auditing
standards. This involves due care in planning, specifying, gathering and evaluating evidence, and in reporting findings, conclusions and recommendations.
The SA1 should adopt policies and procedures to recruit personnel wi th suitable qualifications. The SA1 should adopt policies and procedures to develop and train SA1 employees to enable them to
perform their tasks efficiently, and defme the basis for the advancement o f auditors and other staff. The SA1 should adopt policies and procedures to prepare manuals and other written guidance and
instructions concerning the conduct o f audits. The SA1 should adopt policies and procedures to support the skills and experience available within the SA1
and identify the ski l ls which are absent; provide a good distribution o f sk i l l s to auditing tasks and assign a sufficient number o f persons for the audit; and ensure proper planning and supervision to achieve i t s goals at the required level o f due care and concern.
internal standards and procedures. The SA1 should adopt policies and procedures to review the efficiency and effectiveness o f the SAI's
Field standards (a) The auditor should plan the audit in a manner that ensures that an audit o f high aualitv i s carried out in - . -
an economic, efficient and effective way and in a timely manner. (b) The work o f the audit staff at each level and audit phase should be properly supervised during the audit;
and documented work should be reviewed by a senior member o f the audit staff. (c) The auditor, in determining the extent and scope o f the audit, should study and evaluate the reliability o f
internal control. (d) In conducting regularity (financial) audits, a test should be made o f compliance with applicable laws
and regulations. The auditor should design audit steps and procedures to provide reasonable assurance o f detecting errors, irregularities, and illegal acts that could have a direct and material effect on the financial statement amounts or the results o f regularity audits. The auditor also should be aware o f the possibility o f illegal acts that could have an indirect and material effect on the financial statements or results o f regularity audits.
Reporting standards (a) At the end o f each audit, the auditor should prepare a written opinion or report, as appropriate, setting
out the findings in an appropriate form; i ts content should be easy to understand and fiee from vagueness or ambiguity, include only information which i s supported by competent and relevant audit evidence, and be independent, objective, fair and constructive.
or serious irregularities discovered by the auditors. (b) It i s for the Auditor General to decide finally on the action to be taken in relation to fraudulent practices,
28
ANNEX B
International Standards on Auditing
Framework:
International Framework for Assurance Engagements
General Principles and Responsibilities:
200 Objective and General Principles Governing
2 10 Terms of Audit Engagements 220 Quality Control for Audits of Historical
Information 230 Documentation 230R Audit Documentation 240 The Auditor’s Responsibility to Consider
Fraud in an Audit of Financial Statements 240A Fraud and Error 250 Consideration ofLaws and Regulations in an
260 Communications of Audit Matters with Those
an Audit of Financial Statements
Audit of Financial Statements
Charged with Governance
Risk Assessment and Response to Assessed Risks:
300 Planning an Audit of Financial Statements 3 15 Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement 320 Audit Materiality 330 The Auditor’s Procedures in Response to Assessed Risks 402 Audit Considerations Relating to Entities Using Service Organizations
Audit Evidence:
500 Audit Evidence 50 1 Audit Evidence - Additional Considerations for
Specific Items 505 External Conjrmations 5 10 Initial Engagements - Opening Balances 520 Analytical Procedures 530 Audit Sampling and Other Means of Testing 540 Audit of Accounting Estimates 545 Auditing Fair Value Measurements and
550 Related Parties 560 Subsequent Events 570 Going Concern 5 80 Management Representations
Disclosures
Using the Work of Others:
600 Using the Work of Another Auditor 6 10 Considering the Work of Internal Auditing 620 Using the Work of an Expert
Audit Conclusions and Reporting:
I 0 0 The Auditor’s Reports on Financial Statements 700R The Independent Auditor’s Report on a
Complete Set of General Purpose Financial Stat em ents
I 0 1 Modifications to the Independent Auditor’s Report
7 10 Comparatives 720 Other Information in Documents Containing
Audited Financial Statements
Specialized Areas:
800 The Auditor’s Report on Special Purpose Audit Engagements
29
Annex C
Annex C. Afghanistan Auditing and Accounting Legislation
Auditing Legislation (N.B this is an old translationof the still prevailing 1996 law and has been amended for grammatical sense - there is a need to read the original text for exactness))
In the Name o f God, the Compassionate, the Merci fu l
The Islamic Emirate o f Afghanistan Control and Audit Law
General Ordinances Chapter One
Part 1. This law i s specially issued for organizing the audit and control affairs o f public properties.
