Report No. 25732 - UNI
Nigeria
Country Financial Accountability Assessment
September 6, 2000
Country Department 12
Africa Technical Financial Management
Africa Region
FOR OFFICIAL USE ONLY
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Nigeria
Country Financial Accountability Assessment
Index
Page
Preface                                                                  3
Glossary                                                                 4
Executive Summary                                                        5-7
Recommendations                                                          8
Public Sector
Control environment                                                      9
Legal and institutional                                                  9-10
Government budgeting and accounting                                      10-14
Procurement                                                              14
Government auditing                                                      15-17
Role of the National Assembly                                            17
Capacity issues: Government accounting and auditing                      17-18
Parastatals                                                              18-19
Risks                                                                    19
Private Sector
Legal framework                                                          20-21
Financial sector                                                         21-22
The accounting profession                                                22-23
Accounting and auditing standards                                        23-24
Next Steps Public Sector                                                 25-27
Next Steps Private Sector                                                27-28
Annexes
Public financial management reform program                               29-30
Medium term expenditure framework                                        31
Public financial management reforms in South Africa                      32-33
Training in public sector financial management                           34
Private sector financial management reform program                      35
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Preface
The work on which this report is based was carried out in late 1999 by a team of World
Bank staff and a Governnent Task Force with representation from both Federal and State
levels. Messrs. Deloitte and Touche carried out much of the basic fact-finding under a
contract financed by Government of Denmark. They produced their final report in
January 2000. The entire assignment was carried out through a combination of
questionnaire enquiry, fact gathering, interviews with key officials, dialogue with key
participants and desk research. A two-day meeting of the team and a three-day national
workshop were held in late 1999, to discuss the drafl findings and recommendations of
the consultants and to provide further inputs.
The team consisted of staff from the World Bank (Anthony M. Hegarty, Muraino 0.
Ogunsanya, Michael L. 0. Stevens and Peter N. Dean.) and a Goverrnent Task Force
representing 24 public and private sector organizations. Task Force Members consisted
of: Ministry of Finance - Mult (U.C. Okoye and O.D. Ilariogun); Auditor General (S. B
Adekoya and U.C. Ekpo); Accountant General ( S.O. Ajose and E.O. Adore); Central
Bank of Nigeria (F.C.O. Analogbe); Federal Tenders Board (Presidency, P. T. Ahire);
Federal Ministry of Justice, Planning Research and Statistics (R. A. Olaitan); Public
Accounts Committee; Institute of Chartered Accountants of Nigeria (P. 0. Omoregie);
Institute of Purchasing and Supply Management (A. 0. Shoyeye, P. Alasi); Nigerian
Association Chambers of Commerce, Industry, Mines and Agriculture (L. 0. Awodapo);
Federal Ministry of Works and Housing (L. A. Audu); Nigerian Customs and Excise
Department (Mallam Abubakar Mallam); Federal Board of Inland Revenue Services (P.
A. Akinlolu); Budget Office (FMF, D. A. Ogunkeye); States based on geo-political
zones: (i) SE - Abia State (U. E. Amaonwu); (ii) SS - Cross River State (V. B.
Henshaw); (iii) SW - Lagos State (M. F. Adeyemo); (iv) NE - Bomo State (Tijani
Adams); (v) NW - Zamfara State (A. Moriki); and (vi) NC - Kaduna State (B. James).
Peer reviewers were Anthony N. Byrne (SAR), Malcolm Holmes (PRMPS), and
Zubaidur Rahman (LOA). The work was completed under the guidance of Brian
Falconer (Lead Financial Management Specialist, AFTQK).
The World Bank thanks all those involved: the Federal Ministry of Finance; the
Governors and Comrnmissioners of Finance of the Six States; the Auditor-General of the
Federation, the Federal Government Ministries and Parastatals; the Private Sector
Organisations: members of the Task Force and Government of Denmark for financing the
Consultant contract.
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Glossary
A-G               Auditor-General
ANAN              Association of National Accountants of Nigeria
BOFID             Banks and Other Financial Institutions Decree
CAMA              Companies and Allied Matters Act
CBN               Central Bank of Nigeria
CFAA              Country financial accountability assessment
FMF               Federal Ministry of Finance
IASs              International accounting standards
IASC              International Accounting Standards Committee
ISA               International standards on auditing
ICAN             Institute of Chartered Accountants of Nigeria
IFAC             International Federation of Accountants
JFMIP            Joint Financial Management Improvement Program (USA)
MTEF             Medium term expenditure framework
NASB              Nigerian Accounting Standards Board
NDIC              Nigerian Deposit Insurance Corporation
PAC              Public Accounts Committee
SEC              Securities and Exchange Commission
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Executive Summary
1. A country financial accountability assessment (CFAA) considers the strength of
financial accountability processes in both the public and private sectors. The aim is to
assess whether existing processes are strong enough to ensure that funds are spent for
their intended purposes. A CFAA is an assessment and not an audit and it is carried out
by Bank staff with the help of officials of the country concerned. Therefore its findings
do not provide a complete assurance concerning the status of financial accountability
processes. However it provides a well-informed and objective assessment, a diagnosis of
problems, advice on their resolution and an indication of the level of financial
accountability risk in the country concerned.
2. The Federal Government of Nigeria retains the vestiges of good systems for planning,
budgeting, managing and controlling public resources. But their performance has
deteriorated to such an extent that they provide negligible assurance that moneys are used
entirely for their intended purpose. The same is true at the state level. To return to an
acceptable level of financial accountability will require sustained action over several
years. In the interim, risks of waste, diversion and misuse of funds are assessed as high.
This has clear implications for both Government and the Bank: the former needs to
improve financial accountability along the lines outlined in this report; and the latter
needs to support this process and in the meantime to build explicit risk minimization
actions into all its Nigerian operations.
3. Budgeting and accounting systems and those responsible for them require significant
upgrading. Expressions of intent, studies, reviews and commissions of enquiry have an
appropriate place in the reform process. But more important at present, is serious follow
up on the message from the political leadership that financial indiscipline will not be
tolerated. To be credible this message has to be supported by relevant actions including
serious enforcement. Short-term actions might include: reissue of the key texts on
financial management and accountability, communicating to all public servants new
expectations concerning their behavior, ensuring that all senior positions (e.g. director of
finance) are filled and occupied by suitable persons; and preparation and implementation
of action plans to strengthen compliance with financial controls. An encouraging start
has been made with the enactment of the Anti Corruption Act and the publication of a
booklet explaining its implications for civil servants.
4. Of particular importance is' a realistic budget process. Realistic budget aggregates,
realistic expenditure programs, realistic budget allocations and hard budget constraints
would go a long way to bring discipline back to public resource management. There is a
parallel need for improved government accounting, internal control, record-keeping and
effective auditing both internal and external. These form the foundation on which public
accountability rests.
5. Two conspicuous governance weaknesses are apparent in the Nigerian public sector:
lack of appropriate legislative control and lack of transparency. The first problem is
constitutional: nothing prevents the legislatures at Federal and State levels from
5



