Kreditanstalt für Wiederaufbau DAC TASK FORCE ON DONOR

Kreditanstalt für Wiederaufbau

DAC TASK FORCE ON DONOR PRACTICES

FINANCIAL REPORTING AND AUDITING

DRAFT REPORT

18 MARCH 2002

BYTORUN REITE

ANDJENS CLAUSSEN

TABLE OF CONTENTS

1 Executive Summary ........................................................................................................... 1

2 Introduction ........................................................................................................................ 4

2.1 Scope of work ............................................................................................................ 4

2.2 Approach .................................................................................................................... 4

2.3 Different forms of aid – different requirements ......................................................... 6

2.4 Reference to international and/or national standards ................................................. 6

3 Donor reporting requirements ............................................................................................ 7

3.1 Financial reporting requirements ............................................................................... 7

3.2 External Auditing ....................................................................................................... 8

4 Transaction costs of Donor reporting requirements ........................................................... 9

5 Scope for Harmonisation.................................................................................................. 13

5.1 Steps towards harmonised procedures ..................................................................... 13

5.2 Identifying best practices for financial reporting and auditing ................................ 15

5.3 Proposed main principles for harmonised procedures ............................................. 19

5.4 Implications for donors ............................................................................................ 21

5.5 Standard terms of reference for audits ..................................................................... 22

5.6 Next steps for implementation of a common framework......................................... 22

Annex I – Terms of Reference

Annex II - Matrix of donor procedures

Annex III – Basic Financial Reporting Requirements and sample formats for reporting

Annex IV – Proposed Standard Terms of Reference for Audits

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1 EXECUTIVE SUMMARY

This report presents the outcome of a review of donor practices in the area of Financial

Reporting and Auditing commissioned by Kreditanstalt für Wiederaufbau (KfW), Germany,

on behalf of the OECD/DAC Sub-Group on Financial Management and Accountability. This

review has been conducted as a desk study. It has been based on review of documentation

collected by KfW from various donors in the OECD/DAC Sub-Group and supplemented by

additional information collected by the consultants from the same donors.

The review has covered the following main tasks:

• Assessment of current reporting and auditing requirements.

• An assessment of the scope for harmonisation of the procedures.

• Based on the above developed a proposed common framework for financial reporting

and auditing.

The assessment of current reporting and auditing requirements has revealed that the

requirements vary substantially among the donors/institutions.

1. Some donors/institutions use comprehensive guidelines and/or regulations

including specific formats and procedures for reporting.

2. Some have comprehensive guidelines and/or regulations that serve as guidance for

financial monitoring but formats and procedures for financial reporting are not

specified.

3. Finally, some donors/institutions only have general guidelines with reference to

financial monitoring without any specific requirements concerning financial

management systems and procedures to be applied and no specific formats and

procedures for reporting.

The few donors/institutions that makes reference to international standards are to be found in

the two first categories. Based on the above assessments and with reference to international

standards for accounting and auditing some basic principles, procedures, reporting formats

and terms of reference for audits have been developed.

The following basic principles should be considered as minimum requirements concerning

financial reporting:

• The Financial Reporting and the auditing procedures should provide information about

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all financial sources, allocation and uses of financial resources of the total project (not

only components related to one source of finance like an individual donor

contribution).

• Financial information should allow a reasonable control of how resources are used and

be linked with physical progress to allow assessment of cost efficiency

• Clarity of roles and responsibilities within financial management should be

documented as part of the internal procedures and the internal control system of the

executing agency.

• Reference to the government public finance management system should be made. If

the systems cannot be adopted, a development action plan for converging towards the

government public finance management system should be developed.

• As part of the appraisal, financial management arrangements, accounting policies and

procurements arrangements, including an overall financial management system review

should be carried out. This assessment should be carried out with a view to tailoring

the arrangements to the country context ant the specific requirements of the project

and the executing agency.

• Harmonisations should include content, accounting principles, timing, format, the

chart of accounts, frequency of reporting provided by recipients, including auditing

arrangements.

• Monitoring mechanisms for the harmonisation process should be defined. The

financial management arrangements should be reviewed/evaluated at regular intervals.

• Procedures for financial reporting and auditing should be well documented within each

donor organisation.

A sample format for reporting with basic requirements is outlined in annex III.

The Standard terms of reference for audits has been based on International Standards for

Auditing (ISA) with specific reference to special purpose audits. It has drawn upon previous

reviews of joint donor support (basket funding models etc.), the experience in undertaking

joint audits and the process in developing an agreed set of terms of reference.

The terms of reference has taken as a point of departure the basic principles for financial

reporting mentioned above.

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A standard terms of reference for auditing is provided in annex IV.

As a next step each donor in the subgroup should initiate a process to analyse the gap between

basic principles as mentioned above and identify areas of needed adjustments in internal

procedures/regulations.

Based on the reviews of the above common principles, a unified financial reporting and

auditing framework can be introduced.

In order to test the feasibility of the framework some country case studies may be conducted.

By identifying some new projects under design, donors could jointly commission a design

exercise to test the opportunity to develop a financial reporting procedure and format based on

the mentioned principles, formats and standard terms of reference.

Following the outcome of the “design test” as mentioned above, the principles could be

elaborated into detailed guidelines to be adopted by the OECD/DAC members.

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2 INTRODUCTION

2.1 Scope of work

This report presents the outcome of a review of donor practices in the area of Financial

Reporting and Auditing. The review has been commissioned by Kreditanstalt für

Wiederaufbau (KfW), Germany, on behalf of the OECD/DAC Sub-Group on Financial

Management and Accountability.

The report presents the outcome of the various tasks in accordance with the Terms of

reference (annex I). It has been based on review of documentation collected by KfW from

various donors in the OECD/DAC Sub-Group and supplemented by additional information

collected by the consultants from the same donors.

The review has covered the following main tasks:

• Assessment of current reporting and auditing requirements

• Assessment of transaction costs for partner countries and donors associated with

current donor reporting requirements

• An assessment of the scope for harmonisation of the procedures

The assessment of the scope for harmoninsation of donor procedures has included assessment

of the scope for single reporting and auditing frameworks, the implications it will have on

donors to move towards a proposed common framework and procedures to implement it. In

addition an outline of standard terms of reference for audits has been presented based on the

above and in compliance with International Standards of Auditing (ISA).

2.2 Approach

This review has been conducted as a desk study. Accordingly, it has been depending on the

availability of relevant documentation describing donor practises in the area of financial

monitoring and reporting. During the initial stages of the review it became evident that the

relevance of the documentation provided varied significantly. Initially documentation relevant

to the task was available only for a limited number of the eight donors listed in the Terms of

reference. On the other hand, some other donors not listed had submitted documentation.

Accordingly, a process was initiated to collect supplementary information from all the

donors/institutions. In total eight donors/institutions has provided documentation and thus

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been included in the review of which six are among those initially selected in accordance with

the Terms of Reference.

The donor administration in some countries is subdivided into credit institutions, technical

assistance agencies and institutions providing financial assistance in the form of grants. For

some of the countries information was not available for all the relevant institutions in the

country. Accordingly, the information may be biased since procedures vary between credit

institutions and agencies providing support on a grant basis.