Part 2. The basic objectives o f the law are as follows: (a) Getting precise account for expenses o f public property. (b) Effective control o f accounting and financial affairs o f state departments,
organizations, and f i rms. (c) Control for state program outcomes and that the expenses o f affairs provide
advantages accruing to the state. (d) Performance o f audit and control to strengthen and improve the state
economy. (e) Saving public property through audit and control.
The aforementioned terms in this law shall have the following meanings.
Part 3. Control i s a process that gives assurance from true performance o f activities in different economic and social sections. The control mentioned in this part i s in three kinds: (a) Primary Control i s a process that w i l l be performed to avoid any kind o f
(b) Progressive Control i s a process which will control activities progressively to
(c) Final Control i s a process that checks and compares accomplished and
abuse and violation before starting activities.
avoid any kind o f maltreatment and abuse during the work.
unaccomplished affairs.
Audit i s an annual check o f activities considering existing evidence.
Auditor i s a professional official who performs the audit and control affairs.
Part 4. Ministries, departments, f i rms, cooperatives, social organizations, state agencies, banks, and municipalities are named under control organizations.
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ANNEX C
Part 5. General Department o f Audit and Control (ACD) i s the highest and the most competent reference for audit and control in the country.
This Department may run i t s activities according to Islamic Sharia and domestic laws.
Part 6. The General Department o f Audit and Control consists o f the Heading Council, the General President o f Department and assistants, and the Chairmen o f special sections o f the Department.
Part7. The General President and the assistants o f the Department will be appointed according to the proposal o f the Prime Minister and ratification o f the President.
Part 8. The General President has responsibility for carrying out the assigned affairs. The Heading Council i s the most competent reference in the Department. Appointment o f the members o f this Council will be according to the proposal o f the General President o f the Department and the approval o f the President. The Heading Council w i l l have the following tasks: (a) Making the plan for the Department. (b) Receiving reports from related offices, and determining about their activities.
Part 10. Determination and approval o f the Heading Council will be according to a referendum (vote).
Part 11. Experienced professionals and experts are preferred for appointment to the Department.
Part 12. The General Department o f Audit and Control provides timely reports for high- ranking government authorities.
Part 13. The following evaluation will be carried out by ACD: (a) Certain accounts for state expenses. (b) Considering the dominant role for accountants in preparing and organizing the
(c) Better expenses o f properties, and evaluating the state income processes. (d) Evaluating performance o f the domestic auditors, for better cooperation in
budget o f state departments.
work and efficient development o f activities.
Part 14. The domestic auditors are under direct control o f the minister. They have mutual responsibilities and can play a contributing role with ACD.
Part 15. The domestic auditors have responsibilities in providing reports about their performance to ACD.
Part 16. ACD has the right to recheck the documents and reports provided by domestic auditors.
31
ANNEX C
CHAPTER I11
Competence and Responsibilities
Part 17. ACD auditors have the following functions:
(a) Auditing o f state incomes, cash, expenses and valuable documents and
(b) Visual checking o f provision, conservation, distribution and costs o f materials. (c) Checking the existence o f cash, materials and valuable documents; locking up
(d) Receiving essential information from officials about references. (e) Checking the evidence and asking for the reports and information from the
responsible officials regarding their previous performance. (0 Providing special ACD reports outlining reforms so as to prohibit future abuse
and violations. (8) Providing urgent ACD reports in case o f instances o f abuse, illegal expenses
and violation by officials. (h) Keeping documentary evidence o f illegalities temporarily, until they are sent
to related reference authorities. (i) Dual auditing o f both references in cases o f connected affairs and precise
observation and comparison o f documents. (i) Issuing instructions for stopping illegal operations under control reference and
providing timely ACD reports. (k) Control o f manufactures during the production process and implementation o f
plans for improving quality.
materials.
the properties and the safes in emergency cases.