proposing expenditure plans at significant variance with those of the executive and no
effective means as yet exists for reconciling resultant conflicts; and the newly re-
established public accounts committees are yet to demonstrate their effectiveness. At the
same time little is publicly known about government finance. All key public finance
documents (for instance the budget document, monthly government accounts, annual
financial statements, auditor-general's reports, public accounts committee reports etc.)
should be posted on the world-wide web to ensure maximum dissemination of
information in the interests of fiscal transparency.
6. A plan is proposed to address such problems. ' If it is to be effective, remedial action
has to go beyond the traditional financial management issues into matters such as:
e the calculation, control, management, protection, reporting and disclosure of
national oil revenues.
• the adequacy of procedures for drawing money from the Consolidated
Revenue Fund and for ensuring that transactions on accounts held at the
Central Bank are properly authorized, managed and audited.
* the legal provisions requiring the public disclosure of assets and other
valuable interests of public officials and politicians; the recovery of public
sector assets illegally acquired.
• implementation and enforcement of the Anti-Corruption Act.
* the legal provisions and enforcement arrangements for combating money
laundering including the adequacy of central bank controls over conmmercial
banks.
7. Financial management reform in isolation from the environment in which financial
management processes are located is likely to be ineffective. Therefore attention also has
to be given to issues of standards of public behavior, the adequacy of judicial processes,
civil service management and the governance context.
8. Responding to the needs of a more dynamic private sector is an important challenge.
Clearly regulatory regimes and the country's capacity to make those regimes work, need
to be improved. The current program of privatization and the steps taken to revitalize the
capital market will have profound and positive implications for the Nigerian economy, if
taken to their logical conclusion. Emerging models of corporate governance as
evidenced by the Cadbury Report in the United Kingdom and the King Report in South
Africa are relevant to addressing Nigeria's problems. A dynamic private sector implies:
* greater demand for financial services and expertise.
* increased emphasis on legal and regulatory regimes.
See section 14 below and annex 1.
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• pressure on companies and their financial advisers to respond to the needs of
investors.
e need for a complete set of accounting standards consistent with international
accounting standards and for a monitoring and enforcement mechanism for
ensuring compliance with standards.
* a more important role for auditors in their attestation role and a need for them
to demonstrate due diligence.
These issues are more fully discussed in sections 10-15 below and a plan is proposed for
addressing them in annex 5.
9. Successfully tackling the many issues raised in this Report represents a daunting
challenge for Nigeria. However, through sustained political commitment to change, and
determined collective efforts, the challenges of today can become the reality of
tomorrow.
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Recommendatioins
Public Sector
o  Implement a short tern recovery program with components as given in paragraph
14.4 below.
o  Ensure that a clear message goes out that financial indiscipline will not be tolerated
and support this with relevant actions.
o  Concentrate on improving the following aspects of the budgeting system in the first
.place: achieving realistic budget forecasts, a hard aggregate budget constraint and
budget discipline during implementation.
O  Resolve the legal ambiguity regarding the executive's role in setting the budget
expenditure ceiling (section 6 below).
o  Adopt a medium-term program to improve all aspects of financial management
(annexes I and 2) and improve training (annex 4).
O  Address the following issues listed in paragraph 7 of the executive summary: the
calculation, control, management, protection, reporting and disclosure of national oil
revenues; the adequacy of procedures for drawing money from the Consolidated
Revenue Fund and for ensuring that transactions on accounts held at the Central Bank
are properly authorized, managed and audited; the legal provisions requiring the
public disclosure of assets and other valuable interests of public officials and
politicians and the recovery of public sector assets illegally acquired; implementation
and enforcement of the Anti-Corruption Act; the legal provisions and enforcement
arrangements for combating money laundering including the adequacy of central
bank controls over commercial banks.
Private Sector
o Conduct a review of corporate governance and pnvate sector financial accountability
along the lines of the King Committee in South Africa.
o  Update the Companies and Allied Matters Act so that it reflects such principles and
strengthens company audit.
o  Accelerate the issuance of accounting standards in areas where there are none at
present but are available under International Accounting Standards (1ASs)
promulgated by the International Accounting Standards Committee (IASC).
o  Establish monitoring and enforcement mechanisms to ensure that all listed companies
comply with national and IASs. In this regard, there is need to sufficiently strengthen
the NASB's technical and professional capabilities.
o  Ensure that the procedures for filing company information and providing public
access to it are adequate.
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Public Sector
1. Control environment
1. I Some states collapse due to civil strife and war; others are seriously challenged by
natural disasters. Nigeria is in principle rich but in practice poor because its resources
have been stripped away. The result is a state in crisis with an outward show of
normality, but much' inward decay, particularly regarding the protection, management
and use of public resources. The costs of public contracts are excessive2 and the services
supplied are often inadequate. These are adverse conditions for the achievement of
development effectiveness. Failures are currently blamed on the recent military
government3; but spectacular losses also occurred under the previous democratic regime
(1979-84).
1.2 The big change and a cause for optimism is a regime which is publicly opposed to
corruption and which has given an explicit pledge to restore the rules and regulations
designed to support honesty and transparency. This includes reintroduction and
enforcement of civil service rules and financial regulations. The intention is to stamp out
the rampant corruption and cynical contempt for integrity in the public service (President
0. Obasanjo, Inaugural Speech, May 1999).
1.3 Given serious institutional weaknesses, the existence of powerful vested interests and
an official culture not opposed to graft, caution is needed about the likelihood of
stamping out corruption in the foreseeable future. Risks are likely to remain significant.
But the most pressing question now is what can be done to reduce those risks. Actions to
improve financial accountability are high on the list.
2 Legal and institutional
2.1 Government of Nigeria is fortunate in having a basic legal framework for public
sector financial management and accountability.4 It is an out-of-date framework and
largely inoperative. But it exists and so do staff with knowledge of how it is supposed to
work, although many of these may be in mid-career or even approaching retirement. The
three key documents are:
* The Finance (Control and Management) Act, 1958.
2 A procurement review carried out by the World Bank (Country Procurement Assessment Report, Nigena Country
Department, June 2000) observes: "Many capital projects are implemented by using lower quality of materials than
contracted. Allegedly, illegal actions take place dunng the monitonng process in the form of approval of low quality
work, in return for bribes. Most private contractors claim that it is not possible to implement contracts without taking
part in the corruption. Contractors are not effectively held responsible for implementing and delivering according to
the contract".
3 President O.Obasanjo has described the situation as follows: "Government officials became progressively indifferent
to propriety of conduct. .Government and all its agencies became thoroughly corrupt and reckless. Members of the
public had to bnbe their way through in ministries . .. and one government agency had to bnbe another to obtain the
release of their statutory allocation of funds The rules and regulations for doing official business were deliberately
ignored ......, Inaugural Speech, May 1999.
4 The legal framework for public sector financial management applies unifonmly to the Federal Government and to the
States. The following text deals with the federal level, except where the states are specifically mentioned
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o The Audit Act, 1958.
O The Revised Financial Regulations, 19765.
These three key documents are in very short supply and the copies that do exist are old
and worn. It would be a relatively simple exercise to re-issue and widely distribute these
three documents together with a note explaining the extent to which they have been
modified by the provisions of the 1999 Constitution. This would immediately provide
financial management staff all over the country with basic working tools. However, in
the medium-term, all three documents require substantial revision.
2.2 The new Constitution of the Federal Republic of Nigeria (1999), does very little to
modify the basic provisions made in these three documents. It deals with control of
public funds at two levels: Federal and State. For the Federation, a Consolidated
Revenue Fund is established into which the vast bulk of Federal revenues flow. No
money can be withdrawn from the Fund unless authorized by an Act of the National
Assembly. The President is to ensure that estimates of revenue and expenditure for the
next year are prepared and presented to the National Assembly. The heads of estimates
are to be included in an annual appropriations bill. If this bill is not passed in time
special arrangements are made for spending during the first six months of the year.
Separate arrangements are made for supplementary estimates (when needed) and for a
contingency fund. Items which qualify as charges to the Consolidated Revenue Fund
(expenditures not requiring annual legislative authorization such as interest payable on
the national debt) are defined. The audit of public accounts is required (discussed in
more detail in section 5 below). Similar constitutional arrangements apply to the states.
2.3 The basic institutional framework for public sector financial management is in place,
but it leaves much to be desired in terms of performance, effectiveness and integrity. The
key players are the Ministry of Planning, the Ministry of Finance (in particular its
departments dealing with accounting, budgeting, debt management, cash management
and external resources); the line ministries6; the Office of the Auditor-General of the
Federation; and the National Assembly and its Public Accounts Committees. If these
entities carried out their functions in full, Federal resources would be properly planned,
budgeted, controlled, used, reported on, and audited. Findings would flow from audit to
the Public Accounts Committees and recommendations would flow from these
committees to Ministry of Finance and the needed corrective actions would take place.
But the key institutions are under-skilled and under resourced, they lack modem systems,
and their methods and standards of work have deteriorated. More important, political
interference greatly weakened these mechanisms in the years preceding the return to
democracy. As a result the intended controls are weak or inoperative, and management
of public funds for the benefit of the people is still a somewhat remote goal.
3. Government budgeting and accounting
5 Revised Financial Regulations 1999 have been approved and are now in circulation.
6 When line ministries are self-accounting, central agencies depend on them for financial statements; this apart, the
success of govemment financial management depends on how well line mmnistnes fulfil their role.
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OUDGEr
FORMULATION
LEGISLATIVE                         BUDGET
REVIEW                        AUTHORIZATION
AUDITING                        EXECUT)ON
ACCOUNTING
THE CRCLE OF FINANCIAL CONTROL
3.1 The system of public financial management can be thought of as a circular flow
which repeats itself each year. The circular flow starts with budgeting, goes through
implementation, accounting, and auditing and culminates in legislative review. For
effective financial management each phase of the circular flow must perform well.
3.2 The Federal budget is orientated toward accountability and control. It authorizes
specific resources for defined uses (identity of spending agency; type of expenditure;
period of authority) and sets up the framework in which accountability and control are
intended to take place. The success of this type of budgeting depends upon the realism of
forecasts and the adequacy of implementation controls. Nigeria has a history of over-
estimating revenues, under-estimating expenditures and consequent over spending.7 For
instance for 1994 actual revenues (as reported) were only 50% of estimated, while actual
expenditure exceeded estimated by 11%. In that year the budget deficit was equivalent to
more than half of revenue collected. The revenue head, direct taxes, recorded a shortfall
of 98%. Such variations arise not only from poor predictions but more directly from
ineffective revenue-raising and uncontrolled spending. If we add to this a break-down in
financial discipline, it is easy to see that government budgeting is ineffective in Nigeria,
even on the narrow basis examined in this paragraph.
3.3 The job of formulation is to create a realistic budget (one which is sustainable and
realistically reflects policies, revenues and expenditure plans). Budget implementation is
complicated in Nigeria by unpredictable revenue flows. This arises because oil revenues
are such an important part of total revenues. In conditions of instability the budget as
authorized becomes less important. Available cash balances become more and more
important in deciding the actual use of resources. This puts the Ministry of Finance in
the strong position of deciding on who gets what. But the effect on spending programs is
7 Deloitte & Touche have wntten- "There is a severe structural mismatch between the volume of policies, programs and
projects on the one hand and the resources available through the budget to execute them. As a result, many programs
are senously under-funded including departmental operating expenses and wage bills Non release of counterpart
funds for projects assisted by international lending agencies is common knowledge." Report on Nigena, Country
Financial Accountability Assessment", unpublished, January 2000
11