The countries and institutions included in this review have not been selected in any scientific

manner. They represent donor agencies and multilateral institutions that voluntarily have

submitted information after an open invitation by the OECD/DAC task team. The information

may accordingly be biased towards those with a specific interest in the issue.

A set of criteria has been used to analyse the current donor practises related to financial

auditing and reporting. The criteria has been developed under the assumption that a minimum

set of requirements needs to be included if donors/institutions are to subscribe to the same

framework. The criteria reflect the overall objective of the review; to assess opportunities for

harmonisation.

One criterion has been to assess the comprehensiveness of their guidelines and procedures in

their financial monitoring of projects and programs. As part of this assessment specific issues

have been reviewed like:

• The extent that objective and purpose of financial monitoring and audit is clearly

defined.

• That systems and procedures of the recipient/executing agency are subject to an

assessment to ensure that financial information produced gives reasonable assurance.

• That the financial management procedures in the donor agency/institution are clearly

defined and sufficient to allow reasonable assurance to how resources are used.

• To what extent financial information is requested in a manner that gives sufficient

basis for assessing overall financial performance specifying what type of information

is to be presented and in what form.

• To what extent the information is presented to allow assessment of cost efficiency, i.e.

comparison of resource use with outputs produced (output or activity based financial

reporting).

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Some donors have elaborated detailed guidelines for financial monitoring and control. They

include requirements related to financial management systems and procedures of executing

agencies, and their internal procedures for assessing the information provided. Some has

included pre-assessment of financial management systems and/or accountability assessments

as a procedure to give added assurance to the reliability of financial information presented.

Among those donor with comprehensive guidelines and procedures some have developed

specific formats for reporting that executing agencies needs to produce and according to a

specific schedule complying with internal financial management requirements of the donor.

Another criterion has been related to the extent to which donor agencies/institutions have

applied a flexible approach in their requirements for financial reporting. While some donors

specifically state that they will to the extent possible use the reports of the recipient agency for

financial monitoring other donors request detailed formats and/or procedures for reporting to

be used (e.g. specific chart of accounts, schedules of reporting according to the donor

financial year). In the latter case the various requirements differ substantially among them.

2.3 Different forms of aid – different requirements

Many donors apply different procedures pending forms of finance and agreements like state

level bilateral cooperation agreements, co-financing and/or other forms of joint financing,

grant and credit financing, financing though cooperating partners, institutions and NGOs in

donor countries, etc. This issue has become visible in our review since there are clear

differences between forms of disbursement (advance payments, direct payment to suppliers,

replenishment, reimbursement, letter of credit, etc.) and in grant versus credit financing.

2.4 Reference to international and/or national standards

The main references for assessing the requirements of donors have been the International

Standards of Accounting (IAS) and Auditing (ISA) issued by The International Federation of

Accountants (IFAC). The International Public Sector Accounting Standards (IPSAS) which

build on the IAS has been used as an additional reference, in particular IPSAS 1 concerning

presentation of financial statements. In addition reference are made to the international

guidelines for financial management issued by International Organisation of Supreme Audit

Institutions (INTOSAI).

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3 DONOR REPORTING REQUIREMENTS

3.1 Financial reporting requirements

In the following the main findings from the review of the documentation is presented. A more

detailed presentation for each donor is provided in annex II.

The requirement concerning financial reporting varies substantially among the

donors/institutions. They can be classified into the following three main categories:

4. Those donors/institutions with comprehensive guidelines and/or regulations

including specific formats and procedures for reporting.

5. Those with comprehensive guidelines and/or regulations that serve as guidance for

financial monitoring but were formats and procedures for financial reporting are

not specified. In these cases financial reporting formats and procedures are to a

large extent determined by the financial reporting systems and procedures of the

executing agency.

6. Those with general guidelines to financial monitoring but only limited specific

requirements elaborated concerning systems and procedures to be applied and no

specific formats and procedures for reporting.

The few donors/institutions that makes reference to international standards are to be found in

the two first categories. Table 3.1 gives a summary of donors/institutions according to the

above classification.

Table 3.1 Donors/institutions according to financial reporting requirements.

Category Donor

1. Comprehensive guidelines and detailed

formats/procedures for reporting

UNDP, Japan, Germany

2. Comprehensive guidelines and general


Holland, World Bank

3. General guidelines, no specific


Norway, Sweden, United Kingdom

The first category of donors/institutions would need to revise own procedures and

requirements to adjust to a common framework for reporting. Donors/institutions in Category

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2 and 3 would by and large be able to adapt to a common framework without a need to revise

internal procedures. Donors/institutions in Category 3 could adopt more comprehensive

guidelines for financial management with a common framework as appoint of departure. For

these donors, the accountability assessment reviews conducted by some donors/institutions

would be useful to assess the level of assurance that is provided by the financial management

systems of recipient institutions.

3.2 External Auditing

In terms of auditing, three of the eight donors/institutions presents specific procedures for

audit engagements and reporting of which two has elaborated standard Terms of References

for audit engagements. In general, most donors/institutions require that audits shall be

conducted by an independent auditor and in accordance with “generally accepted principles”

or standards. Some make reference to International Standards of Auditing (ISA) and some

makes reference to financial administration regulations applicable to the Government

institutions of donor country.

The above suggest that there should be a scope to elaborate a general framework for audit

engagements in the form of some broad standard Terms of References in which all

donors/institutions may use as a point of departure. The frequency and procedure for audit

engagements would however need to be determined in each case and may by some

donors/institutions require that they adjust their internal guidelines to allow for audits to be

conducted in accordance with the recipient country fiscal year.

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4 TRANSACTION COSTS OF DONOR REPORTINGREQUIREMENTS

In this section we will briefly address the issues of transaction costs to give some guidance to

a way forward for harmonisation.

Transaction costs related to financial reporting and auditing can be associated with the

following:

• Transaction costs for executing agencies in recipient countries due to incompatible

reporting and auditing requirements by donors compared to financial reporting and

auditing requirements of host countries.

• Additional transaction costs for executing agencies in recipient countries due to

multiple donor requirements in the same projects and programs.

• Transaction costs for the donors related to the above.

In the following the two first issues will be the focus of our attention all though they are

closely related to the third issue. As an illustration we present the case of program aid to

Mozambique.

There are obvious transaction costs related to multiple financial reporting requirements by

donors to the same projects/programs. Obvious since they would require a financial

management system capable of producing reports in accordance with different chart of

accounts, different frequencies of reporting and sometimes also in accordance with different

fiscal years of the different donors. In many case it leads to the establishment of separate

budget and accounting procedures and systems tailored to meet individual donor

requirements. In addition, it demands a special effort by the recipient executing agency to

acquire what is of its core interest, a full overview of resources used for its regular financial

monitoring purpose. In order to produce such an overview it needs to reconcile the

information from various financial management systems.

