Report No. 39621-BT Kingdom of Bhutan Public Sector Accounting and Auditing A Comparison to International Standards Country Reports April 2007 Financial Management Unit South Asia Region Document of the World Bank Acknowledgments This assessment of accounting and auditing standards and practices in the public sector was carried out in active collaboration with the Royal Government of Bhutan (RGoB) andvarious stakeholders, particularly the Royal Audit Authority; the Ministry o f Finance; and the Royal University of Bhutan and its institutions, including the Royal Institute of Management. The review was conducted through a participatory process that involved these stakeholders whose responses to issues that were raised in the diagnostic questionnaires were especially useful, as were the reports and information from recent World Bank assessments of public financial management. A workshop was held in Thimphu on September 20, 2006 by the Government and the World Bank to review the results of the assessment and to decide on actions to be taken. The list of those actions has been included inthis final report at Part IV. The team of advisors and development partners also contributed greatly to the early stages of the concept note and framework development, as well as drafting of earlier reports for this study which ultimately is intended to cover the countries of the South Asia Region: Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka. The World Bank's Task Team for the assessment is responsible for the content of this report. Irene Julitta Ponniah, Senior Financial Management Specialist, SARFM, World Bank provided substantial assistance to the team with drafting work. Peer reviewers included Ivonna Teresa Kratynski and Rajat Narula, Financial management Specialists in the World Bank. Task Team P K Subramanian, Lead Financial Management Specialist Manvinder Mamak, Senior Financial Management Ronald Points, Lead Consultant, Accounting Michael Jacobs, Lead Consultant, Auditing Advisors Simon Bradbury,Manager, Loans Department, World Bank David Goldsworthy, Operations Manager, International Technical CooperationProgram, UK,National Audit Office Noel Hepworth, CharteredInstitute of Public Finance and Accountancy, London Abdul Mudabbir Khan, Fiscal Affairs Department, InternationalMonetary Fund IanMackintosh, Chairman, UK Accounting Standards Board N.R.Rayulu, Additional Comptroller & Auditor General (International Relations), Office of the CAG of India; Nominee of Asian Organization of SupremeAudit Institutions (ASOSAI) ... 111 Paul Sutcliffe, Technical Director, International Public Sector Accounting Standards Board, International Federationo f Accountants DevelopmentPartner Collaborators David Biggs, Financial Management Advisor, UK Department for International Development Kathleen Moktan, Asian Development Bank iv Contents Executive Summary I.Introduction ...................................................................................................... ............................................................................................................. 11.PublicSector Accounting .................................................................................................., .........vi1 3 A. Institutional Frameworkfor Public SectorAccounting.. ....................................................... 3 I. Accounting Laws andRegulations 2. Education and Training............................... 3. Code of Conduct 4. Public Sector AccountantArrangements................................................................ B.AccountingStandardsas Practiced .................................................................................... 6 1.SettingPublic Sector Accounting Standards.......................................................... 6 2 PresentingFinancial Reports ......................................................... 6 111. PublicSector Auditing ..................................................................................................... 8 A. Institutional Frameworkfor Public SectorAuditing ............................................................ 8 I. Institutional Framework 2. SettingAuditing Standar ................................................. 9 3. Code ofEthics .. .......................................................... 4. Accountability in the SupremeAudit Institution.......................... 5. Independence ........................................................ 6. QualiJicationsan ............................................... I O 7. Training....................................................... 8. Audit Competence .......................................................... 9. Quality Assurance ......................................................... B.Auditing Standards as Practiced ...................................................................................... 12 I.Audit Planning ......................................................... 2. Audit Supervision............ ............................................... 13 3. ReviewingInternal Controls........................ 4. ReviewingCompliance............................................................. 5. Audit Evidence ........................................................... 6. Analyzing the Financial Statements. 7. Preparing Audit Opinions ............................. 8. Reporting on Fraud............... ........................................... 14 9. Reporting on Compliance............................ ........................................... 14 IV. Action Plans ............................................................................................... ,..............16 Annex A. Methodology ofthe Assessment....................................,.....................,.................. 20 Annex B.Accounting and Auditing Standards ...................................................................... 22 International Public Sector Accounting Standards ................................................................ 23 International Education Standards.. .................................................................................... 23 International Financial Reporting and International Accounting Standards ............................. 24 INTOSAI Code of Ethics andAuditing Standards.. ................................................................ 25 International Standards onAuditing.. .................................................................................. 27 Annex C. Accounting Legislation Annex D-1.Audit Legislation ................................................................................ ......................................................................................... ..............2830 Annex D-2.Audit Act, 2006 ............................................................................................................... , 31 Annex E. Benefits of AccrualAccounting ............................................................................. 52 Supplementary Table of Standards and Gaps ....................................................................... 56 V Executive Summary 1. This assessment o f public sector accounting and auditing is generally meant to assist with the implementation of more effective public financial management (PFM) by means o f better quality accounting and public audit processes. It is intended to provide greater stimulus for more cost-effective outcomes of government spending. The specific objectives are (a) to provide the country's accounting and audit authorities and other interested stakeholders with a common well-founded knowledge as to where local practices stand in accordance with the internationally developed standards of financial reporting and audit; (b) to assess the prevailing variances; (c) to chart paths to reduce the variances; and (d) to provide a continuing basis for measuring improvements. 2. Adoption o f international standards for accounting forms the basis o f competent financial reporting and transparency. The International Public Sector Accounting Standards Board (IPSASB) o f the International Federation o f Accountants (IFAC) has developed a core set o f accrual-based International Public Sector Accounting Standards (IPSAS) and also a comprehensive IPSAS on the cash basis o f accounting. These IPSAS establish an authoritative set o f independent international financial reporting standards for governments and others in public sector organizations. The study has taken the international standards as axiomatic with any acceptable options incorporated in the standards. The study has not assessed whether or not the country should adopt a limited version o f the standards, as the processes o f developing the standards have already considered any acceptable options that can be incorporated into the text of the standards, butthey do not override authoritative national standards issued by governments, regulatory or professional accounting bodies. Application o f IPSAS will support developments in public sector financial reporting directed at improving decision making, financial management, and accountability and it will be an integral element o f reforms directed at promoting social and economic development. The IPSASB has also developed guidance on the transition from cash- to accrual-based reporting.' The traditional emphasis on cash accounting has been found inadequate through failure to recognize true costs, and all assets, and liabilities. Cash accounting can too easily neglect asset management, accumulating arrears, future liabilities (e.g., pensions), and contingent liabilities (e.g., guarantees). 3. Annex A explains the methodology used for the study. Annex B provides a summary o f accounting and auditing standards referred to in this study. Annexes C and D provide country accounting and auditing legislation, respectively. Annex E includes a description o f the benefits o f accrual accounting. The desired actions indicated by this assessment are summarized below. 4. For reliability, the requirementsfor public sector accounting and reporting should be specified by law. The Financial Rules and Regulations 2001 are currently inplace. A draft Public Finance Bill has been prepared for presentation to the incoming legislature. Passage o f this legislation would provide a sound framework for PFM development. An 'Transition to the Accrual Basis of Accounting: Guidance for Governments and Government Entities, IFAC Public Sector Committee.December2003. vi Accounting Standards Board should be set up to give advice on the establishment o f accounting standards for both the private and public sectors. This Board should include representatives from public and private enterprises, the Ministry o f Finance, and the Royal Audit Authority (MA). 