disruptive because spending units lack certainty about the availability of funds. This
results in stop-go or even stop-stop policies. Any delay in authorizing the budget, in
informing spending units of their allocations or in the issue of warrants for the release of
funds further complicates the situation. Significant remaking of the budget during its
implementation robs the budget process of meaning and creates adverse conditions for
achieving the outputs and outcomes which the budget was designed to deliver.
3.4 Reforming a budget process with such serious flaws represents a challenge. A longer
budget timetable would help only if the quality of budget formulation improved. For this
the following are needed: better data on which to make budgetary decisions, greater
realism in estimating available resources, improved co-ordination between the various
parties involved in budget formulation, more realistic allocations within the resources
available, better links between current and capital budgets (a merging of the two budgets
is the preferred course of action) and the establishment of hard budget ceilings. Budget
implementation problems also need to be addressed. The constitutional principle that
public funds cannot be spent except in accordance with law needs to be strongly re-
affirmed with a clamp down on all forms of unauthorized spending (overspending of
authorized budgets, extra-budgetary expenditure, expenditure from bank accounts not
controlled by the Accountant-General; expenditure paid into "dedicated accounts";
expenditure authorized by those without legal authority8). An up-dated budget manual
and training in its use would support the above reforms. Revenue generating measures
are also needed.
Measures to improve revenue management and collection
o  Improved means of identifying taxpayers, especially large ones.
o  Separation of assessment and collection functions.
•   Improved taxpayer assistance programs including those regarding
payment of taxes.
•  Steps to ensure tracking of tax payments to individual taxpayers and to
government bank accounts.
*  Use of taxpayer identification numbers.
* Strengthened internal controls and external inspections in tax offices.
*  Better conditions of employment for tax staff.
3.5 In an unstable economic situation, spending policies cannot be entirely insulated
from underlying instability. A medium term expenditure framework (MTEF) leads to
more effective budgeting. It provides a more complete context (a 3-4 year perspective),
thus allowing more certainty in budgeting for expenditures.
8Under military rule the President frequently authonzed expenditure without the necessary legal authority to do so.
12



3.6 Adoption of an MTEF could contribute to more realistic budgets; a stronger link
between government policies and their costs; better management of the budget
formulation process; more transparent budgeting; budgeting more closely related to the
performance expected and greatly improved financial and budgetary discipline during
implementation. In considering an MTEF policy-makers should consider Nigeria's
primary needs in expenditure management and the capacity available for budget reform.
This type of assessment is likely to result in a phased adoption with early emphasis on
improving the realism of the budget. The MTEF is described in more detail in Annex 2.
3.7 Government accounting supports government budgeting. Each would be ineffective
without the other. The fiscal year for the Nigerian govemment is the calendar year. The
basis of accounting in budget-funded entities is cash, with parastatals typically using the
full accruals basis. Budget-funded entities use a fonn of commitment accounting (vote
books) for budget control purposes.9 The failure to do this well (i.e. to keep expenditure
within the limits established by the budget and expenditure warrants) contributes to
budget indiscipline. Another issue is lack of modern computer systems. Manual systems
of accounting are still quite common and this limits the possibilities of timely and
accurate accounting, beside being more costly.
3.8 Government accounts play several roles:
* to achieve budgetary control.
*  to carry out financial transactions (pay wages, collect debts etc.).
*  to provide a reliable record so that business can be conducted efficiently.
* to promote internal accountability by fixing responsibility.
* to ensure external accountability (via the publication of financial statements).
*  to provide relevant cost figures so that resources can be properly managed.
*  to provide statistical and economic data.
3.9 To perform these roles well, accounting data have to be relevant, reliable. objective,
understandable and timely. The Federal Government has been running approximately
four years late in producing financial statements o; some State Governments are in even
worse shape. The accounting records on which the financial statements are based, are of
varying reliability (as evidenced by reports from the Auditor General which cite many
instances of lack of accounting reconciliation, inaccurate accounting and the need to
correct accounts after their submission by the Accountant General). In 1994 the Auditor
General's calculation of recurrent expenditure was 20% higher than that of the
Accountant-General. Moreover, serious unexplained discrepancies are evident in the
9 A full analysis of the working of the govemment accounting system is given in "Government accounting and
financial control" by K. Oshisami, Spectrum Books, Ibadan, 1992.
'0 By August 2000, the backlog had been cleared while the 1999 accounts were neanng completion.
13



Federal Government's financial statements: large and growing debit balances on fund
accounts; and cash control accounts of 21 ministries and extra ministerial departments
showing credit balances (overdrafts) which totaled N4.6 billion. Late, defective and
inaccurate data cannot be relevant data. Thus the objectives of accounting as described
above are largely unachieved.
3.10 According to the Finance and Management Act, both the Federal and the state
governments are to submit their annual financial statements for audit not later than 6
months after the close of the financial year. These dates are very far from being met.
4. Procurement
A review of public procurement by the World Bank' 1 identified a number of serious
weaknesses:
* Nigeria lacks a modern law on public procurement and a permanent oversight body to
provide guidance and monitor purchasing entities.
e  The Finance (Control and Management) Act, 1958, together with the Financial
Regulations set basic rules for managing public expenditure. Gaps, deficiencies and
faulty implementation of existing regulations on procurement (e.g. lack of permanent
arrangements for control and surveillance) create opportunities for bribery and
corruption.
e  Tender boards are seen by the private sector as a source of delays and non-
transparency.
•  Customs systems and procedures are cumbersome and a major cause of delay in
clearing goods, and hence a source of corruption.
*  Procurement is often carried out by staff who substantially lack relevant training.
The result is a system which is inefficient, easy to manipulate, difficult to control and not
transparent to bidders and the public. The procurement review assessed risks and the
prospects for reform as follows: "there are serious weaknesses in the current procurement
system including lack of appropriate legislation, shortage of basic skills and inadequate
organisation. On top of these it is likely that there will be resistance from some quarters
towards the suggested reform program" (op.cit. vol.2 para 69).
" Country Procurement Assessment Report, Nigeria Country Department, June 2000.
14