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Box 1: Program aid/balance of payments support to Mozambique

For many years several donors provided program aid (balance of payments support) toMozambique guided by individual donor agreements. Although generally subscribing to thesame objectives and benchmarks for the support, the disbursement mechanisms applied andfinancial reporting requirements deviated. The cooperation suffered from adequate financialmanagement capacity by the Government in providing relevant and timely information relatedto the foreign exchange utilisation as well as the counterpart funding generated. If theGovernment was to comply it would have demanded resources to entertain extraordinaryreporting requirements not compatible with their financial management system. It demandedextraordinary efforts on the donor side to enable some form of “value for money assessment”both by the donor representatives of the country concerned as well as though various externalreviews demanding additional resources and time spent by the Government. In a move tosimplify and harmonise procedures to improve overall quality of monitoring and subsequentlyreduce transaction costs, the following were among the various steps taken:

1. One of the first steps taken was to conduct not only joint program reviews but alsojoint audits. This step alone reduced the transaction costs on the donor sidesubstantially (shared cost of a single audit rather than multiple audits) and on theGovernment side with the time spent on entertaining several donor initiated audits.

2. Technical assistance was provided to establish a financial monitoring system withinthe Ministry of Finance to account for counterpart funding associated with donorforeign exchange contributions. It reduced the need for repeated follow up by theindividual donors related to their own contributions, however, it led to significantlyincreased transaction cost on the Government side to be able to maintain the system.

3. As a step further donors in collaboration with the Government revised theirdisbursement procedure and gradually decided to rely on the financial information thatthe Government system can produce. TA was directed to improve on the Governmentsystem rather than maintaining a parallel donor funded system. This latter step hasproven a significant step in reducing transaction costs and at the same time increasedthe level assurance of the financial information provided.

The above may serve as an illustration of how donors can invoke steps to harmoniseprocedures using the host Government financial management system as a point of departureinstead of limiting their efforts to harmonise requirements among themselves.

With the current trend of moving towards program aid within sector wide approaches to

programming (SWAPs), the focus has in some cases been shifted from financial reporting of

individual donor contributions to outcomes and resource use of the total programme

regardless of the source of funding. Such an approach would be more in line with the regular

management approaches of similar institutions in donor countries were source of funding is

not the key issue, but total outputs and outcomes produced compared to total resources used

are the main issues. As an illustration of the process in moving towards a harmonised

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procedure to reduce transaction costs, the case of Primary Education Project in Nepal is

presented in Box 2.

Box 2: Basket funding approach in the Basic and Primary Education Project in Nepal.

In the phase II of the Basic And Primary Education Project in Nepal (BPEP II) several donorsjoined with the Government in a move to harmonise disbursement and reporting procedures inorder to reduce the transaction costs by simplifying monitoring and reporting requirements. Inthis project the World Bank was given the role of monitoring resource use including flow offunds from the donors through the Government to the program (the disbursementmechanism).

This model proved to be conducive for the Government in as much as it only had to relate toone financial management system rather than several and that release of resources from thedonor side was associated with only one reporting requirement rather than several. Thus itproved to be an illustration of harmonising donor requirements.

On the other hand, the project suffered severely from problems in providing the requestedinformation. This led to substantial delays in disbursements and subsequent delays inimplementation. This was due to the fact that the reporting requirement was based on aspecific chart of accounts incompatible with the Government financial management system.Accordingly, technical assistance was provided to train the financial officers of the 94 costcentres involved in the financial management of this national programme. With quarterlyreporting the 94 cost centres produced some 370 reports annually which needed to bereconciled at the central level and translated into the reporting format required by the donors.In order to comply with the specific reporting procedure the Government executing agencyhad to develop a “key” on how to translate Government chart of accounts to the donorrequired chart of accounts presenting the information in a manner that satisfy the donorrequirements.

The auditing requirements are met by the Auditor General through its regular audits inaccordance with the Governments standard chart of accounts and a special purpose audit toreconcile the information with the donor requested procedure.

In terms of financial reporting it induces significant additional costs to the Government, whilein terms of auditing the additional cost is minimal since the basis for the financial reports aresubject to a regular audit annually.

The above may serve as an illustration of the fact that harmonisation of donor procedures maybe an important step in the direction of reducing transaction costs, but it is not alone sufficientunless one takes into account the compatibility of the financial system by the hostGovernment.

At the one end harmonising donor procedures may entail that one donor takes the “lead”

through which all other donors institutions route their contributions. At the other, all

donors/institutions may provide resources in “parallel” applying a common set of procedures

and reporting requirements. In both cases, from the recipient side it enables them to consider

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one and only one financial management system and reporting requirement. However, as box 2

illustrates in the case of the basket-funding model in Nepal, it is often still an opportunity to

explore further the possibility of building on the host Government financial management

system.

This leads us to the third issue of transaction costs on the donor side. Although the ideal

situation may be that the donors work through a lead donor with co-financing arrangements, it

will still require that the “lead” donor requirement to the extent possible is open to adjust to

the financial management system of the host country. Even if a single reporting framework

was achieved it may not necessarily comply with host Government systems or capacities to

deliver. This leads us to the next sections of the report discussing and presenting some basic

guidelines and procedures which at the one end may provide reasonable assurance and meet

basic donor requirements and at the other, allow opportunity to adjust the requirements in

accordance with host Governments systems and capacities to deliver.

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5 SCOPE FOR HARMONISATION

5.1 Steps towards harmonised procedures

Harmonisation will require a change management perspective to the process of adopting

common donor reporting requirements and procedures. The section presents some main steps

towards harmonising procedures for financial reporting and auditing among donors.

Harmonisation of procedures for financial reporting and auditing will induce changes in

internal procedures in various organisations in OECD countries. It will require commitment

and participation of the relevant stakeholders within the respective organisations.

Commitment, realism and monitoring of progress are key critical success factors in this

process.

Potential “reality gaps” between formal procedures and actual practices should be addressed

to benefit from developing harmonised procedures. To capture such discrepancies the need for

monitoring mechanisms and evaluations are emphasised.

This report will provide input for preparation, discussion and decision-making related to some

key areas that needs to be considered in order to develop harmonised procedures for financial

reporting and auditing; 1) analysis, 2) decision-making on the functional scope and time frame

for adopting harmonised procedures, 3) GAP analysis in each agency and 4) elaborating

implementation strategies. It is our view that streamlining recommendations with those of

interrelated sub-groups within the Task Force’s work is important. The sub-group on reporting

and monitoring is assumed to be closely interrelated with the sub-group for financial reporting

and auditing.

To following is an outline of the proposed steps to be taken (ref figure 5.1):

Step 1: Identify “best practice”

Based on a review of documentation on existing donor procedures for financial reporting and

auditing this report will present some findings that provide the basis for identifying “best

practices” among OECD/DAC donors. “Best practices” are identified with reference to

criteria that contribute to reduce transaction costs of recipients, facilitate the process of

harmonisation, and with content-quality in line with existing international standards.

Step 2: Agree on main principles and a “concept” for harmonised procedures

Main principles for financial reporting and auditing are proposed with a view towards

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decision-making and commitment of new harmonised procedures within OECD/DAC Sub-

group on Financial Management and Accountability. The main principles are proposed with a

view towards establishing minimum requirements for financial reporting and auditing as a

point of departure for harmonisation. Subsequently the main principles should be developed

and applied to define a “concept” for harmonised procedures based on examples from donors

with best practises.