5. There i s a need to improvethe reliability and consistency of reportingby usingthe format of the Cash Basis IPSAS. An implementation time table for adoption of Cash Basis IPSAS is needed. The Government's reporting does not at present comply with the formats o f the Cash Basis IPSAS, Part 1, but the information i s generally available to do so. Further examination will be needed to assess the steps to consolidate controlled entities. The IPSASB encourages governments to progress to the accrual basis o f accounting and to harmonize national requirements with the IPSAS. A longer-term goal will be to move to accrual-based reporting, but inthe early stages the optional information set out inIPSAS, Part 2, may be reported on a progressive basis. 6. There is a need to improve the current budget and accounting computer systems to providea fully linked system that enables monthly and annual reporting at entity and national level. Program changes are underway to support electronic transfer of accounting reports on a monthly basis from all accounting offices. Scoping studies are being made o f the communications links that are needed and will provide an estimation o f the hardware, communication, and software requirements. There i s a need for some reassessment o f the system to establish how it will support the accounting and reporting requirements o f the proposed Public Finance Act. This Act will require half-yearly and annual ministerial reports on the actual performance against that specified in the budget. To achieve better budget performance, the accounting system needs to provide managers with frequent informationon progress against budgetsat the portfolio level andbelow. 7. Increased attention needs to be given to reporting issues for public enterprises. The state-owned enterprises tend to apply unspecified accounting standards. The International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) issued by the IFAC should be adopted by the Royal Government of Bhutan (RGoB) and be specifically referred to inthe financial statements as having been adopted. The relevant schedule o f the Companies Act should be so amended. The proposed Accounting Standards Board would advise the Ministry o f Finance and the Royal Audit Authority on the implementationo f the ISA. 8. A Supplementary Table o f Standards and Gaps at the end o f this report provides a matrix detailing the current standards, the present position, and options for improvements, separately, for accounting and auditing. A summary o f the accounting issues i s shown in Table ES1, while Table ES2 covers those related to auditing. vii Table ES1 Summary of AccountingStandardsIssues Standard Current status ActiviQ required to adopt international standards 1. Doesthe Public Sector No The proposedPublic FinanceAct Accounting Law adopt provides for the Chief Accounting IPSAS? Officer to set accounting standards. Once inplacethen IPSAS shouldbe specified. 2. Does educationand Broadly yes, but enhancements are Training needs analyses needto be training of accountants neededto provide sufficient completed and training courses and accordwith IES? capacity. resources modified to meet the requirements. 3. Doesthe Code of Broadly but not insufficiently Part A ofthe IFAC Code of Ethics Ethics matchthe specific terms for accountants. for ProfessionalAccountants should international standards? be adoptedsuitably amended for Bhutan. 4. Is there a body to No. The proposedPublic Finance Itwould be desirableto establisha prescribepublic sector Act provides for the Chief formal Board or Committee to advise accountingstandards? Accounting Officer to set on the establishment of accounting accounting standards. standards for both the private and public sectors. 5. Are the financial No The RGoB should adopt Part 1 ofthe statements in accord with Cash Basis IPSAS for ;he the international Government's accounts. standards? Consolidation of controlled entities, such as public enterprises, shouldbe consideredwhen feasible. 6. I s the statement of Cash No Receiptsand Payments in IPSAS form? 7. Are accountingpolicies No The information for these and explanatorynotes requirementsis available and aCash required? Basis IPSAS statement should be 8. Are other disclosures in No included inthe annual accounts. accord with IPSAS? 9. Doesthe government No issue a consolidated Implementationplan and time tables financial statement which are needed for consolidation of consolidatesall controlled controlled entities into the cashbasis entities? statements. 9. Adoption of the international standards for auditing provides the basis for assuring competent financial reporting and transparency if supported by enforcement of a code of ethics. The International Organization o f Supreme Audit Institutions (INTOSAI) has produced a Code of Ethics as a statement o f values and principles to guide the daily work o f the auditors; and a set of Auditing Standards that contain the postulates and principles for carrying out the audit work. The INTOSAI proposes that auditors need a subsidiary level of guidance to provide practical assistance to supreme audit institutions (SAI) in implementing the auditing standards in their individual constituencies. This lower level of guidance i s provided by the International Standards of viii Auditing (ISA) prepared by the IFAC's International Auditing and Assurance Standards Board (IAASB). 10. There is a need to adopt the practices set out in the IFAC-issued International Standards on Auditing in the new auditing manuals. The current auditing approach is based on the Auditing Standards of Bhutan, which are in line with the INTOSAI Auditing Standards. However, INTOSAI Auditing Standards are too general to support the development of adequate manuals. New laws and manuals are indevelopment and should mandatethe adoption of international auditing standards. The implementation of the Audit Act and the modern audit methodologies needs to rely on the IFAC-issued International Standardson Auditing for efficient audit processes. 