5. Government auditing
5.1 The 1999 Constitution requires the Auditor-General (A-G) to audit the public
accounts of all offices and courts of the Federation and to report on the audit to the
National Assembly. The A-G has the power to carry out periodic checks of the accounts
of statutory corporations, commissions, authorities, agencies and bodies set up by Acts of
the National Assembly. However in practice parastatal audits are normally carried out by
private sector auditors with the A-G providing the auditees with a list of qualified
auditors and guidance on fees. Auditors are chosen from the approved list. The
fundamental problem is one of quality: how does the A-G ensure the quality of the audit
firms on the list and the quality of audits carried out. He retains the right to comment on
the accounts and audit reports and to carry out periodic checks on them. The procedures
for auditing statutory corporations and other semi-autonomous bodies require re-
examination to ensure effective audit.
5.2 The Auditor-General is to submit his reports on the government accounts to the
National Assembly within 90 days of receipt. Each house of the Assembly has a public
accounts committee to consider the audit report.
5.3 The Constitution establishes the independence of the Auditor-General by establishing
that he/she is not under the direct control of any other body. Appointment is by the
President on the recommendation of the Federal Civil Service Commission and dismissal
is only possible after an affirmative vote by at least two thirds vote of the senate. The
two houses of the legislature have the power to ask for the A-G to carry out an
investigation provided that it is on a matter within their competence. But no minimum
period of office is mentioned. A-Gs in other countries have long statutory terms of office
to enhance their independence. Another reform worth considering would be to identify
candidates from the private sector. At present the Civil Service Commission proposes
only civil servants. The right to recommend candidates could with advantage be
transferred from the Civil Service Commission to a joint committee of the two houses of
the legislature. In due course it may even be possible to replace the budget-funded audit
office with an audit services commission which charges for its services.
5.4 The A-G publishes two main annual reports: one containing long form audit findings
(part I) and the other containing the financial statements and short form audit opinions on
them (part II). The latest audit report is for 1996, for which only part I is available. Part
II usually appears later than Part I because it can only be published when the financial
statements have been finalized and submitted for audit. For 1994, out of 33 financial
statements expected from the Accountant-General only 13 were submitted to the Auditor
General in usable form. A task force has been established to clear the backlog.
5.5 This should not be greeted with undue shock. Until recently, the political
environment was very hostile indeed to good financial management. To have performed
well under these circumstances would have been impossible. The encouraging feature is
that accountants and auditors are still working with determination, even though their
work has been so marginalized.
15



5.6 The report of the Auditor-General is a sad story of public sector waste and loss,
financial indiscipline, inaccuracies, and worse. In a hundred different offices in all parts
of the country key documents have been lost (especially paymnent orders), assets
(especially vehicles) have gone missing, travel and other advances remain undischarged,
money has been stolen or embezzled and public resources have just oozed away. The A-
G's attempts to follow it have been frustrating and frustrated. Files remain open;
explanations are sought; matters are "under correspondence"; but responses seem never
to come. And if they do come, they arrive too late and are in most cases by that time
irrelevant.
5.7 The other main impression given by the Auditor General's report is of unremitting
detail concerning relatively small amounts. On the dissipation of the country's oil wealth
which occurred on a large scale in recent years, next to nothing is said. Auditors were
either excluded, or excluded themselves from involvement in these larger depradations.
Their checks never came anywhere near the big money. Or if they did, they raised the
issues in private, and otherwise remained silent. In any case, the "audit alarm system"
was hardly used. Clearly it will take more than improved audit to fix such ills.
5.8 Nevertheless, audit should be an important target of the reform agenda. Internal
control is the first line of defense. Internal control comprises the systems in each
government office, department or enterprise tending towards the protection of assets,
effective controls, proper authorization, reliable records and proper accounts.
5.9 Internal control is weak in the Nigerian public sector and so is internal audit. The
role of internal audit is to report to management on whether controls are in fact working
as intended. It is frequently understaffed and often ignored. Internal auditors often carry
out prepayment functions. This involves checking authorizations and documentary
evidence before payments can be made. Some are involved in accounting duties. For
internal audit to be effective such practices have to cease. Internal audit would be more
meaningful if it dealt to a larger extent with the adequacy of internal controls and
performance.
5.10 Very feAv public sector internal auditors are professionally qualified. Irrespective of
the ministry/agency to which they are posted, they are members of a cadre headed by the
Accountant General, to whom they look for guidance, moral backing, transfers and
promotions. The Accountant-General presides over a pool of accountants and internal
auditors numbering almost seven thousand. This leadership role needs to be strengthened
both in developing guidance materials and enforcing discipline.
5.11 The same approach is needed to transform external audit. The Office of the
Auditor-General of the Federation lacks skilled staff, budgetary resources, independence
and clout. Substantial resources and supportive actions will be needed to ensure its
relevance to the new Nigeria.
5.12 If reforms of governmnent audit are to be successfal, they will have to extend beyond
auditors. To be effective, government audit must find strong legislative support. Thus
the reactivation of the public accounts committee(s) is a priority. They should be
receiving timely audit reports, investigating audit findings, holding hearings and
16



reporting their own findings to the legislature and in public. In addition, the part of the
Ministry of Finance dealing with improving government-wide financial management
requires activation. Audit findings and PAC recommendations can then be subject to
follow up with the managers of spending units and effective corrective actions taken.
5.13 In the interests of public accountability all key public finance documents (for
instance the budget document, monthly government accounts, annual financial
statements, auditor-general's reports, public accounts committee reports etc.) should be
posted on the world-wide web to ensure maximum dissemination of information in the
interests of fiscal transparency.
6. Role of the National Assembly
6.1 The preparation of the year 2000 budget was complicated by ambiguity regarding the
budgetary powers of the executive and the legislature. The budget having been laid
before the National Assembly by the President in accordance with the Constitution, the
National Assembly voted to increase significantly the expenditures proposed. This was
in response to a steep increase in the oil price that occurred during the budget preparation
period. It also reflected the desire of legislators for a budget which satisfied their
aspirations, both personal 12 and national.
6.2 The President asserted his constitutional powers to present financial estimates to the
legislature. These form the basis for appropriation accounts, the device by which money
in the Consolidated Revenue Fund can be used annually to finance budget expenditures.
He also threatened to veto the National Assembly amendments. However the
Constitution gives the power to each house of the National Assembly to originate bills
(draft legislation) and the clause dealing with money bills does not state that they can
only originate with the executive. Moreover the Constitution provides the means of
overcoming the President's veto.
6.3 To resolve the issue a compromise was reached: the President agreed to most of the
National Assembly's demands. The budget was passed halfway through the financial
year. And the President announced that he would use warrants (authority to incur
expenditure) to prevent expenditure of which he disapproved. Round one has therefore
gone to the President but the issue of the legislature's powers over money bills remains
unresolved.
6.4 As Nigeria makes the transition from a parliamentary to a presidential system, its
institutions also need to adapt. At this stage, the need for a hard budget constraint and
fiscal discipline over-rides other considerations.
7. Capacity issues: Government accounting and auditing
7.1 Amongst the many factors behind the weak performance of govermment accounting
and auditing is lack of capacity. The two offices concerned can hardly be regarded as
12 The amendments contained lavish recurrent and capital expenditure for the National Assembly itself.
17