Part 18. Auditor and controllers o f ACD have the following responsibilities:
(a) Impartially performing o f duties according to law. (b) Limiting time for providing information and explanations on related
(c) Offering fast, clear, adequate, reasonable, and legal suggestions. (d) Devising the logical way for using property in order to enhance the efficiency
(e) Proving causes and conditions which may create wastage, shortage, and
references.
o f activities.
embezzlement o f state properties.
Part 19. Auditors and controllers will be considered guilty in the following cases:
(a) Ignorance o f illegal performance. (b) Non-disclosure o f suspicious papers. (c) Non-disclosure o f lost papers and files. (d) Hiding or collection o f papers for maltreatment. (e) Accusing officials without documentary evidence.
32
ANNEX C
( f ) Fabrication, and tampering o f documents. (g) Any action which may cause losses for the government. (h) Violation o f the law.
Part 20. Audit and control department has the following responsibilities:
(a) Offering systematic reports about the result o f evaluation which may need
(b) Taking necessary decisions towards improving diagnostic faults in economic
(c) Offering suggestions about adjustment and responsibilities o f under control
(d) Sending improvement suggestions to those responsible for the reference to
(e) Establishing relationships with international supreme audit institutions for
urgent decisions, to state authorities.
and social affairs.
organizations to state authorities.
avoid violations and faults which appeared during control.
cooperation with them in technical and professional fields.
Part 2 1. Organisation under control references have the following obligations:
(a) Providing sufficient facilities for ACD officials during work. (b) Providing experts, professional workers and experienced officials to cooperate
(c) Observing Chapter 3, Part 18 o f this law about providing necessary
(d) Drawing the attention o f auditors to budget drafting and financial
(e) Providing special reports about the result o f their activities.
with auditors.
information to auditors.
arrangements o f their organization.
CHAPTER I V
The Final Ordinances
Part22. For securing the public property, the ACD i s considered as cooperator for exposure o f crimes.
Part 23. (a) High Court o f Islamic Emirate o f Afghanistan (IEA) has responsibilities in
(b) In case o f objections, justices o f IEA should deliver the f i les back to ACD for
(c) Justices have to state reason to ACD in case o f not following up legally the
providing reports o f the assigned affairs to ACD.
solution.
assigned issues.
Part 24. ACD’s officials in combination with delegates o f Ministries and state departments responsible for signing economic and financial agreements can travel abroad after approval from state authorities.
33
ANNEX C
Part25. ACD can observe the activities o f State agencies abroad considering the principals o f the government.
Part 26. ACD officials can only be employed for the jobs mentioned in this constitution.
Part 27: ACD officials have special identification cards.
Part 28. To avoid corruption, controllers o f the other references including the high court, cannot use the ordinance o f this law. They have to carry out only their own occupations.
Part 29. This law, after issue i s dominant and wi l l be inserted in the state official publication.
And any domestic ordinances, if contrary to this, will be cancelled.
34
ANNEX C
Accounting Legislation
Extracts from the Budget Law of the Democratic Republic o f Afghanistan
6-5 State accountants-within their own jurisdictions-will keep adequate records o f the uncollected revenues and will execute the expenditures o f the appropriate departments on the provincial levels. Further, after accounting for expenditures in the current month, the said state accountants shall transfer-to the general accounts receivable (administered by the Treasury through the Ministry o f Finance) o f the government-any additional revenues which cannot possibly be used for expenditures for the next month. Furthermore, if [during a given period] the revenues should not prove adequate for meeting the expenditures o f a state, based on the request o f the state accountants and when the necessity o f the same shall be adequately evidenced, the Treasury may al low the transfer o f fundsfiom its own resources to the said state so as to bridge the gap.
8.4 Government expenditures are comprised o f amounts paid by the government in exchange for execution o f services, delivery o f goods, and carrying out o f other obligations for the purpose of: growth o f national economy; advancement o f material and cultural level o f the nation; strengthening o f the national defense; and providing for the consumption o f the governmental bureaucracy. Any payment for expenditures must take place in accordance with-and under the guidance of-the applicable laws and regulations and generally accepted accounting standards [mavazeen-e hessabi: hereinafter, GAAS].