Figure 5.1 Steps towards harmonised donor procedures for financial reporting and

auditing

Step 3: Carry out GAP analysis at organisational level

Gaps between existing procedures and the concept model needs to be identified by each donor

to adopt and implement harmonised procedures. The GAP analysis should be prepared by

each donor/agency with reference also to the OECD/DAC Sub-group on Financial

Management and Accountability. Methodology should be uniform to facilitate harmonisations

and to avoid differences in terminology.

Step 4: Time schedule and implementation

Based on input from the GAP analysis, a realistic time-schedule for gradual adoption of the

new harmonized procedures by each donor should be made. This could be shared as

information on where each donor is in the process of adopting the framework.

3 GAP- analysis

2 Propose common principles

6 Evaluation

5 Monitoring

4 Implementation

1 Identify ”best practice”

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Step 5: Establish monitoring mechanism for implementation of main principles

Mechanisms for monitoring progress and actual implementation of the main principles and the

“concept model” will be required. Some pooling of resources or coaching by institutions with

“best practices” should be considered to facilitate the procedural changes for donors/agencies

with large GAPs.

Step 6: Evaluate and/or assess the effects of harmonised procedures

A basic assumption for initiating harmonised procedures for financial reporting and auditing is

to reduce transaction costs at a project level in recipient/borrower countries. Another

assumption is that the downscaling of parallel systems will lead to a strengthening of

government public finance management systems in recipient countries. The actual effects of

harmonised procedures should be evaluated periodically.

5.2 Identifying best practices for financial reporting and auditing

In the first sections of this report documentation of donor requirements for financial reporting

and auditing are presented. As illustrated in previous sections the donor requirements vary in

terms of comprehensiveness and flexibility. In this section the analysis is further extended. A

normative assessment is made with a view towards identifying agencies with “best practices”

according to specific criteria. Before presenting the specific criteria, the overall objective, key

assumptions and some critical success factors are outlined.

Overall objective, key assumptions and critical success factors

The overall objective of the work within OECD/DAC Task Force on Donor Practices is to

cost-effectively reduce the burden on the capacities of partner countries in managing aid

relationships. A performance indicator of the extent to which this objective is met is actual

reduction in the transaction costs of recipient countries.

Harmonisation of donor procedures is regarded as a key instrument to reduce the burden on

the capacities of partner countries. In addition to harmonisation of donor procedures a key

assumption is that the procedures are compatible with government’s public finance

management systems in recipient country. These key assumptions are critical success factors

and the point of departure for the recommendations put forward in this report.

• One critical success factor is actual tailoring to country context adopting procedures

compliant with recipient governments financial management systems.

• A second critical success factor is actual convergence between donor procedures.

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If convergence takes place between donor requirements and procedures, and donors actually

tailor the procedures to country context adopting government public finance management

systems, the number of specific reporting relations will be significantly reduced. The process

will reduce the transaction costs of both donors and recipients. Some organisational

implications will be highlighted in another section of this report.

Criteria for identifying “best practices”.

As a point of departure for our work we have identified criteria for differentiating between

donors. In doing so, we have carried out a normative assessment of donor procedures and

features that contribute to reducing recipients’ transactions costs. The assessment has been

carried out using three important aspects/dimensions;

1) the content-quality dimension,

2) the transparency dimension, and

3) the tailoring-to-country dimension.

These are briefly described in the following paragraphs.

The content-quality dimension. To develop cost-effective financial reporting and auditing

mechanisms the effectiveness of the system is one aspect and the costs are another. The

transaction costs are closely related to the complexity of the financial management system,

herein the financial reporting and auditing requirements, and the absolute quality level the

donors demand. Many and detailed requirements, ceteris paribus, will involve higher

transaction costs. However, it is important to identify minimum standards in the

harmonisation process to ensure that financial reports gives a “fair” presentation and audits

gives “reasonable” assurance. The variation between donors in minimum requirements is

highlighted as a point of departure. The international standards for financial reporting and

auditing have served as benchmarks in the normative assessment.

The issue of transparency. To be able to harmonise procedures there is a need to address the

issue of transparency associated to procedures and practices that donor agencies apply.

Transparency is closely related to the level of documentation of policies, procedures and

practices, including compliance control. To be able to develop a common understanding of the

main principles and minimum requirements for financial reporting and auditing, the level of

documentation is an important aspect to ensure transparency in application of procedures. A

move towards more comprehensive guidelines and thus more transparent procedures is, in our

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view, a prerequisite to successful harmonisation. It is important to note that a demand for

increased transparency, in the short run, will lead to an increase in the administrative burden

of some OECD/DAC donors. This should be taken into consideration and ways and means to

facilitate the change should be discussed in the Task Force.

Tailoring to country/project dimension. Harmonisation of procedures must take place at a

project/programme level and take into account the country context. Thus the level of tailoring

to the country context and the flexibility in adapting adequate procedures according to

existing financial management systems, risk, management cycle and other project specific

factors are important. Designing adequate systems require assessment of the country context,

the nature of the project, the implementing agency, staff skills and the inherent and control

risks involved.

Table 5.1 presents an overview of the results of the normative assessment of donor

procedures. A scale, from; Low (1) – Medium (2)– High (3) indicate each donor countries

score in each dimension according to the available documentation provided. The donor with

the highest total score has the overall “best practice”.

Table 5.1. Overview of normative assessment of donor procedures

“Score”/criteria Content-Quality Transparency Tailoring to country-

context

High (3) World Bank, UNDP,

Holland

UNDP, Japan,

Germany, Holland,

World Bank

World Bank, Norway,

Sweden

Medium (2) UK, Germany, Japan UK UK, UNDP, Holland

Low (1) Norway, Sweden Norway, Sweden Japan, Germany

The World Bank has the highest overall score with a high score on all the criteria; content-

quality, transparency and tailoring to country context. It is important to note that the

guidelines of the World Bank have recently undergone a substantial revision and reflects the

World Banks’ policies that emphasise tailoring to country context, dialogue with partners and

recipients and focus on development of government public finance management systems in

recipient countries.

The assessment is made based on available documentation. Other donors might have practices

that to a large extent are on par with the World Bank’s practices in several areas. Due to the

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high level of documentation and thus transparency of World Bank practices, these guidelines

are considered as a good example of “best practice” and will provide a useful point of

departure for further harmonisation. Some elements in the procedures of UNDP and Holland

should also be considered as examples of “best practice” in some areas. A brief presentation

of some of the World Bank’s principles and procedures is given in the following:



is carried out. Project supervision procedures are elaborated, negotiated and agreed

upon between World Bank staff and recipients. Other donors involved in the project

are invited to participate in the discussions. Agreements include content, timing,

format and frequency of reporting provided by recipients, including auditing

arrangements.

• Prior to carrying out the financial management assessment, the country context should

be examined. The Country Financial Accountability Assessments (CFAA) and other

relevant information on fiduciary risks in the country context are important

instruments at this stage.

• The World Bank guidelines create clarity of roles and responsibilities within the World

Bank and between World Bank and recipient. Documentation of roles and

responsibilities within financial management is an integral part of designing the

financial management system.