understaffed.13 But they lack the tools to do the work effectively: equipment, software,
travel budget and vehicles (the last two are serious limiting factors to the effectiveness of
the Office of the Auditor-General) and adequately trained staff. That neither has many
fully qualified professionals is unsurprising given the large disparity in levels of
remuneration between the public and private sectors in Nigeria (even allowing for the
value of allowances such as housing which for higher level public sector staff are often
significant in relation to actual salary).
7.2 Clearly, if these two institutions are to play their roles in full, considerable up-
grading of staff and of their conditions of service will be needed. In the case of the
Office of the Auditor-General, the staffing issue is linked to that of its independence. Its
budget is subject to the same budget exercise as applies to all other government
departments. As a result it cannot recruit the type and number of skilled staff necessary
to do the job; nor does it have the other resources (e.g. travel budget) necessary to carry
out its role effectively. Greater budgetary independence, more resources and freedom to
recruit would provide a sound basis for capacity building.
8. Parastatals
8.1 This report does not extend to individual parastatals. The following general points
are however relevant. Parastatals are of two main types: those that are commercial
enterprises operating in the public sector and those that are administrative bodies
operating outside the framework of central controls which apply to ministries and
departments. Both types offer an opportunity for using public resources without close
supervision. Many enterprise-type entities and some administrative-type entities justify
this treatment. In the past parastatals have often been managed by political appointees
whose selection would be difficult to justify on purely managerial grounds despite the
fact that the relevant acts often specify the composition of the Board and the skill mix of
directors. Parastatals have been used as a siphon for private resource diversion on a wide
scale'4. Many are in receipt of public funds and rely on these funds for their survival.
Few produce up to date financial statements. Many of the enterprise type are inefficient
(costs too high; revenues too low; outputs of poor quality etc.). Few are commercially
viable. Often they pay no dividends and many have ceased servicing loans received from
government.
8.2 Government has decided on an extensive privatization program with the objective to
improve efficiency, promote transparency and to do this within a defined timeframe. It
has put into place the legal and institutional framework. The Public Enterprises
(Privatization and Commercialization) Decree of 1999 establishes the National Council
13 The Audit Department and the Accountant General's Department have staff of 2,000 and 3,000 respectively.
14 Deloitte & Touche have written: "Government has at various times made indirect reference to parastatals as
financial drain-pipes. There is hardly any parastatal in this country that has fully justified the purpose for which it was
established. Virtually all govemment-owned enterpnses in this country have failed to justify the enormous expenditure
of govemment funds entailed In setting them up. They are not able to efficiently provide the goods or services that are
expected of them. There has always been the huge and growing burden of financing the investment needs and
operating deficits of these govemment enterpnses". Report on Nigeria: Country Financial Accountability Assessment,
unpublished, January 2000.
18



on Privatization, which is chaired by the Vice President of Nigeria. Secretariat support is
provided by the Bureau of Public Enterprises.
8.3 The Government's privatization program is in three phases: Phase 1: Government's
shares in banks, cement companies and oil marketing firms listed on the Nigerian Stock
Exchange will be offered for sale; Phase 2: Government will sell its holdings in hotels
and vehicle assembly plants; and in Phase 3: Government will privatize public
enterprises dealing with telecommunications, electric power, fertilizers, airlines and oil
refineries.
8.4 The elimination of parastatals to the largest possible extent, by denial of public
funds, commercialization, privatization, liquidation, or re-absorption into the budgetary
sector will lead to far better use of national resources. Remaining parastatals should be
subject to a disciplined financial regime and lose their status as parastatals if they cannot
adhere to it.
9. Risks
Significant areas of risk include:
*  Defective procurement practices which promote profiteering on the part of the
contractor and corruption on the part of the civil servant.
*  Ineffective public accounts committees in the National Assembly and
legislators more interested in receiving public perquisites than in defending
the interests of the people.
*  Revenues due to government which are not received by government.
*  Systems of audit, follow-up and corrective action which are largely
ineffective.
*  Unreliable accounts, weak documentation and untimely reporting.
* Lack of control over the manner in which parastatals manage their resources.
*  Lack of basic financial management information on the 36 states and lack of
monitoring of their accountability performance.
In addition, Nigeria has an unenviable reputation for corruption. Transparency
International gives it a score of 1.6 out of a maximum possible score of 10 in its
Corruption Perceptions Index. It is ranked 98th out of 99 countries covered by the index
and is bracketed by Indonesia (1.7) and Cameroon (1.5). A new anti-corruption law has
just come into effect. Nevertheless, financial management and accountability are weak
and this contributes to fiduciary risk which is assessed as very high.
19



Private Sector
10. Legal framework
10.1 Private sector accounting is regulated by the Companies and Allied Matters Act
(CAMA, 1990) Companies are also required to conform with local and international
accounting standards. Appendix 8 of CAMA, 1990 prescribes the accounting records to
be kept as well as the form and contents of the financial statements. CAMA also makes
provision for the appointment and removal of auditors and prescribes the duties and
liabilities of the auditors.
10.2 For the purposes of this act a person is qualified for appointment as a company
auditor, if he is a member of a body of accountants in Nigeria. A subsequent amendment
defined an accountant as a Chartered Accountant. The audits of quoted companies are
therefore carried out only by members of the Institute of Chartered Accountants of
Nigeria (ICAN) which is a member of the International Federation of Accountants
(IFAC).
10.3 ICAN has set up the Public Practice Section to monitor audits carried out by its
members. The checks cover planning, execution and compliance with auditing and
accounting standards. ICAN has published a code of ethics for its members. While the
Institute disciplines erring members who are reported for unethical behaviour, it has no
mechanism in place for identifying erring members.
10.4 Public companies are expected to have audit committees to which the auditor
reports. The composition of the audit committee as contained in the decree leaves much
to be desired. The committee is to consist of an equal number of directors and
shareholders subject to a maximum number of six members. Since the accounts and
reports to be considered by the committee concern the stewardship of the directors, it
appears improper for them to be so heavily represented on the committee unless they are
non-executive directors.
10.5 The duties of the Audit Committee as spelt out under Section 359(6) include
ascertaining whether the accounting and reporting policies of the company are in
accordance with legal requirements and agreed ethical practices and reviewing the scope
and planning of audit requirements. But there is no legal provision entitling audit
committee members to remuneration.
10.6 CAMA is silent on the qualification of individual members of the audit committee
and their obligations. The audit committee has the power to authorize the internal auditor
to carry out an investigation into any activities of the company which may be of interest
or concem to the audit committee. Listed companies have internal auditors, typical
issues being the relevance of their skills and the appropriateness of management
responses to their findings.
10.7 Every company is required to submit yearly annual retums of its financial and
related activities to the Corporate Affairs Commission. Failure to submit retums attracts
20



a penalty of N1,000 and NI00 fine respectively for a public and a private company.
These are trivial sums. The Corporate Affairs Commission does not publish the names of
erring companies neither does it impose sanctions on them.
11. Financial Sector
11.1 Apart from the CAMA, 1990 which provides a general legal framework for
regulation of the financial sector, specific laws also exist:
* Banks and other Financial Institutions Decree 1991.
* Insurance Decree, 1997.
* Nigerian Deposit Insurance Corporation Decree No. 22, 1988.
11.2 The financial sector comprises:
* licensed commercial and merchant banks including mortgage and community
Banks
* licensed finance companies including bureaux de change
* registered insurance companies and insurance brokers.
11.3 In addition to complying with the requirements of CAMA 1990, the above are
regulated by the Banks and Other Financial Institutions Decree (BOFID, 1991). Banks
are also regulated by guidelines and other circulars issued by the Central Bank of Nigeria.
In order to check the distress in the banking sector, the Central Bank of Nigeria and the
Nigerian Deposit Insurance Corporation (NDIC) have strictly enforced prudential
guidelines for licensed Banks. These became operational in November 1990. They
specify rules for classifying loans as to whether they are performing, non-performing or
bad and details what provisions ought to be made. Non-performing loans are further
classified into sub-standard, doubtful and lost.
1 1.4 In 1998 as a result of implementing the guidelines, about twenty six banks were
classified as distressed and their licenses revoked. In view of the supervisory and
regulatory roles being played by the CBN, the NDIC and the Commissioner for
Insurance, public confidence has now been restored in the financial sector of the Nigerian
economy. Through regular issuance of statements of accounting standards, the Nigerian
Accounting Standards Board (NASB) creates a framework for proper accounting by
banks and financial institutions. Statements 10 and 15 specifically concern financial
disclosure by banks and financial institutions and are equivalent to International
Accounting Standard 30 on the same subject.
11.5 The legal framework governing securities markets has been significantly expanded
and consolidated by the Investment and Securities Decree (1999). The act which replaces
an earlier act, re-establishes the Securities and Exchange Commission and defines its
responsibilities and powers. It regulates the setting up of stock exchanges, the offer of
securities for sale, trading in securities and mergers and acquisitions. It also sets up an
21