Public Finance and Expenditure Management Law - extracts
Article 4. The Ministry o f Finance i s responsible for implementing the provisions o f this law, and shall have the fol lowing duties and authorities: . . . .
Setting the financial and public expenditure policy o f Afghanistan. To report to the government and the National Assembly [o f Islamic Republic o f Afghanistan] o n the implementation o f the provisions o f this law. To propose the adoption o f regulations to the government To adopt procedures (tarzulamal) and rules (layeha), for [ensuring] better implementation o f this law.
Article 6. The responsible authorities for financial affairs o f state administrations shall have the fol lowing obligations:
1. To prepare, arrange and submit the draft budget to the Ministry o f Finance 2. To submit report o f financial affairs in accordance with this law, and the related
regulations and Rules To ensure that this L a w i s applied concerning expenditure commitments within the established budget allotments, regulation o f the financial system and efficient controls on the executions within the relevant administration.
35
ANNEX C
Article 7. In order to carry out the relevant affairs, the Treasury o f the Ministry o f Finance shall have the following responsibilities and authorities:
Maintaining the Treasury General Ledger and recording transactions according to budget classification and accounting rules compliant with internationally accepted standards and principles;
Providing regular reports on the implementation o f the State's budget and other financial matters for the Ministry o f Finance
Upon the confirmation o f the Ministry o f Finance, issuing necessary instructions covering the relevant affair.
Performing management for the debts o f the state
Compilation o f the annual accounts o f the financial operations o f state including appropriation accounts and financial statements
Managing and controlling the affairs related to processing o f expenditures and other treasury related responsibilities in the Mustufiats o f centre and provinces
Article 34. The financial statistics such as revenues, expenditures and financing in the annual budget documentation shall be set out, organized and published by the International Monetary Fund, in consistency with the Government Finance Statistics classification.
Article 53. Classification o f budget records
1) The Ministry o f Finance shall establish classification systems for budget and accounting records in observance o f the following:
(1) To facilitate the control o f expenditures by state administrations; [and]
(2) To permit analysis o f expenditure by organization, function, and economic category according to the Government Financial Statistics cash basis classification requirements as set out by the International Monetary Fund.
2) To achieve the objectives o f paragraph one, the Ministry o f Finance shall maintain, records of:
a. Government income receipts; b. Appropriations and adjustments to appropriations o f state
administrations
36
ANNEX C
c. Documents for Actual expenditures made and outstanding liabilities.
d. Appropriations made available to state administrations for expenditure by means o f allotment form;
3) State administrations shall maintain accounting records in accordance with Ministry o f Finance instructions and provide copies o f the accounting records to the Ministry o f Finance when requested, except in cases where the law provides for the confidentiality o f such records.
Article 55. Final Report on the Budget
1) The Ministry o f Finance shall publish the fol lowing information upon submission to the President and the government:
(1) Final budget reconciliation report o n the budget for previous fiscal year. This shall be submitted no later than the end o f the month of Sonbola (the second quarter o f the year); [and]
(2) A set o f financial statements compiled according to the international accounting principles that have been audited as required by article 59.
2) The final budget reconciliation report referred to in paragraph one shall cover the fol lowing issues:
a. Budget overview information; b. A revenue and expenditure report; [and] c. Assets and liabilities information.
Article 56. Budget overview information
The budget overview information will include:
(1) Tasks accomplished and the main plan for the new fiscal year; (2) An overview o f important actual revenues and expenditures; (3) Details o f how a budget deficit was financed or how a surplus was invested; and (4) Other information considered necessary by the Ministry o f Finance.
