Liberia WorkshopDeveloping Internal Audit

March 1, 2011

Mario Pessoa

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Good PFM Systems Require Attention to Multiple Issues

Legal and institutional framework Medium-term planning Budget preparation and execution Internal Control and Internal Audit Cash and Debt Management Asset Management Accounting and Reporting External Audit

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Roles Preparation Completeness Quality of information

Internal oversight

Friendlyness

Legal framework

Execution

External oversight

Timeliness

CODE OF GOOD PRACTICES ON FISCAL TRANSPARENCY - PRINCIPLES

- Structre of the government- Responsibilities between Executive, Legislative and Judiciary- Levels of government (central and subnational)- Public corporations- Private sector

- Taxes- Budget- Public Finances- Procurement- Civil Service- Assets- Liabilities (Debt)- Contracts

- Budget calendar- Realism of fiscal projections, fiscal targets- Main revenues and expenditures, and link to policies- Budget documents, assumptions- Clear coordination between budgetary and extra-budgetary activities

- Coverage of budget documents- comparable budget information (previous years and upcoming years)- tax expenditure, contingent liabilities, quasi-fiscal activities- Identification of revenues- Debt, assets and liabilities- Fiscal position of subnational governments- Information on long-term public finances

- Accounting system- Periodic fiscal reports- Supplementary budgets- Audited final accounts and audit reports

- Summary guide to the budget- Fiscal data in gross terms (revenue, expenditure, financing)- overall balance and gross debt, and other fiscal indicators- results of programs presented to legislature

- Publication of fiscal information- Calendar of publications

- Budget forecasts- Annual budget and final accounts- Consistency and

- Ethical standards for public servants- Documentation and accessibility- Clear procurement rules- Purchase and sales of public assets- Internal audit- Revenue administration protected from political direction and ensure taxpayers'

- Scrutiny by an independent national audit body- Publication of audit reports- Independence of national statistics body

CLARITY

of

ROLES

and

RESPONSIBILITIES

OPEN

BUDGET

PROCESS

PUBLIC

AVAILABILITY

of

INFORMATION

ASSURANCE

of

INTEGRITY

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External Scrutiny and Audit

PEFA - Public Expenditure and Financial Accountability - The PFM High-Level Performance Indicator Set

Predictability and Control in Budget Execution

Comprehensiveness and Transparency

Credibility of the budget Policy-Based Budgeting Accounting, Recording and Reporting

- Aggregate expenditure out-turn compared to original approved budget

- Composition of expenditure out-turn compared to original approved budget

- Aggregate revenue out-turn compared to original approved budget

- Stock and monitoring of expenditure payment arrears

- Classification of the budget

- Comprehensiveness of information included in budget documentation

- Extent of unreported government operations

- Transparency of inter-governmental f iscal relations

- Oversight of aggregate fiscal risk from other public sector entities

- Public access to key fiscal information

- Orderliness and participation in the annual budget process

- Multi-year perspective in fiscal planning, expenditure policy and budgeting

- Timeliness and regularity of accounts reconciliation

- Availability of information on resources received by service delivery units

- Quality and timeliness of in-year budget reports

- Quality and timeliness of annual f inancial statements - Transparency of taxpayer

obligations and liabilities

- Effectiveness of measures for taxpayer registration and tax assessment

- Effectiveness in collection of tax payments

- Predictability in the availability of funds for commitment of expenditures

- Recording and management of cash balances, debt and guarantees

- Effectiveness of payroll controls

- Competition, value for money and controls in procurement

- Effectiveness of internal controls for non-salary expenditure

- Effectiveness of internal audit

- Scope, nature and follow-up of external audit

- Legislative scrutiny of the annual budget law

- Legislative scrutiny of external audit reports

- Predictability of Direct Budget Support

- Financial information provided by donors for budgeting and reporting on project and program aid

- Proportion of aid that is managed by use of national procedures

PFM-OUT-TURNS

BUDGET

CYCLE

DONOR

PRACTICES

KEY

CROSS-CUTTING

ISSUES

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Internal Audit Function in the World

Indicator 21 on Internal Audit: (i) Coverage and quality of the internal audit function; (ii) frequency and distribution of reports; (iii) extent of management response to internal audit findings

PEFA Assessments in 106 countries appoints that “indicator 21” on Internal Audit scores “C” or “D” in 101 countries, “B” in 3 (Mozambique, Mauritius, Seychelles), and “A” in only 2 (South Africa and Brazil)

INTOSAI INTERNAL AUDIT STANDARDS

Basic postulates: the development of adequate information, control, evaluation, and reporting systems facilitates the accountability process. Authorities should ensure the promulgation of acceptable accounting standards for financial reporting and disclosure relevant to the needs of the government. Each audit body should establish a policy to ensure its work is of high quality

General standards: individual auditors and the audit body must be independent of the executive, of the individual entity being audited, and of any political influence; they must possess the required competence; and they must exercise due care and concern in complying with specific auditing standards

Field standards: auditors should design procedures for the completion of regularity audits to provide reasonable assurance of detecting errors, irregularities, and illegal acts that could have a direct and material effect on the financial statement amounts; auditors should evaluate the reliability of internal controls; and a regularity audit should provide assurance that the budget and accounts are complete and valid

Reporting standards: following each audit, the chief auditor should prepare a written opinion or report setting out the findings in an easy-to-understand form, including only information that is supported by competent and relevant audit evidence; audit reports should be independent, objective, fair, and constructive (i.e., they should address future remedial action)