investor protection fund and regulates borrowing by states, local governments and other
government agencies. The Nigerian Stock Exchange is the largest stock exchange at the
moment. Approval has been given for the start up of a Stock Exchange in Abuja. The
Securities and Exchange Commission (SEC) regulates the capital market in accordance
with the above decree.
11.6 The Nigerian Investment Promotion Commission Decree of 1995 liberalized the
investment climate by pernitting foreign investment in quoted companies. It created the
NIPC to monitor foreign and domestic investments, with foreign and domestic investors
having equal rights under the decree. At the same time exchange control regulations
were liberalized and more recently taxes related to investment have been reduced. The
Stock Exchange has itself embarked on important reforms including an automated
clearing, settlement and delivery system. This and the Investment and Securities Decree
have transformed the investment climate, and created renewed need for meaningful
company disclosures. Today capital market regulation is based on full disclosure,
whereby companies issuing securities are obliged to disseminate full information about
themselves and the securities being issued. Adequate accounting standards are essential
if these arrangements are to achieve their full objectives.
12. The accounting profession
12.1 The country has two statutorily recognized accountancy bodies:
o The Institute of Chartered Accountants of Nigeria (ICAN) established by Act
of Parliament No. 15 of 1965.
o Association of National Accountants of Nigeria (ANAN) established by
Decree 76 of 1993.
12.2 Since the establishment of ANAN, there has been controversy as to the role of each
body. Statutory audits of publicly quoted and private companies including government
parastatals with limited liability are largely carried out by ICAN members.
12.3 Membership of the International Federation of Accountants (IFAC) generally
denotes organizations whose fully-qualified members are officially recognized as having
attained the highest levels of training and qualification in accounting and/or auditing. In
Nigeria, ICAN belongs to IFAC while ANAN does not. The current membership of the
two accountancy bodies is as follows:
ICAN           ANAN
Qualiried accountants
Government                        604           1,300
Public practice                  3,514            300
Statutory bodies                 1,020           500
Comnmerce and industry           5,599           750
Educational institutions          471             150
Others                           1,592
Total                              12,800          3,000
22



12.4 With the country's population put at about 120 million the ratio of qualified
accountants to the total population is 1 to 7,595. It is difficult to interpret such figures.
Certainly Nigeria has a far larger accounting profession both absolutely and relative to
population than many African countries. However qualified accountants are concentrated
in the large national and multinational companies and due to a sluggish economy as many
as 14% of ICAN members are unemployed.
12.5 A few concluding issues:
*  ICAN has in place a mandatory continuing professional education program for
its members. Every member is obliged to obtain thirty credit hours annually.
*  There is at present no monitoring mechanism to ensure compliance with
minimum financial reporting standards; complaints of infringements are
investigated and erring members sanctioned.
*  In order to cope with the training of accountants, ICAN has accredited
selected universities and polytechnics with a view to giving certain
exemptions to graduates of these institutions. ICAN monitors these
institutions to ensure that the quality of staff and technical materials are
appropriate.
13. Accounting and Auditing Standards
13.1 The regulation of accounting and auditing standards is respectively performed by:
* The Nigerian Accounting Standards Board (NASB).
* The Institute of Chartered Accountants of Nigeria (ICAN).
13.2 NASB is a parastatal under the Federal Ministry of Trade and Commerce and was
established in 1982. Presently, NASB has a 20 member interim technical committee that
is charged with the responsibility of supervising all the technical activities of the Board.
13.3 Before standards are issued, exposure drafts prepared by technical committees of
NASB and ICAN are circulated amongst professionals for comments. To date, 18
standards have been issued'5 as against the 33 extant standards of the Intemational
Accounting Standards Committee (IASC) that was established in 1973. The accounting
standards issued by NASB are comparable with international standards and comprise:
SAS 1 - Disclosure of Accounting Policies
SAS 2 - Information to be Disclosed in Financial Statements
SAS 3 - Accounting for Property, Plant and Equipment
SAS 4 - Inventories
SAS 5 - Construction Contracts
SAS 6 - Extraordinary Items & Prior year Adjustments
SAS 7 - Foreign Currency Conversion & Translations
15 Standards 16 and 17 have no IAS equivalent
23



SAS 8 - Employee's Retirement benefits
SAS 9 - Accounting for Depreciation
SAS 10 - Accounting by Banks and Non-Bank Financial Institutions (Part I)
SAS 11 - Leases
SAS 12 - Accounting for Deferred Taxes
SAS 13 - Accounting for Investments
SAS 14 - Accounting in the Petroleum Industry (Upstream Activities)
SAS 15 - Accounting by Banks and Non-Bank Financial Institutions (Part II)
SAS 16 - Accounting for Insurance Business
SAS 17 - Accounting In the Petroleum Industry: Downstream Activities
SAS 18 - Statement of Cash Flows.
13.4 ICAN has published two auditing guidelines: on engagement letters and on the role
of the reporting accountant in the issue of a company prospectus for the issue of
securities. ICAN requires its members to comply with International Standards on
Auditing but does not have an effective method of enforcing this requirement. An
obvious need is to provide guidelines for interpreting/explaining standards so as to
facilitate adequate compliance by members.
13.5 Other bodies responsible for ensuring compliance with standards are as follows:
o   Central Bank of Nigeria.
O   Nigerian Deposit Insurance Corporation.
O   Nigerian Stock Exchange.
o   Corporate Affairs Commission.
o   Security and Exchange Commission.
However there is no mechanism to monitor the extent of compliance with either
accounting or auditing standards and there are no prescribed sanctions for non-
compliance.
24



Next Steps: Public Sector
14.1 How should Government of Nigeria approach the issue of strengthening financial
management? The answer is that it should do so with determination and appropriate
resources, within a program of broader governance reforms and in a phased manner over
a period of years. This would locate financial management in the larger "house of good
governance":
MANAGEMENT
REPRESENTATIVE INSTITUTIONS
14.2 What would such a reform process look like? The following paragraphs give
guidance.'6 A reforn program requires an adequate organizational basis and political
backing. Without these, the aims of the program are likely to be dissipated and frustrated.
The President of Nigeria has announced his government's commitment to fighting
corruption. It is therefore appropriate to locate the financial management reform process
in the executive branch of government where it will receive the necessary high level
backing. Ideally, a representative Stakeholders Group will be formed under the
Presidency, with representation from the agencies and bodies responsible for key
financial management functions (e.g. FMF, A-G, PACs, line ministries) as well as the
private sector. The Group would need full time experts and other resources. It would
design a program of financial management reform, obtain executive endorsement for the
program, co-ordinate efforts between the bodies involved, ensure funding and evaluate
and report on progress in implementing the program. Each participant agency would
form its own oversight committee responsible for guiding its part of the reform process.
16 See annex I below for further detail and annex 2 for a review of recent public financial management reforms in
youth Africa.
25