11. Improvement of accountingand auditing skills would benefitfrom some external support to academic bodies. Improved compliance with international standards requires properly trained accounting and auditing staff. Recent reviews found that Royal Institute of Management (RIM) qualifications need to be upgraded and supported with further in- service training in the core competencies needed for public sector accounting and reporting. Both accounting and auditing knowledge and skills need to be adequate for all audit staff. The Royal Institute of Management is developing its courses to support training of potential recruits and current staff for the Royal Audit Authority. Strengthening this training support through association with a foreign accounting institution would be helpful. 12. A summary of the auditing issues is shown below inTable ES2. TableES2 Summaryof AuditingStandardsIssues Standard Current status Action to move toward international standards 1. Is the SA1statutory Not untilthe Implementationofthe new Audit Act framework inaccord with the new Audit Act will provide a sound framework. needs o f the INTOSAI was passed Auditing Standards? following the conduct of the assessment. 2. I s there a body to prescribe RAA does this There is aneedfor a Standards Board public-sector auditing currently. to assist. standards? 3. Have INTOSAI and IFAC RAAhas IFAC ISAs have not beenadopted and audit standardsbeenadopted? adopted the action should be taken to adopt them. INTOSAI Auditing Standards. 4. Has a code of ethics Yes Enforcement will support equivalent to the INTOSAI transparency. standardsbeenadopted? ix Standard Current status Action to move toward international standards 5. I s the accountability process Yes inthe SA1inaccordwith INTOSAIAuditing Standards? 6. Doesthe SA1legal No Implementation of the newAudit Act framework meet the INTOSAI will provide a sound framework. standards for independence andpowers? 7. Does education andtraining No Training needs analyses of staff and of auditors inaccord with linkage with a foreign accountancy INTOSAIand IES standards? institutionto assist the Royal Audit Authority with capacity development Should be instituted. 8. I s the SA1equippedwith the Broadly Newaudit manuals are inprocessof auditmethodsand development and the technology needs technologies to meet INTOSAI will emerge from these. Auditing Standards? 9. Does the SA1have the Yes quality assurance programs to meet international standards? 10. Do the processesfor No New audit manuals being developed planning, supervision, should improve these processes.The evaluation of internal control, manuals should adopt guidance from assessment of compliance with the relevant ISA. laws and collection of audit evidence for the audits meet international standards? 11Does the audit analyze the No The RGoB needs to adopt IPSAS for financial statements to reporting. establishwhether acceptable accounting standards for financial reporting and disclosure are complied with? 12 Does the auditor prepare an No The form of report needs to be audit opinion on the financial adjustedto accord with ISA 700. statements ina form that conforms to international standards? 13. Does the consideration o f Broadly yes Further adoption ofthe relevant ISA fraud and error inan audit of will improve performance. financial statements accord with international standard? 14. Are the Auditor General's Yes reportsmade public? X Standard Current status Action to move toward international standards 15. I s the process for taking Yes inthe Parliamentary scrutiny is a crucial action on audit absence of an component of the process of recommendations sufficiently effective responding to audit scrutiny. effective to meet international legislative standards? scrutiny 13. Improve public financial management through making managers of budget and accounting systems accountable for internal controls. Public financial management relies on a comprehensive and timely accounting and financial reporting system, which i s supported by a competent audit function that assures that the system is working properly and that the information is reliable. The M A report on the 2002-03 annual accounts (submitted January 4, 2005) proposed a position of a Chief Financial Officer (CFO) to head a separate Department of Public Accounts in the Ministry of Finance. This position has been separated from the budget function. The proposed Public Finance Act imposes substantial reporting requirements on portfolio ministers. A CFO for each portfolio would be needed to manage this. Accountable officers for the public finance system should maintain systems o f internal financial controls that manage risks, and prepare the accounts for signature. Specific identification of CFOs officers with overall responsibility will help ensure effective implementation. In addition, the budget monitoring system should be computerized and supported by timely accounting information. 