Article 57. Revenue and expenditure report
The revenue and expenditure report shall include:
(1) Actual revenues compared with projected revenues;
37
ANNEX C
(2) Actual special funds received during the fiscal Year; (3) Actual expenditures from special funds appropriations; (4) Actual number o f permanent and temporary State employees
paid from appropriations in the fiscal year; (5) Actual payments o f interest or amounts in the nature o f interest
on debt owed by the State and [for] repayment o f debt principal;
(6) Actual expenditures in respect o f each appropriation category compared with the budget appropriation for that category, the actual expenditure for that category in the previous fiscal year, and details o f additional appropriations under this law;
(7) Details o f a l l recipients o f public grants and the amount they received;
(8) Details o f the contingency expenditures; (9) Details o f al l adjustments made to appropriations in the fiscal
(10) Actual user fee receipts for the fiscal year; [and] (1 1) Other information considered necessary by the Ministry o f
year;
Finance.
Article 58. The assets and liabilities information
The assets and liabilities information will include: (1) Details o f investments o f public money made during the fiscal
(2) Details o f any changes made to loans during the previous fiscal
(3) Details o f any loans made by the State during the fiscal year; (4) Details o f any borrowings by the State during the fiscal year; (5) Details o f differences in the amount o f guarantees planned to
be made and loans to be incurred by the State during the fiscal year and guarantees actually made and loans actually incurred;
(6) Details o f difference between the estimated amount o f contingent liabilities o f the State that were expected to give rise to actual liabilities during the fiscal year and amount o f contingent liabilities that actually gave rise to liabilities;
(7) A full accounting o f assets held by the State at the end o f the fiscal year; [and]
(8) Other information considered necessary by the Ministry o f Finance.
year;
year;
Article 59. Independent Audit
1. The independent auditors shall have the right to acquire al l information and explanations deemed necessary for auditing.
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ANNEX C
2. The administration for inspection and control shall prepare an independent audit report with in six months from the end o f a fiscal year and submit it to the government. The independent audit report shall include:
(a) Certification o f the appropriation accounts; and (b) Recommendations for fines to be applied consistent with th is Law.
3. The government shall submit the report referred to in paragraph 2 o f this article to the f i rs t meeting o f the National Assembly. The report shall be made publicly available upon submission to the National Assembly.
Article 60. Reporting to the National Assembly
The government shall report to the National Assembly on decisions taken pursuant to the audit and control report.
Article 61. Audit Powers o f the Ministry o f Finance
1. The Ministry o f Finance shall establish an internal audit administration and appoint auditors to audit the financial and accounting affairs o f all State administrations.
2. The auditors referenced in paragraph one may require the relevant administrations to provide all information needed for auditing financial affairs .
Art icle 64. Exceptions
State-owned companies and enterprises are not subject to this law, and their affairs shall be regulated under their related Laws.
Article 65. Entry into Force
This law shall be enforced from the date o f signature and shall be published in the official Gazette and with i ts entry into force the budget Law dated 30/8/1362, published in official gazette # 544, and other contrary provisions shall be eliminated.
39
Annex D
Annex D. Benefits of Accrual Accounting
Extract from Study No. 14 “Transition to the Accrual Basis o f Accounting: Guidance for Governments and Government Entities,” IFAC Public Sector Committee, December 2003
1.18 The PSC has commented extensively on the benefits o f accrual accounting for governments and individual public sector entities in previous Studies (Studies 5, 6, 8, 9 10 and 11) and Occasional Papers (Papers 1, 3, 5, 6 and 7). In order to provide some context for readers who are not familiar with the PSC’s other publications, this section contains a summary o f the benefits o f reporting on the accrual basis.
1.19 The information contained in reports prepared on an accrual basis i s useful both for accountability and decision-making. Financial reports prepared on an accrual basis allow users to:
assess the accountability for all resources the entity controls and the deployment
assess the performance, financial position and cash flows o f the entity; and make decisions about providing resources to, or doing business with, the entity.
o f those resources;
1.20 At a more detailed level, reporting on an accrual basis:
shows how a government financed i t s activities and met i t s cash requirements; allows users to evaluate a government’s ongoing ability to finance i t s activities
shows the financial position o f a government and changes in financial position; provides a government with the opportunity to demonstrate successful
i s useful in evaluating a government’s performance in terms o f i t s service costs,
and to meet i t s liabilities and commitments;
management o f i t s resources; and
efficiency and accomplishments.