• According to the guidelines, the Financial Monitoring Reports should provide

information about financial sources, allocation and uses of financial resources of the

whole project (entity), and are not limited to providing information on World Bank-

funded resources.

• The World Bank accepts either cash or accrual accounting, depending on the nature of

the activity. The cash basis of accounting is normally accepted for projects

implemented by non-revenue-earning entities. The accrual basis is required of all

commercial/revenue-earning entities in receipt of World Bank funds. Project

accounting policies are agreed on as part of the appraisal of the project.

• The main principles for financial monitoring reports, are the following:

o Financial Management Reports should provide the World Bank with sufficient

information to establish whether:

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� funds are used for the intended purpose,

� project implementation is on track, and

� budgeted costs will not be exceeded.

o Financial information should be linked with information on physical progress

and procurement to give assurance on consistency between financial and

physical progress.

o Project monitoring by the World Bank should be cost-effective from the

viewpoint of both the World Bank and the recipient. Ways and means to

strengthen cost-effectiveness are:

� Reporting requirements that necessitate recipients investing or

maintaining parallel or duplicate systems should be avoided, as far as

possible.

� The same structure of financial information should normally be used

for project planning and costing, Financial Monitoring Reports, audited

financial statements of the project, and implementation completion

reports.

� The requirements for financial and procurement monitoring should, as

far as possible, be aligned and integrated with other World Bank

requirements for project progress reporting and monitoring, including

project outcome monitoring and reporting. For example, when semi-

annual progress reporting is required, the Financial Monitoring Reports

should be an integral part of these reports.

� Wherever possible, common reporting and monitoring arrangements

should be agreed with other donors involved in the project.

5.3 Proposed main principles for harmonised procedures

This section aims at proposing some main principles that can serve as a point of departure for

the harmonisation of donor procedures. The main principles are deducted partly from “best

practices” and partly from international financial reporting and auditing standards.

Content-quality

20

• The Financial Reporting and the auditing procedures should provide information about

all financial sources, allocation and uses of all financial resources of the total project

(not only components related to one source of finance like an individual donor

contribution).

• Financial information should;

o allow a reasonable control of how resources are used

o cover all funds, regardless of source

o be linked with physical progress to allow assessment of cost efficiency, i.e.comparison of resource use with outputs produced (output or activity basedfinancial reporting)

o be complemented with evaluation of efficiency of the instruments applied atspecific intervals.

• The harmonised donor procedures for financial reporting should define clear roles and

responsibilities between donor and recipient.

• The role of the internal auditor and external auditor should be clearly defined.

• Terms of Reference for external auditors should be negotiated and agreed upon.

• Reference to the government public finance management system should be made. If

the systems cannot be adopted, a development action plan for converging towards the

government public finance management system should be developed.

• At regular intervals the financial management arrangements should be

reviewed/evaluated.

Transparency

• Clarity of roles and responsibilities within financial management should bedocumented as part of the internal procedures and the internal control system of theexecuting agency.

• Procedures for financial reporting and auditing should be well documented within each

donor organisation.

• If government public finance management systems are not used, a development plan

should be elaborated and monitored as part of the project monitoring/ or country

21

portfolio monitoring.

Tailoring to country-context



should be carried out. This assessment should be carried out with a view to tailoring

the arrangements to the country context ant the specific requirements of the project

and the executing agency.

• All donors involved in the project should be invited to participate in the definition of

financial reporting and auditing procedures. Harmonisations should include content,

accounting principles, timing, format, chart of accounts, frequency of reporting

provided by recipients, including auditing arrangements.

• Monitoring mechanisms for the harmonisation process should be defined. To benefit

from harmonisation actual practices must change at the project level. Key Performance

Indicators would be based on measuring the extent to which government public

finance management systems in recipients’ countries are adopted or measuring the

actual transaction cost of recipients.

A sample format for reporting with basic requirements are outlined in annex III.

A discussion on the proposed main principles should be carried out in the OECD/DAC Task

Force on Donor Practices. On the basis of the main principles and a presentation of the “best

practices” identified previously in the report, a concept for harmonised procedures should be

elaborated.

5.4 Implications for donors

As the above indicate, in order to adopt a principle of tailoring financial reporting to country

financial management systems requires for some donor discontinuation of specific formats

and schedules of reporting. It means for all donors to consider adopting a process of

conducting assessment and design of financial reports as an integrated component of overall

project and program design rather than applying predefined standard formats and procedures

in all countries/projects.

For some donors that to day only have general guidelines for financial monitoring to adopt the

principles as presented above and elaborate them into more comprehensive internal

guidelines. For those with detailed guidelines and principles it would mean to allow

22

adjustment in accordance to country financial management systems.

The proposed standard terms of references would be applicable to any format and procedure

for reporting as long as the basic accounting principles are followed along the lines mentioned

above.

5.5 Standard terms of reference for audits

Standard terms of reference for audits are considered as one of the “tools” which may be used

in harmonisation of donor procedures. The Standard terms of reference for audits has been

based on ISA with specific reference to special purpose audits. It has drawn upon previous

reviews of joint donor support (basket funding models etc.), the experience in undertaking

joint audits and the process in developing an agreed set of terms of reference.

The terms of reference has taken as a point of departure the basic principles for financial

reporting mentioned above which among others include:

• The financial reports should reflect total project/programme resource use, not only use

of a specific source of funding

• A review of the financial management system and procedure.

• It should include review of assets, review of management procedures including

procurement procedures applied and, reconciliation of financial reporting according to

regular chart of accounts with activity based financial reporting.

The Terms of reference assumes that all donors providing support to the project should be

provided copies of letter of engagements, audit opinions and management reports even though

the client is the executing agency of the recipient country.

In annex IV a proposed standard is introduced.

5.6 Next steps for implementation of a common framework

As a next step each donor in the subgroup should initiate a process to analyse the GAP

between basic principles as mentioned above and identify areas of needed adjustments in

internal procedures/regulations.

Based on the reviews of the above common principles, a unified financial reporting and

auditing framework can be developed.

23

In order to test the feasibility of the framework some country case studies may be conducted

testing the principles and procedures on some projects with multiple donor support. By

identifying some new projects under design, donors could jointly commission a design

exercise to test the opportunity to develop a financial reporting procedure and format based on

the above principles.

Following the outcome of the “design test” as mentioned above, the principles could be

elaborated into detailed guidelines to be adopted by the OECD/DAC members.

1

ANNEX I

TERMS OF REFERENCE FOR CONSULTANTS TO ELABORATE

ASPECTS OF FINANCIAL MANAGEMENT AND AUDITING OF BILATERAL

DONORS

PURPOSE OF THE CONSULTANCY

• To identify and to document requirements in the area of financial management

and auditing related to financial and technical co-operation by bilateral donors

to recipient countries.

• To guide and advise on ways and means to optimally harmonise and

streamline the above-mentioned requirements that are currently in effect in the

development community, and

• To provide guidance on the various options to facilitate the development of a

widely agreed reporting and audit framework.