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Definition of Internal Audit (IA) IA is an independent, objective assurance and

consulting activity designed to add value and improve an organization’s operations

IA evaluates and improves effectiveness of internal control processes and risk management

It Improves an organization’s operations, particularly internal control

It helps an organization accomplish its objectives

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IAA Standards The International Standards for the Professional Practice of

Internal Auditing issued by the Institute of Internal Auditors (IIA) are: The purpose, authority, and responsibility of the internal audit activity

must be formally defined The internal audit activity must be independent, and internal auditors

must be objective in performing their work The chief audit executive must communicate and interact directly with

the board Internal auditors must have an impartial, unbiased attitude and avoid

any conflict of interest Internal auditors must possess the knowledge, skills, and other

competencies needed to perform their individual responsibilities The chief audit executive must establish risk-based plans to determine

the priorities of the internal audit activity

IAA Standards (cont.) The chief audit executive should share information and coordinate

activities with other internal and external providers of assurance and consulting services to ensure proper coverage and minimize duplication of efforts

The internal audit activity must evaluate and contribute to the improvement of governance, risk management, and control processes using a systematic and disciplined approach

Internal auditors must document relevant information to support the conclusions and engagement results

Communications must include the engagement's objectives and scope as well as applicable conclusions, recommendations, and action plans

Communications must be accurate, objective, clear, concise, constructive, complete, and timely

The chief audit executive must establish and maintain a system to monitor the disposition of results communicated to management

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IA Models

Centralized – third-party ex-ante approach – MOF directly intervenes in ex-ante controls placing its own staff in Line Ministries

Decentralized – management responsibility approach – Each line ministry takes full responsibility for spending its own budegt and for ensuring appropriate checks and safeguards on the way this is spent

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Country’s Approach

France, Portugal, Spain – strong focus on ex-ante control

UK – decentralized with centralized guidance from the Treasury

USA – IA inspector general reports to the head of the agency but reports go to Congress

Germany – is part of the external control system. Federal Court of Audit supervise and guide the work of the IA. Report only to external auditor. Pre-audit role.

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Country’s Approach (cont.)

Anglophone African Countries – Westminster model – MOF is primarily an office of superintendence and appeal. The IA can be viewed as support to the MOF in the monitoring of compliance by the line ministries with financial regulations and accounting procedures. But there are two ambiguous roles: central control and service provided to the accounting officers.

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Country’s Approach (cont.)

Francophone African Countries – centralized IA function. Pre-audit role performed by financial comptroller and public accountants, centrally managed. The FC and accountants approve payments individually after authorization issued by financial controller. IA has a more investigative approach in case of irregularities. Sometimes functions are not well defined.

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Country’s Approach (cont.)

Latin America – centralized and focused in pre-audit of payments. Some Contralorias accumulate accounting and auditing functions (Chile, Colombia, Mexico). Most recently some countries adopted an independent, centralized IA that is focused in pre-audit, reports to the SAI, defines audit standards, and has expanded the scope to work also with performance audit (Argentina, Brazil).

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Brazil – Comprehensive Approach

Performance Compliance

MTEF/BUDGET

Legal and Accounting Rules

Resources

FINANCE

LM

Brazil - Organization of the Internal Control System

Evaluation of Program Performance

Evaluation of Rules and Procudures

IA

Evaluation of Fiscal Rules

ABC Curve of Program Hierarchy(Relevance, Materiality, Risk)

100%

A = Essential Program B = Relevant Program C = Non Critical Program

95%

80%

20% 50% 100%

A

Systematic

C

AsymetricB

$

Actions

GENERAL SPACIAL DISTRIBUTION

PacificOcean

AtlanficOcean

PARANÁ – SAMPLE REGIONAL DISTRIBUTION

Housing Program Inspection

Unidade Habitacional Construída Casa de Saibro, AnteriormenteHabitada

Habitational Unit BuiltHouse made of gross sand (saibro)previously inhabited

TRANSPARENCY PORTAL

TRANSPARENCY PORTAL

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Key challenges in this area

Design level issues: Scope of IA

Its central role in the context of the trend toward devolution of controls to line agencies

IA is a tool of the management (In addition to compliance and financial audits, to what extent the IA should focus on ensuring efficient and effective use of resources to achieve the management’s objectives?)

Organizational structure for IA Degree of centralization: role of central ministry of finance vs. line

ministries/agencies Should IA units be established in all or in key ministries/agencies?

Role and responsibilities of Internal Auditors Internal audit vs. External Audit Ex ante control vs. Internal Audit

Staging/sequencing of IA reform and linking it to reforms in related PFM areas

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Key challenges in this area

Implementation issues: Overall PFM structure as a foundation for IA

Is the basic PFM structure adequate to make an IA system functional? (sequencing of reforms is important)

Professional proficiency Appropriate audit methodology, work practices Technical competence of Internal Auditors

Management of IA function Identifying risk and evaluating internal control systems and procedures to

counter risk Audit planning and personnel management Ensuring complementarity with external audit

Follow-up (on findings of IA) and oversight (by Parliament and external audit)

Culture “Open” culture to detect irregularities or non-compliance Integrity of top management (to whom Internal Auditors report) Scope for collusion

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Discussion andQuestions and Answers

Reference

http://www.theiia.org/ http://blog-pfm.imf.org/pfmblog/research-pap

ers.html - Jack Diamond - The Role of Internal Audit in Government Financial Management – IMF WP/02/94

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