14. The Royal Government of Bhutan should prepare a PFM indicators survey for monitoring progress in adopting and applying international standards. Use of the PFM performance measurement framework developed by the Public Expenditure and Financial Accountability (PEFA)' program, suitably extended, would be a good basis to develop and measure progress in the full cycle of PFM reform that encompasses budget formulation, accounting and audit, legislative scrutiny, and remedial action. The PEFA Program is a partnership among the European Commission, the UK Department for International Development, the Swiss State Secretariat for Economic Affairs, the French Ministry of Foreign Affairs, the Royal Norwegian Ministry of Foreign Affairs, the Strategic Partnership with Africa, IMF, and the World Bank,. A Steering Committee, comprising members of these agencies, manages the Program. A secretariat is located at the World Bank in Washington, DC. xi 1. Introduction 1. The purport o f this assessment o f accounting and auditing in the public sector is to help in implementing a highly effective public financial management (PFM) through better quality accounting and public audit processes. It is envisaged to provide greater stimulus for more cost-effective outcomes of government spending. The specific objectives are (a) to provide the country's accounting and audit authorities and other interested stakeholders with a common well-founded knowledge as to where local practices stand in accordance with the internationally developed standards o f financial reporting and audit; (b) to assess the prevailing variances; (c) to chalk out methods to reduce the variances; and (d) to provide a continuingbasis for measuring improvements. 2. Information on national standards and practices for accounting, financial reporting, and auditing in the government budget sector and in the state-owned enterprise sector were collected through diagnostic questionnaires that were completed in conjunction with country authorities. The diagnostic questionnaires incorporate the principles contained in the public sector accounting and auditing standards promulgated by the International Organization o f Supreme Audit Institutions (INTOSAI) and International Federation of Accountants (IFAC). The responses in these questionnaires have been further explored through discussions by a World Bank team with country authorities. These discussions included examination of accounts and audit reports and working papers to explore the quality o f the processes and the products. Annex A further explains the methodology usedfor the study. 3. The analysis in this report has been conducted in the light o f the strong measures being taken in the Kingdom of Bhutan to reform the accounting and auditing processes. New laws on public finance and auditing are in an advanced stage o f preparation or are before the legislature. Steps are already being taken in the Department o f Budget, the Department o f Finance, and the Royal Audit Authority (MA) to modernize their practices and make better use o f information technology and communications. 4. The World Bank and other donors have been involved in assisting the Royal Government o f Bhutaninthese endeavors. A coordinated effort to prepare a roadmap for comprehensive PFM upgrading is being developed between the donors and the Government. The Country Financial Accountability Assessment (CFAA) completed in February 2002, identified financial human resource development as one of the priority areas. The CFAA recommended that the Government develop an integrated plan to improve financial accountability including: Adopting international accounting standards inmajor public enterprises; Implementing professional leadership in accounting and financial management; Implementing a fully integrated, computerized government accounting system; Drafting new acts on public financial management and combating corruption; 1 Strengthening the Royal Instituteo f Management (RIM); and 0 Providing training for finance, accounting, and internal audit staff in line ministries and other government agencies, heads of administration and finance divisions, and other managers. 5. The Royal University o f Bhutan and its institutions are increasing the attention given to training in accounting and establishing revised and upgraded curricula and courses. Assessment o f training needs have been carried out to help in the creation o f their medium-term development plans. 6. Annex B provides a summary o f international accounting and auditing standards referred to, in this study. Annex C and D provide national accounting and auditing legislation, respectively. Annex E includes a description o f the benefits of accrual accounting. The Supplementary Table o f Standards and Gaps shows the present position for each component o f the existing standards, and the options for improvements that would bring closer conformance with the international standards. 2 II. Public Sector Accounting A. Institutional Framework for Public Sector Accounting 7. The institutional framework should include adherence to IFAC-issued International Accounting Standards (IAS) and qualified accounting staff to provide the timely, relevant, and reliable financial information needed to support all fiscal and budget management, decision-making, and reporting processes. The diagnostic questionnaires that were used inthis assessment have collected informationon the current arrangements and the apparent gaps in accounting laws and regulations, education and training of public sector accountants, application of a code of conduct, and numbers and characteristicsof public sector accountants. 