BACKGROUND

To respond to the challenge to harmonise procedures of bilateral donors the

Development Assistance Committee (DAC) of the Organisation for Economic Co-

operation and Development (OECD) set up the Task Force on Donor Practices in

January 2001, with a two years mandate, to identify and document practices that could

cost-effectively reduce the burden on the capacities of partner Countries in managing

aid relationships. The purpose of the Task Force is not to decide on fundamental

policy questions related to individual agencies‘ choice of modalities but to look at the

most appropriate practices where such modalities are applied.

The Task Force is focusing on three sets of activities, each the responsibility of a Sub-

Group:

• Financial Management and Accountability

• The pre-implementation phase of the project and programme Cycle, including

design, appraisal and risk assessment.

• Reporting & Monitoring

Each Sub-Group has agreed a work programme over the period to end 2002 (see

attached). These comprise a combination of desktop studies and examination of field-

2

level experience. The programmes of the Sub-Groups on Pre-Implementation (SPI)

and Reporting and Monitoring (SRM) are closely inter-related as the framework for

reporting and monitoring is generally designed prior to implementation. To build on

these synergies this Consultancy will address elements of both Groups’ work

programmes. The Sub-Group on Financial Management (SFM) is responsible for all

financial issues including financial reporting by partners.

The Task Force is open to all Members of the DAC, as well as its regular observer

organisations (the World Bank, the IMF, the UNDP), the OECD Development Centre,

the European Commission, and the Club du Sahel. The Task Force, and its Sub-

Groups, are developing close links with other networks and working groups within the

DAC, and other relevant initiatives to promote greater harmonisation of donor

procedures (e.g. the various Multilateral Development Bank Working Groups and the

Special Partnership with Africa).

The Sub Group 1 on Financial Management and Accountability has divided its work

into five task

• Task AConceptual Framework

• Task BCollaboration on Diagnostic Work

• Task CDonor Accountability

• Task D Standards

• Task E Financial Reporting and Auditing

WORK OF TASK E

The sub-group noted that multiple financial reporting and auditing requirements by

individual donors is a significant contributor to additional costs and capacity overload

in recipient countries, especially those with weaker capacity. It also noted that there is

already a well developed body of international standards in this area. The sub-group

agreed to:

Identify and document the policies and procedures of DAC Member countries with

respect to financial reporting and auditing of different forms of donor-financing (i.e.

traditional projects and newer models of aid delivery).

Compare these procedures to available international standards, and identify

differences.

3

Develop a range of options by which common financial reporting and auditing

requirements could be accepted by all (or most) donors in individual projects and

programs in a way that is cost effective, provides donors with the information and

assurance that they need, and contributes to better quality reporting and auditing in the

recipient country.

The members of Task E of the Sub Group 1 on Financial Management and

Accountability are seeking the support of a Consultancy for the work formulated

below:

SCOPE OF WORK

On the basis on the documentation available the Consultant’s task is as follows:

• Document and analyse donor reporting arrangements in the field of financial

management and auditing including comparison to international standards;

• Assess the cost of Donor reporting requirement on partner countries;

• Make the case for harmonisation of diverse bilateral donor reporting

procedures more compelling;

• Identify scope for single reporting frameworks and single audit frameworks;

• Assess the implications of these models so that each of the Members can form

an assessment about how different that is from where they are now;

• Based on this analysis and the objectives of the subgroup options should be

developed as to how the objectives in this key area can be furthered.

• Develop standard terms of reference for auditing development co-operation

funds based on international standards

To carry out his work, the Consultant is asked to co-operate very closely with the

Consultant of the MDB Group, Mr. Charles Coe, e-mail: [email protected].

TIMETABLE

The Consultant should start with his work in January 2002, analysing the available

documentation. The first draft of the study should be submitted middle of March

whereas comments by the members of Task E will be made available at the middle of

March 2002 so that the final version of the study can be submitted by end of March

2002.

4

It is estimated that the Consultant will need six weeks to prepare the documents.

SKILLS REQUIRED

The Consultant will need an understanding of the financial management and auditing

in the field of development aid. He should also be familiar with international auditing

standards.

DOCUMENTATION AVAILABLE

The following bilateral donors have send their rules and regulation to KfW: France,,

Germany, Ireland, Japan, New Zealand, Norway, Sweden, Switzerland, UNDP, World

Bank

This documentation will be the basis for the analysis to be carried out.

FUNDING ARRANGEMENTS

The Consultant will be financed by KfW; the contract with the Consultant will be

made between the respective consulting firm and KfW.

Contact person within KfW is

Mr Knut Bäse

Secretariat of International Credit Affairs

Kreditanstalt für Wiederaufbau

Palmengartenstr. 5 - 9

60325 Frankfurt am Main

Germany

Telephone +49 69 7431 - 2562

Telefax +49 69 7431 - 3363

e-mail [email protected]

Frankfurt, December 2001

1

ANNEX II

Matrix of donor practisesUNDP HOLLAND

General UNDP has a comprehensive framework for financialmonitoring and auditing. Detailed guidelines are found in theUNDP Programming Manual in addition to UNDP FinancialRegulations and Rules.

In addition, UNDP carries out Country Assessments inAccountability and Transparency (CONTACT) for which aseparate manual has been developed.

Holland has elaborated detailed guidelines includingfinancial monitoring in their Operational ProceduresManual. The manual presents clearly defined objective andpurpose for financial management, reporting and audit

Financialmonitoring

Specific formats have been developed (annexed to UNDPmanual). The budget format uses a specific chart of accounts.Accordingly, in terms of financial reporting the executingagency will need to maintain accounts with cross reference tothe UNDP proposed accounting structure unless theproject/programme accounts are maintained separate fromthe regular accounting system of the recipient institution..

UNDP requires quarterly reporting with financial year equalto the calendar year and annual auditing presented within 30April.

UNDP has also developed formats for reporting to enableactivity based financial monitoring.

The Operational Procedures Manual presents a standardproject cycle with guidelines and checklists for each elementin the cycle.

Specific formats with checklists for monitoring has beendeveloped, but not for financial reporting. Specific formatsfor financial reporting are not presented (i.e. flexible chart ofaccounts).

Progress reports have to be submitted semi-annually withoutspecifying the financial year.

Activity based financial reporting has specifically beenstated as an important factor to assess in the ActivityAppraisal phase and for monitoring. To what extent it isactually implemented is unknown.

Externalaudit

UNDP has defined objective and purpose as stated both inthe UNDP Manual and Financial Regulations.

In terms of procedures and guidelines the UNDP Manualalso gives reference in the UNDP Financial AdministrationRules and Regulations.

The Operational Procedures Manual presents detailedguidelines for audit with clearly defined scope andobjective.

It makes reference to and has elaborated audit guidelines onthe basis of ISA.

A specific scope and content of auditors report and opinionare presented.

Audit reports are to be submitted within 6 months of thepartner’s financial year and end of project.

Overallassessment

Comprehensive framework that would need adjustments informat for reporting if it was to be harmonised with acommon framework and to apply standard ToRs for audits.

Comprehensive procedures and requirements howeverflexible to allow adjustment to partner financial year,reporting formats, etc. Gives details of content (like achecklist) rather than demanding specific forms andschedules.

2

GERMANY JAPAN

General KfW has not presented any specific financial managementguidelines, rules or regulations. They appear as an integralpart of general guidelines and part of the standard loanagreement/grant agreements.