14.3 A program of financial management reform for Nigeria has to be based in reality.
Several key processes fundamental to good financial management are currently very
weak or ineffective. A successful prograrn would be based on the principle "don't run
before you can walk". It would therefore be organized in phases with the first phase
devoted to recovery and consolidation (ensuring that fundamental processes such as
budgetary control and accounting actually work). Only at a later stage would reform turn
to more sophisticated issues. The phases of the reform process might look like this:
Phase     Aim                             Duration
1         Recovery                        I year
2         Consolidation                   5 years
3         Strengthening and upgrading     5 years
14.4 Possible contents of the first phase are suggested:
*   set up a representative Stakeholders Group'7 (including staffing, and co-
ordination arrangements); ask participating stakeholders to establish oversight
committees.
*   draft a financial management reform program for the public and private
sectors.
*   obtain political endorsement and funding for the reform program.
*   reissue basic legal documents regarding public finance with a commentary on
their current validity.
*   assess extent of problem of accounting arrears and assign specialist teams
consisting of civil servants and consultants to the task of bringing accounting
records and reports up to date.'8
*   establish realistic budgets.
*   iron out difficulties in the mechanics of the budget preparation process;
enforce budget controls during implementation of the budget and impose
penalties on those flagrantly violating financial management regulations.
*   ensure adequate staffing for accounting and auditing both by filling vacancies
and by employing consultants to increase financial management capacity.
*   impose sanctions in serious cases of non-compliance with financial laws and
regulations.
17 It has been suggested that this group would cover both financial management and procurement.
'8 The Accountant-General of the Federation has already formed a team to address these issues.
26



14.5 A full reform program would have to be worked out with all the participating
stakeholders. Annex I gives further details. The following table illustrates possible
contents of a full reform program phase by phase:
Financial management reform program: main processes
Phases             I                         II                             | III
Actions to be taken in each phase
Government         Achieve adequate staffing  Achieve timeliness and accuracy  Re-engineer govemment
and resourcing; initiate  in accounting records and the    accounting system using up to
accounts           work on accounting        production of annual financial  date technology
arrears                   statements; take steps to
streamline existing processes
Internal           Achieve adequate staffing  Issue guidelines, train staff,  Ensure that all entities have
control            and resourcing,           ensure adequacy of intemal audit  adequate internal control
systerns and adequate internal
audits
Budget             Achieve adequate staffing  Perfect a system of top-down    Link budget allocations more
and resourcing,           budget envelopes with bottom     closely with performance,
Achieve realistic         up ordering of pnonties by      introduce performance
aggregate budgets and     spending agencies within         measurement systems and
effective budget control  envelopes, delegate more         further delegate to spending
dunng execution           powers to spending ministnes     ministnes
Audit              Achieve adequate staffing  Ensure a high quality financial  Develop value for money audit,
and resourcing, ensure    and compliance audit Improve     tighten quality assurance, ensure
audits are camed out      the quality of audit reports and  legislature's information needs
annually on all agencies  linkages with the legislature    are met
within the mandate
Public             Assess needs of PACs      Provide technical assistance to  Ensure that PACs play their
Accounits          and assist                PACs                             intended roles in full
Committees       I        _I
Next Steps: Private Sector
15.1 The contemplated reforms affecting the private sector (extensive privatization,
revitalization of the capital market and expected inward investment-see above) underline
the need for improved accounting and auditing standards, improved performance against
standards and investment in education and training in order to be able to produce the
required financial skills. Nigeria needs complete accounting standards which comply
with International Standards; better company compliance with accounting standards; and
more effective audits. The same applies to the banking sector, where the success of
supervision relies to a large extent on such factors.
15.2 The detailed content of a reform program would need to be considered by the
relevant parties. It might include:
* revision of the Companies and Allied Matters Act 1990 for instance to
strengthen the auditor's position, to empower audit committees and to require
greater public accountability from directors.
27



o   assistance to the Corporate Affairs Commission'9 to improve the efficiency of
the registration of companies and the public's ease of access to the
information registered.
o   issuing a full set of LAS-compliant accounting standards.
O   assistance to NASB in monitoring compliance with accounting standards and
to ICAN in monitoring compliance with auditing standards.
o  passing of an anti money laundering law and establishment of an adequate
enforcement mechanism.
o   assistance in those aspects of banking supervision that rely on accounting and
auditing.
o   assistance for education and training.
19 The Govemment has constituted a Committee to examine the activities of the Corporate Affairs Commission and to
make recommendations to enhance its performance.
28



Annex 1
Public flnancial management reform program
1. Government budgeting will be one of the main focuses for reform. A medium tern
expenditure framework (MTEF) is described in annex two. It would be introduced in
phases as already indicated with early emphasis on achieving realistic budgets.
2. Government accounting is another important area for reform. A modem treasury
system20 is a medium-term aim. The following table explains the advantages.
Modern Treasury Systems
These systems are designed to provide
sharper ex ante controls on spending enabling the treasury and spending agencies to
ensure that funds are spent for authorized purposes and that over-spending is prevented.
a treasury single account so that control is stncter and cash management is easier to
achieve.
integrated data bases so that different systems use the same basic data.
more reliable accounting information.
better data for cash and debt management.
more uniform procedures and greater ease in identifying rogue transactions
improved opportunities for carrying out systems-based audits.
3. To embark on such a reformn requires adequate planning and resources. A first step
would be to carry out a functional analysis of the current financial management system
(budgeting, allocation of funds, commitment and disbursement of funds, accounting and
reporting). This could be used to provide a rough estimate the cost of such a reform and
to assess the degree to which existing systems are adequate or need to be changed. At the
same time the capacity of government to undertake the reform including the information
technology base and adequacy of inforrnation technology and other skills would also be
assessed.
4. A financial management reform program covering budgeting, accounting, reporting
and control has one main organizational focal point: the Ministry of Finance. It also has
several subsidiary focal points: audit, the legislature and the spending agencies in which
the reforms are to take root. Overdue emphasis on the ministry of finance and neglect of
the spending agencies is a recipe for failure because there can be no good financial
management unless the spending agencies are fully committed to reform. For this, they
have to be fully involved in the process of reformn, not just recipients of instructions
emanating from the Ministry of Finance. That said it will be necessary to assess the
20 Treasury systems and integrated financial management systems are discussed in detail in "Information systems for
govemment fiscal management", Ah Hashim and Bill Allan, World Bank, 1998.
29