1. Accounting Laws and Regulations 8. The accounting laws and regulations should be more prescriptive about the use of international accounting standards. A draft Public Finance Act i s being circulated for comment. Passage of this Act will provide for a good PFM foundation. Bhutan's Financial Rules and Regulations 2001, specify the current accounting practices, internal control procedures, reporting requirements and timetables, and responsibilities for financial management inall agencies. The accounting system is focused on ensuring due control over and reporting against budget appropriations, and audited annual accounts are essentially a budget realization statement. The International Public Sector Accounting Standards (IPSAS) issued by the International Public Sector Accounting Standards Board (IPSASB) of the IFAC are not adopted or complied with in preparing the annual accounts. However, in practical terms, the provisions of the Financial Rules and Regulations 2001 have facilitated a flexible reporting environment. Since much of the information seems available, there is scope for the Ministry of Finance to format annual financial statements using Cash Basis IPSAS, Part 1. This will be in line with the proposedPublic Finance Act, which provides for the chief accounting officer to prescribe accounting standards. 9. Enacting the proposed Public Finance Act can provide a firm basis for more effective enforcement and clarify the financial accountabilities of responsible parties. Audit reports show some lack of financial discipline and a lack of proper training for finance personnel, which has led to practical problems in implementing Financial Rules and Regulations 2001. There is a need for a better framework o f financial accountability through a modern financial reporting framework, as proposed in the Public Finance Act. Producing annual reports for each ministerial portfolio will provide a basis for holding senior managers accountable for their operations and use of budget funds. The Auditor General will need to specify the actions that departments should take to correct any accounting effects that lead to audit findings. Currently the accounts are only available at year-end. The computer accounting system needs to be 3 enhanced and connected to enable monthly reporting at entity level. Networking and other system improvements are needed. 10. As the relevantauthority,the Auditor Generalshould requirepublicenterprises to report in accordancewith internationalaccountingstandards. Public enterprises are not supported by a set o f BhutanAccounting Standards. It is up to the enterprise and its auditors to decide which set o f accounting standards are used to report in accordance with generally accepted accounting principles. Public enterprises are required by the BhutanCompanies Act 2000 to provide an annual report, including a balance sheet and a profit and loss account. The Companies Act includes a schedule o f the audit requirements that specifies reporting in accordance with generally accepted accounting principles. This schedule i s subject to amendment by the Auditor General. 2. Education and Training 11. Accounting courses need to be upgraded. A training needs analysis conducted in 2004 by the Australian Society o f Certified Practicing Accountants (CPA Australia) found a need for the Royal Institute o f Management accounting courses to be modified to provide the basic accounting competencies required by the Confederation o f Asian and Pacific Accountants (CAPA) standards. The RIM qualifications provide a basis for an effective National Finance Service but need to be upgraded and followed up with further in-service training in the core competencies needed for public sector accounting and reporting. 12. There is no regular system or mechanism to provide public sector accountants with continuingprofessionaldevelopment and training. The use of a comprehensive graduated framework o f professional accountancy qualifications i s needed. The training needs analyses by CPA Australia found that the National Finance Service should review its functional and skills requirements as a professional accounting service. The Royal Public Service Commission has introduced a formalized position classifications system for the National Finance Service. The UK Association o f Chartered Certified Accountants (ACCA) offers a worldwide Professional Scheme and Certified Accounting Technician Scheme, as does the public sector program o f the Chartered Institute o f Public Finance and Accountancy (CIPFA) in the United Kingdom. Cooperation with these or similar bodies and the Royal University o f Bhutan could provide a cost-effective mechanism for providinga wide range o f levels o f accountancy training. 13. The Government should develop a strategy to develop adequate accountingand financial professionalism. The training needs analyses by CPA Australia proposed a professional accounting body in Bhutan to support the National Finance Service. The Royal Public Service Commission has decided to establish an Accounts and Finance Division in its new Position Classifications System, a step forward in creating a professional body o f accountants in the National Finance Service. The Government should respond to the proposals put forward in the CPA Australia report on strategic pathways to developing adequate accounting and financial professionalism. 