In the area of financial monitoring there are no specificobjectives defined other than assessment of planned versusactual resource use.

JBIC has not presented any specific financial managementguidelines, rules or regulations. Like KfW they are anintegral part of general guidelines and part of the standardloan agreement/grant agreements.

In the area of financial monitoring there are no specificobjectives defined other than assessment of planned versusactual resource use.

Financialmonitoring

In the area of financial reporting there are specific formatspresented but with flexible classification. The outlined chartof accounts is divided between procurement (investment) andother services.

Specific procedures apply pending form of disbursement(replenishment, advance, direct payment and LC). Reportingis linked to procurement and replenishment and similar toWorld Bank procedures applying to investment lending.

No specific schedule of reporting is presented (financialreporting quarterly, semi-annually, annually).

Not activity based financial reporting specified.

In terms of financial reporting, specific formats for reporting(SOEs) with specific chart of accounts are introduced.

Specific procedures apply pending form of disbursement(replenishment, advance, direct payment and LC). Reportingis linked to procurement and replenishment and similar toWorld Bank procedures applying to investment lending.

Not activity based financial reporting.

Externalaudit

KfW has elaborated standard Terms of Reference forauditing with a clearly stated objective reflecting generalobjectives in program guidelines. There are no specificreferences to national and international standards.

There are no specific format required but types of reportsstated like management letter, etc. are included in standardTerms of Reference.

No specific schedule for auditing has been stated.

None of the documents provided give any specifications.

Overallassessment

Financial monitoring guidelines are part of generalguidelines and the standard loan /grant agreements.

Adjustments will be required in reporting framework andToRs for auditing if it is to be harmonised with a commonframework.

Financial monitoring guidelines are part of generalguidelines and the standard loan /grant agreements.

If format for reporting are to be harmonised with a commonframework (use a specified chart of accounts) it will requireadjustments in the formats and procedures specified.

3

WORLD BANK UNITED KINGDOM

General The World Bank has an extensive framework for financialmonitoring and auditing, and puts an emphasis onstreamlining the reporting and auditing procedures. TheWorld Bank underlines the principle of tailoring the reportingand auditing procedures according to the level of risk and thecomplexity of the project. Nevertheless some minimumrequirements are explicit.

The World Bank has a sample of reporting formats andminimum requirements for reporting frequency.

An assessment for developing financial managementarrangements is carried out prior to approval of project andthroughout the implementation.

DFID has provided the team with the general instructionsused for DFID staff. The emphasis is put on internalfinancial management systems and internal control.

The instructions have limited explicit standards for financialmonitoring and audits of DFID-funded projects.

Principles of aid management are not published yet.

Financialmonitoring

It is World Bank policy that financial reports, as far aspossible, should be in a format that the recipients systems canproduce. If required the World Bank staff aim at developingacceptable formats in collaboration with the recipients. Theunderlying principles for financial monitoring reports are asfollows:

1) The reports should provide information to establishwhether funds disbursed are being used for the purposeintended, project implementation is on track and budget costwill not be exceeded.

2) Financial information should be linked with informationon physical progress and procurement.

3) Cost effective from the viewpoint of both World Bank andrecipient/borrower.

Content, formats and frequency of reporting should bedetermined as part of project appraisal. Minimumrequirements are;

- Financial reports must include a statement showing cashreceipts (periodic and cumulative) by source and expenditureby main expenditure classification; beginning and endingcash balances; and supporting schedules comparing actualand planned expenditures.

- Cash accounting and accrual accounting principles areacceptable. Commercial/revenue-earning entities must applyaccrual principle.

- Avoid duplicate systems. The monitoring cycle should asfar as possible be streamlined with the project managementcycle.

The World Bank makes reference to the InternationalAccounting Standards (IAS).

No explicit requirements for reporting.

Reference to disbursement.

(A more detailed assessment will be pending additionaldocumentation to be collected)

Externalaudit

Yearly audits of financial statements are required. There areno specific formats for audit reports.

For audits of commercial, industrial or business entities,reference is made to the International Standards of Auditing(ISA).

According to DFID policy auditing can be carried outthrough the auditing systems in the recipient country or otherexternal auditors with a specified Terms of reference.

DFID makes reference to the GAGAS (General AcceptedGovernment Auditing Standards) defined by INTOSAI.

Overallassessment

The World Bank has developed a comprehensive frameworkwith opportunities to adjust reporting requirements to thefinancial management systems of executing agencies.

Based on the available information the financial monitoringand reporting requirements are integral part of generalprogramme management guidelines with no detailedrequirement concerning format and procedures for reporting. (A more detailed assessment will be pending additionaldocumentation to be collected).

4

NORWAY SWEDEN

General NORAD strongly advocates the principle of recipientresponsibility that implies that the partner’s systems androutines are to be applied as far as possible. This applies i.a.to procurement procedures, accounting and audit, reports anddisbursements.

NORAD has printed formal, general guidelines focusing onsome core requirements.

The team has not yet been provided with guidelines andregulations expressing Sida’s policy for its financialmonitoring and audits nor any printed formal financialcontrol guidelines.

According to one source, before committing funds to anyprogramme a checklist of budgetary/financialmanagement/audit issues is used to ascertain the quality ofrecipient or partner government financial arrangements.(Source: Crown Agents, Appendix F, p.29; the checklist isnot submitted to the team).

Financialmonitoring

NORAD has no requirement that accounts shall beperformed according to a specified standard. If the partnercountry has established a standard for accounting NORADexpects this to be followed. In the opposite case NORADwill usually expect accounting to be performed in accordancewith generally accepted accounting principles.

There are no specific report formats required. However, thespecific content of the reports and the procedures forapproval of them must be regulated in theAgreement/contract or other binding format.

Core financial reporting requirements:

- Progress in accordance with work plans and budgets

- Expenditure reports in accordance with budget, and auditedaccounts.

Disbursement of Norwegian aid funds shall be based onapproval of these reports.

The agreement template shows some core requirements, butno formal format requirements.

The Progress Report shall show at a minimum presentallocated budget, advances, expenditure and unutilisedbalance.

The Annual Progress Report, based on LFA, should containan analysis and an assessment of the implemented activities,time frame and actual cost in relation to the annual plan ofoperations.

The Results Analysis Report, prior to the End-term Reviewshall present a cumulative overview of all costs and inputsversus all realized outputs for the entire period.

Externalaudit

NORAD makes no requirement that audits shall beperformed according to a specified standard. If the partnercountry has established a standard for auditing NORADexpects this to be followed. In the opposite case NORADwill usually expect audit to be performed in accordance with“generally accepted auditing principles”.

Disbursements made to the partner shall be audited either bythe partner country's Auditor General, or any othergovernmental auditing body that normally is auditing theaccounts of the implementing ministry/agency. If the AuditorGeneral or the auditing body lack the capacity or competenceto perform the audit, a recognised - preferably an“internationally recognised” - auditor firm should be used.

The basic audit frequency that should be followed is anannual audit in accordance with the partner's fiscal year.