Financial Position
1.2 1 Accrual accounting provides information on an entity’s overall financial position and current stock o f assets and liabilities. Governments need this information to:
make decisions about the feasibility o f financing the services they wish to
demonstrate accountability to the public for their management o f assets and
plan for future funding requirements o f asset maintenance and replacement; plan for the repayment of, or satisfaction of, existing liabilities; and manage their cash position and financing requirements.
provide;
liabilities recognized in the financial statements;
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ANNEX D
1.22 Accrual accounting requires organizations to maintain complete records o f assets and liabilities. It facilitates better management o f assets, including better maintenance, more appropriate replacement policies, identification and disposal o f surplus assets, and better management o f risks such as loss due to theft or damage. The identification o f assets and the recognition o f depreciation help managers to understand the impact o f using fixed assets in the delivery o f services, and encourage managers to consider alternative ways o f managing costs and delivering services.
1.23 Accrual accounting provides a consistent framework for the identification o f existing liabilities, and potential or contingent liabilities. The recognition o f obligations meeting the definition o f a l iabi l i ty and the criteria for recognition:
compels governments to acknowledge and plan for the payment o f al l recognized liabilities, not just borrowings;
provides information on the impact o f existing liabilities o n future resources; means that it i s possible to allocate responsibility for the management o f al l liabilities; and
provides necessary input for governments to assess whether they can continue to provide current services and the extent to which they can afford new programs and services.
1.24 Accrual accounting highlights the impact o f financing decisions on net assets/equity and may lead governments to take a longer term view when making financing decisions than i s generally possible when relying o n cash or modified cash reports. Information on net assetdequity also means that governments may be held accountable for the financial impact o f their decisions, o n both current and future net assets/equity. Changes in an entity’s net assetdequity between two reporting dates reflect the increase or decrease in i t s wealth during the period, under the particular measurement principles adopted and disclosed in the financial statements. Under the accrual basis o f accounting, the financial statements will include a Statement o f Financial Position which discloses information about assets and liabilities. Where assets and liabilities are not equal, a residual figure for net assets/equity wil l be reported. Where this figure is positive it can be interpreted as the net resources that may be applied for the provision o f goods or services in the future, and therefore the community’s investment in the reporting entity. Where the figure i s negative, it may be viewed as the amount o f future taxation or other revenues which are already committed to paying o f f debt and other liabilities. N e t assets/equity can comprise some or al l o f the fol lowing components:
contributed capital; accumulated surpluses and deficits; and reserves (for example revaluation reserve; foreign currency translation reserve).
Financial Performance
1.25 Accrual accounting provides information on revenues and expenses, including the impact o f transactions where cash has not yet been received or paid. Accurate
41
ANNEX D
information on revenues is essential for assessing the impact o f taxation and other revenues on the government’s fiscal position, and in assessing the need for borrowing in the long term. Information o n revenues helps both users and governments themselves to assess whether current revenues are sufficient to cover the costs o f current programs and services.
1.26 Governments need information about expenses in order to assess their revenue requirements, the sustainability o f existing programs, and the l ikely cost o f proposed activities and services. Accrual accounting provides governments with information on the full costs o f their activities so that they can:
consider the cost consequences o f particular policy objectives and the cost o f alternative mechanisms for meeting these objectives;
decide whether to fund the production o f services within government sub- entities, or whether to purchase goods and services directly from non- government organizations;
decide whether user fees should cover the costs associated with a service; and allocate responsibility for managing particular costs.
1 -27 Accrual accounting can provide financial information on whether sub-entities are delivering specified services, and delivering them within agreed budgets. The same information, at a more detailed level, can also be used within sub-entities for the management o f activity and program costs.
1.28 Accrual accounting allows an individual entity to:
record the total costs, including depreciation o f physical assets and amortization
recognize al l employee-related costs and to compare the cost o f various types o f
assess the most efficient way o f producing their goods and services and o f
determine the appropriateness o f cost-recovery policies; and monitor actual costs against budgeted costs.
o f intangible assets, o f carrying out specific activities;
employment or remuneration options;
managing the resources over which they have been delegated authority;
Cash Flows
1.29 Accrual accounting provides comprehensive information on current cash flows and certain projected cash flows, including the cash flows associated with debtors and creditors. It can therefore lead to better cash management and may assist in the preparation o f more accurate cash budgets.