structure, operations, resources, inter-relations and performance of each department of
the Ministry of Finance:
Financial management functions of the ministry of finance:
Budgeting
Accounting
Intemal control
Debt management
Cash management
Relations with donors
Foreign currency resources
Government-wide management improvement
Relations with PAC
5. Spending agencies will be involved in areas such as budget formulation, accounting,
budget control, allocation of budget authority, periodic reporting etc. For this, staffing
and the development of appropriate skills will be important issues.
6. A particular problem is apparent in the field of records management. In parallel with
the breakdown of financial management systems, there has been a break-down of records
management. Behind every accounting transaction there is a documentary record
comprising payment orders, invoices, stock records etc. A financial management system
not backed by documentary evidence lacks an essential element of internal control.
Moreover those who come to audit the system or to investigate wrong-doing cannot do so
without adequate documentation. This is currently a significant problem in Nigeria and
one which needs to be addressed in any reform program.
7. As the availability of appropriate skills is a core issue for public sector financial
management, the reform program must contain a strong training component. Training
facilities already exist in the Accountant-General's Department and in the Office of the
Auditor-General, but these have suffered neglect and require revitalization. At the same
time, more intensive training is needed for other financial management staff including
staff of FMF and of spending agencies, both in basic skills and in the implications of
moving to more exacting financial management standards. Of longer term significance
would be the introduction of a recognized qualification in public sector financial
management with appropriate courses available at selected Nigerian universities and
training centers.
8. A reform program must address not only training issues but other human resource
issues which lie behind financial management problems. At present the public sector
cannot acquire and retain the skills needed to manage public resources effectively.
Nigeria is capable of producing skilled people, but public sector working conditions are
insufficiently attractive. Those with relevant skills are attracted to the higher salaries and
other conditions of employment of the private sector. Civil service reforn is needed to
address such issues. In the meantime steps must be taken to improve morale and
incentives in public sector financial management: by filling vacant positions; introducing
merit-based allowances and providing budgetary funds so that consultants can be hired
where supplementation of existing skills is a high priority. Such measures will make
training more effective. Training is discussed more fully in annex 4 below.
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Annex 2
STEPS IN THE PREPARATION OF A MEDIUM TERM EXPENDITURE FRAMEWORK
(MTEF)
A fully developed Medium Term Expenditure Framework entails the following steps:
Step 1. (Re)estimation of the Resource Envelope. This is based on forecasts of economic performance
during a three to five year period, from which revenue estimates may be derived, and forecasts of
development assistance flows. This would be done, in the first instance, at the Federal Government level,
based in Nigeria's case on expected shares from the Federation Acounts. In due course, states should be
encouraged to develop their own MTEFs.
Step 2. Definition of Medium-term Sectoral Resource Limits. The resources available for allocation
are determined by deducting funds that are already committed by contract or agreement (such as
counterpart financing of aid, debt service obligations and, in some cases, salaries) and statutory
expenditures (such as pensions) from the overall resource envelope. The main revenue expenditure and
debt service aggregates comprise the Medium Term Financial Framework (MTFF) on which the MTEF is
based. Indicative sectoral expenditure limits are then defined on the basis of government priorities and
following preliminary discussions with sector ministries. The indicative limits together with proposed
policy changes from line Ministries and Ministry of Finance are submitted to Cabinet/Council (or a
designated sub-commnittee) for consideration and decision several months before the beginning of the
annual budget cycle. In the case of Nigeria, the MTEF might be tabled in the National Assembly for
debate, consistent with the spirit of the Phillips Committee.
Step 3. Preparation of Sector Programs. The sector ministries prepare medium-term strategic plans that
set out their key objectives, outputs and activities, together with expenditure forecasts within the spending
limits agreed by Cabinet/Council. These plans, which would supplant the Rolling Plan, should take into
consideration the cost of both ongoing and new programs relating the expenditure to performance targets to
be met. Ideally, expenditure should be presented by program and discriminated by expenditure categories,
(distinguishing, at the very least, salaries, operations and maintenance, and investment). This could not be
done immediately in Nigeria whose budget is currently presented in traditional line item format.
Step 4. Review of the Sector Programs by Ministry of Finance. The Ministry of Finance analyses the
sector programs to verify their consistency with the government priorities and the expenditure limuts,
focusing on broad strategic issues rather than the detailed structure of the proposed expenditures. Where
the sector forecasts exceed the liruts, the Ministry of Finance may assist the sector agency in trimming
expenditures or may request additional mformation in order to revise the limits.
Step 5. Submnission of Revised Limits to Cabinet/Council. On the basis of this review, the Ministry of
Finance will propose revised multi-year limits for sector expenditure for approval by Cabinet. These limits
provide the basis for the preparation of more detailed budget proposals in the first year of the MTEF.
Step 6. Finalization of Budget and Presentation to Legislature. The annual budget is then prepared by
the line agencies, on the basis of the MTEF proposal, and submitted to the Ministry of Finance for
aggregation and presentation to the legislature. In some countries, the proposal submitted to the legislature
includes the indicative limrts for outer years of the MTEF.
Step 7. Review and Rollover. The followmg year, the expenditure estimates are reviewed in relation to
performance and preliminary budget out-turn data, where available. These provide an input to sectoral
limits in Step 2 of the next MTEF process, together with an analysis of policy changes and their budgetary
implications.
Based on "Public Spendingfor Poverty Reduction ", World Bank, April 2000, adaptedfrom Elizabeth Muggeridge
1999.
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Annex 3
Public financial management reforms in South Africa
1. Using public resources economically, efficiently and effectively.
O Establishment of performance auditing capacity in the Office of the Auditor-
General.
o  Development of an audit methodology for auditing the budget, whereby
shortcomings in budget preparation are identified.
o Modernization of the role of public sector auditing and accounting by the
introduction and implementation of new legislation such as the Audit
Arrangements Act and the Public Finance and Management Act.
2. More effective accountability for public funds based on the concept of the
separation of powers.
O Explicit constitutional recognition of the separation of powers and the
articulation of appropriate measures to maintain these principles.
O  Explicit and effective constitutional protection of institutions designed to
support constitutional democracy.
O  Enhancements to the effectiveness of Public Accounts Committees.
o Harnessing the Press in facilitating the principles of transparency in the public
accountability process.
3. llncreasing convergence of private and public sector accounting and auditing
standards.
O The establishment of an Accounting Standards Board and the adoption of
generally accepted accounting practices for central and provincial
governments.
O  The adoption of generally accepted accounting practices by parastatals.
O The harmonization of auditing standards developed by the International
Organization of Supreme Audit Institutions (INTOSAI) with those developed
by the South African Institute of Chartered Accountants by the incorporation
into the latter of "public sector perspectives".
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4. Increased attention to governmental financial management.
* Movement towards the replacement of "legacy" computer systems with
Enterprise Resource Planning (ERP) based software.
*  Establishment of the post of Financial Manager at the level of Deputy-
Director-General in Departments.
*  Broadening of the eligibility for membership of the South African Institute of
Chartered Accountants by making specific types of membership available for
accountants and auditors in government who are not chartered accountants.
*  Upgrading of the post of Accountant-General.
*  Formation of the Institute of Public Finance and Auditing independent of but
with support from government.
*  Enforcing sanctions for Accounting Officers who do not fulfill their financial
management responsibilities diligently.
5. A move towards greater, independence for Auditors-General.
*  Re-establishment of the Office of the Auditor-General as a legal person,
outside the civil service and with effective, transparent and credible
governance structures.
*  The establishment of a Staff Management Board to oversee the human
resource function in the office of the Auditor-General.
*  The design and implementation of financing mechanism for the Office of the
Auditor-General which is independent of the Executive.
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Annex 4
Training in public sector financial management
1. Training in private sector financial management is relatively well-developed in
Nigeria. The same is not true of the public sector. The Accountant-General and Auditor-
General have their training schools but they are badly resourced.
2. To widen the training base certain initial actions are needed:
o carry out a training needs assessment for all major categories of financial
management staff
o  assess the capacity of existing institutions to meet training needs.
O  consider ways of meeting training needs in the likely event of needs exceeding
capacity.
3. One way to increase capacity is to hire better qualified entrants. Upgraded courses in
public sector financial management are likely to be needed, in which case the following
actions are called for:
o assess existing courses and the qualifications and experience of new recruits.
o  establish criteria and contents for new and improved technical and tertiary
level courses in public sector financial management (PSFM).
o  negotiate with selected colleges, universities and training institutions to offer
courses in PFSM as qualifying components in existing diploma, graduate and
postgraduate accounting degrees.
o  assist the selected institutions in developing curricula and course materials.
O establish links between training institutions and the government departments
seeking staff.
4. There are significant training needs for staff currently in post. For these new internal
training courses will be needed, to the extent that they do not qualify for the two training
schools mentioned above. These could be developed in conjunction with institutions
such as the Administrative Staff College of Nigeria and the Centre for Management
Development.
5. Another possibility is to establish a new training center including both the existing
training schools and also offering a full range of courses for all those working in public
sector financial management.
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Annex 5
Private sector financial management
reform program
1. The CFAA reveals weaknesses in private sector financial management (sections 10-13
above).
2. An efficient capital market presumes the working of these processes. A review and
consolidation of company law is needed; as are legal provisions requiring greater
accountability from company directors and granting enhanced shareholder rights.
3. It would be advantageous for Nigeria if NASB can accelerate the issuance of
accounting standards in areas where there are none in existence but are available under
the IASC. With a full set of accounting standards, the emphasis of the NASB could turn
to monitoring compliance and enforcement.
4. Transparency would be greatly improved by an efficient companies' registry.
5. Above all, the corporate governance model is incomplete with the result that large
corporations are frequently unaccountable, and impervious to shareholder interests. The
emerging models of corporate governance as evidenced by the Cadbury Report in the
United Kingdom and the King Report in South Africa may be relevant to Nigeria's
problems. The CFAA has identified several problems in the field of private sector
financial management and in Nigeria's corporate governance model.
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