There are no standard Terms of references for auditselaborated but in standard agreements it is required that theaudit shall confirm that funds have been accounted for at alllevels and that they have been applied as intended.

The project/programme shall be audited annually. The auditsshall be carried out by an independent and qualified auditor(e.g. Auditor General, Certified Public Accountant,Chartered Accountant) and in accordance with “generallyaccepted international standards on auditing”.

The audit report shall certify whether submitted financialreports are correct and give a true and fair view of theadministration of the project/programme in accordance with“generally accepted international accounting standards”.

If requested by Sida, the audit report shall also certify thatprogress reports give a true and fair view of theproject/programme. Furthermore, if requested by Sida, theaudit report shall comment on the management and theinternal control system of the project/programme.

The audit report shall state which measures have/have notbeen taken as a result of previous audit reports, and whethermeasures taken have been adequate to deal with the reportedshortcomings. The executing agency/institution subject tothe audit shall provide Sweden with copies of audit reportsfrom the audit of the project/programme.

Overallassessment

General guidelines addressing the issue of financial reportingand auditing.

General guidelines addressing the issue of financialreporting and auditing.

1

Annex III – Basic requirements and sampleformat for financial reporting

The following are basic requirements and principles to be observed when developing

and agreeing on financial reporting procedures. The requirements are associated with

the presentation of financial information:

1. The financial reports should provide information on who is the reporting

entity.

2. The financial reports should provide information on the unit responsible for

maintaining accounts and preparing the financial report.

3. It should state the accounting policy applied (e.g. accrual or cash basis).

4. It should specify all sources of funding; domestic and foreign.

5. The financial report should present all cash receipts and their uses for the total

project including all sources of funding and all uses.

6. The financial report should present all cash receipts and their uses both for the

reporting period and cumulative with presentation of beginning and end cash

balance.

7. The financial report should present an additional schedule showing planned

sources and uses of funds, both for the period and cumulative, to allow

assessment of deviations between planned and actual resource use.

8. It should contain a separate schedule with notes to explain major deviations.

9. It should, to the extent possible use the chart of accounts of the recipient

country executing agency for classifications of revenue, expenditure,

financing, opening and end balance.

10. In a separate schedule it should present the classification of expenditure by

activity compatible with reports on physical progress.

11. It should be presented on a quarterly, semi-annually or annual basis what ever

is agreed upon complying with the fiscal year of the executing agency.

12. Sound accounting policies imply that the accounting entity reconciles accounts

on a monthly basis. It should accordingly present the financial report for the

2

relevant period within one month after the end of the period.

Sample formats for reporting:

Sources and uses of funds by [reporting entity] for [project].

Prepared by [entity/unit]

Covering the period from [date] to [date]

All figures in [currency]

Budget[quarter/sixmonths/year]

Actual[quarter/sixmonths/year]

Variance CumulativeBudget

CumulativeActual

Note

Receipts bysource

…..

1

Expenditureby item

…..

2

Receiptslessexpenditure

..

Openingcashbalance

…..

..

Net change..Receiptslessexpenditure

...Foreignexchangeadjustments

Closingcashbalance

…..

NOTES:

1. ………………

2. ………………

3

MEMO ITEM: Specification of accounting policy.

Uses of funds by activity by [reporting entity] for [project].

Prepared by [entity/unit]

Covering the period from [date] to [date]

All figures in [currency]

Activity Budget[quarter/sixmonths/year]

Actual[quarter/sixmonths/year]

Variance CumulativeBudget

CumulativeActual

Note

Activity 1. 1

Activity 2. 2

…. ..

Totalexpenditure

NOTES:

1. ………………

2. ………………

1

Annex IV – Sample terms of reference forauditing

INTRODUCTION

<Name of audit firm> has been assigned as auditor for <Name of

Programme/Project>.

<Brief description of the programme/project. Identification of the donor/funding

organisation. Reference to and identification of the funding-agreement between the

programme/project and the donor/funding organisation>

AUDIT OBJECTIVES

• The audit shall be carried out in accordance with international generally

accepted standards on auditing (ISA 800) as issued by the International

Federation of Accountants (IFAC).

• The specific objectives of the audit are:

o to give an opinion as to whether the financial statements give a true

and fair view of the revenue collected, the expenses/costs occurred and

the financial position of the programme/project at the time of reporting.

o to evaluate and express an opinion on the programmes/projects

accounting- and internal control systems established to ensure correct

financial reporting and safe custody of programme-/project financed

assets in accordance with the programme/project objectives.

AUDIT SCOPE

• The audit shall be designed to enable the auditor to express an opinion on the

financial statements and accounting and internal control systems for the

programme/project as a whole.

• The audit shall be planned, documented and otherwise conducted in

accordance with ISA 800 and related relevant ISA standards. This includes, -

but are not limited to, - preparation of an audit plan and – programmes,

documentation of tests and audit controls performed, and documented

reporting of findings.

2

• When planning and performing the audit, the auditor should consider the risk

of material misstatements resulting from fraud or error. The auditor should

design relevant audit procedures to obtain reasonable assurance that materialmisstatements are detected. Reference is made to ISA 240.

REPORTING

Auditors report to the financial statements

The auditor shall issue a report to the financial statements in accordance with ISA800.

The report shall include:

• an identification of the financial statements reported on.

• a statement that indicates the basis of accounting used (or a reference to the

note to the financial statements giving that information).

• a statement that identifies the basis for the audit performed, International

Standards on Auditing ISA 800, and a general description of the content of the

audit.

• an opinion as to whether the accounting and internal control systems are

adequate to ensure correct financial reporting and safe custody of

programme/project financed assets in accordance with the programme/project

objectives.

• an opinion as to whether the financial statements are presented in all material

respects in accordance with the identified basis of accounting.

• an opinion as to whether the financial statements give a true and fair view of

the revenue collected, expenses/costs occurred and the financial position of the

project at the time of reporting.

• an identification and description on all material exceptions to the above

(qualification of opinion).

Management letter

At the end of each audit the auditor shall issue a report (“management letter”) on all

findings and suggested improvements. The reporting of such findings and

improvements shall include, - but are not limited to:

3

• a brief outline of the findings related to the accuracy and faithfulness of the

financial statements.

• a statement of expenditure that is irregular or have doubtful regularity.

• findings related weaknesses and proposed improvements in the accounting and

internal control systems.

Identified weaknesses or errors that could cause the programme/project to collapse or

detected major fraud or errors shall be reported immediately.

The management letter shall include a comment as to measures taken by management

to implement the recommendations. The management letter may include programme/

project management’s comments to matters raised and recommendations made in the

letter.

Engagement letter

Upon acceptance of this audit engagement the auditor shall issue an engagement letter

confirming:

• the willingness and ability to conduct the audit.

• the auditor’s independence to the assignment.

• the objective and scope of the audit

• adherence to the reporting requirements.

The engagement letter should also identify the audit team assigned to the assignment

together with an estimate of the fees and related costs for the audit.

It is imperative that any limitation in the auditor’s ability to comply with these terms

of reference and the audit requirements as stated in ISA 800 is clearly described and

addressed in the engagement letter.

Documents

Kreditanstalt für Wiederaufbau DAC TASK FORCE ON DONOR