42
Annex E. PFM Reform Agenda
Short-term actions (next 6 to 12 months)
Automate reconciliation o f government accounting records with banking data, particularly the Treasury Single Account (TSA)
The analysis o f public financial management (PFM) conducted by the World Bank in 2005 developed a program o f reform to concretely move forward. The two main points from the recommendations relating to accounting and auditing reforms, deal with the capacity development of the key PFM institutions. Without stronger capacity and institutional reforms, improvements in P F M performance, as well as progress toward key national development objectives, will be difficult to achieve and impossible to sustain. Priority areas include training, recruitment practices, pay structures, organizational reforms, detailed business processes, and specific information technology systems.
Medium-term actions beyond 6 to 12 months
Develop public accounting standards and clarify role o f line ministries (regulations to implement PFEM Law)
Enforce use o f modem budget classification and increase capacity to issue
While these issues cut across al l levels o f government, the Ministry o f Finance’s capacity is o f particular importance. Since the Ministry i s chief custodian o f the PFM system, i t s capacity to develop and implement policies i s at the core o f P F M performance. Progress toward Ministry o f Finance Strategic Plan (initiated in M a y 2005) will be important in developing its capacity and performance. The P F M capacity development in l ine ministries also is important but will take more time. The Government should adopt a clear action plan to improve PFM performance with time-bound milestones, quantified objectives, and clearly identified responsible agencies.
The PFM analysis report seeks to provide a comprehensive, high-level roadmap o f policy reforms (as illustrated in Table 10.1 o f the report). It is comprehensive in the sense that al l areas o f public financial management are covered. I t i s high level in the sense that some concrete next steps are identified for the next 6-12 months, but many actions are less specific and will need to be converted into detailed action plans later, by the respective government departments. Also, some key accountability, l e f t out o f the PFEM Law, will need to be fully specified, especially with regard to the respective roles o f the Ministry o f Finance and the line ministries. The Procurement L a w clearly gives authority to line ministries. Progress along this roadmap could be measured by key fiscal outcomes and implementation and progressive improvement o f the Medium Term Financial Framework, and by the P F M performance indicators presented in this report. Monitoring o f progress along with a meaningful feedback loop into subsequent decision- making, will be as important as the action plan itself.
Key actions relevant to accounting and auditing reforms forming part o f the way forward in the P F M analysis report are summarized in the fol lowing table.
Area
Accounting in year o f reporting
43
Area
Transparent and accessible external financial reporting
External audit
Short-term actions (next 6 to 12 months)
Develop the means to capture and report accurately expenditures o f donor implemented projects
Ministry o f Finance (MoF) to commit to preparing formal accounting period cut-offs at least quarterly
Carry-out accounting and auditing certification process for al l professional staff
Develop audit work o f whole-of- Government annual accounts
Medium-term actions beyond 6 to 12 months
timely monthly reports
Complete roll-out o f AFMIS to line ministries for complete and timely in-year reporting
Undertake roll-out o f AFMIS to Mustoufiats
Develop accounting capacity of municipalities
Develop accounting capacity o f SOEs
Move toward modernized accounting standards over time Disclose state enterprises annual financial results and financial position, company objectives, ownership, governance structure and information on employees
All information should be audited. All SOEs (regardless o f form o f public ownership) should be covered
Establish the procedures and requirements for the line ministries for collection, review and follow-up o f the external audits o f donor implemented projects Finalize draft and gazette new Audit Law
Develop external audit regulation, implement Audit Law
Develop external audit o f procurement
Create Public Accounts Committee and i t s processes
Develop a system for scrutiny and response to audit reports including responses by involved ministries and scrutiny by a Public Accounts Committee o f Parliament
Develop role o f media and civ i l society in the scrutiny o f the budget (formulation and execution)
44
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