4 14. A training program that meets the IFAC InternationalEducation Standards (IES) for Professional Accountants is needed for public sector accountants and auditors. The recommendations of the CPA Australia report should be assessedby the Auditor General and the Ministry o f Finance with a view to establishing a Bhutan Institute o f Accountants. The professional leadership capacity o f the Royal Institute of Management and the National Finance Service should be strengthened in order to train and manage the professional development o f public sector accounting staff. There are approximately 585 accounting staff in the Bhutan public sector. The Royal Institute of Management requires higher-level training for professional development and professional membership qualifications. The ACCA is a body that could provide substantial support to the Bhutan accounting profession. Plans to adopt the ACCA or the CIPFA public sector program for local conditions would provide the path for sustained, improved training. The planwould be to use the existing local training institutions within the Royal University o f Bhutan to teach the appropriate curricula with the guidance of the international affiliate. 3 , Code of Conduct 15. A public sector accounts code of ethics is needed. Public sector accountants must adhere to the Civil Service Code o f Conduct and Ethics stipulated in the Bhutan Civil Service Rules 2002. But the Civil Service Code i s less prescriptive than the standardcode for professional accountants, thus a special code is needed. The new Audit Act includes a specific code o f conduct for auditors. This should be mirrored in a similar code for accountants, which can be based on Part A o f the IFAC Code o f Ethics for Professional Accountants. The cultural support that a strongly directed Code o f Ethics can create would be helpful inmaintaining good public financial management. 4. Public Sector AccountantArrangements 16. External and internalaudits are not as effective as they should be in ensuring that systems of internalfinancialcontrolswork well. For each public sector body that prepares annual accounts, there should be a professionally qualified Chief Financial Officer (CFO) to shoulder overall responsibility for maintaining systems o f internal financial controls that manage risks, and for preparing the reports and accounts for signature by the chief executive officer. The audit results are not being sufficiently translated into remedial actions. For this work to be done properly, the CFO needs to be given specific responsibility. The RAA report on the 2002-03 annual accounts (submitted on January 4, 2005) proposed the creation o f a post o f CFO as head of a separate Department o f Public Accounts in the Ministry o f Finance; this has been separated from the budget function. The proposed Public Finance Act imposes substantial reporting requirements on portfolio ministers, and a CFO for each portfolio will be needed to manage this. 5 B. Accounting Standards as Practiced 17. The diagnostic questionnaires have facilitated the collection o f information on the current arrangements and the apparent gaps for setting public sector accounting standards, besides presenting financial reports. Out o f this exercise came recommended activities that will helpbring local standards into line with international standards. 1. Setting Public Sector Accounting Standards 18. More formalized arrangementsare needed for settingaccountingstandardsfor the public and private sectors. The proposed Public Finance Act provides for annual audited financial statements and for a Chief Accounting Officer (CAO) inthe Ministry o f Finance who shall prescribe accounting standards for use by all budgetary bodies. It would be desirable to establish a formal board to advise on the establishment o f accounting standards for both the private and public sectors. This proposed Accounting Standards Board should include representatives from public and private enterprises, the Ministry of Finance, and the Royal Audit Authority. The preference would be for this Board to adopt all IAS, IFRS, and IPSAS for the relevant bodies, but specify appropriate exemption periods for particular standards or clauses where difficulty in implementation i s envisaged. Consultation and cooperation with other boards or committees in the Region on their practices could assist inthis process inthe initial and early stages. 2. Presenting Financial Reports 19. The annual consolidatedfinancial statements need adjustment to accord with CashBasis IPSAS,Part 1. Inhis report onthe 2002-3 financial statements, the Auditor General recommended that notes to the accounts should form an integral part of the financial statements and that the financial position should be presented in the form of a balance sheet and other accounts. The Royal Government o f Bhutan should adopt Part 1 of the Cash Basis IPSAS for Government accounts. Consolidation o f controlled entities such as public enterprises should be considered when feasible. Time tables are needed for consolidation o f controlled entities into the cash basis statements as per 1.6.5 o f the Cash Basis IPSAS (e.g. public enterprises), and for the longer-term transition path to the adoption o f accrual-based IPSAS. 20. Increased attention should be given to reporting issues for public enterprises. State-owned enterprises tend to apply unspecified accounting standards o f their own choosing. This does not give the consistency required for proper interpretation of accounts. It is important that a specific set o f accounting standards be used for preparation o f financial statements and for the audit o f those statements. The use o f `generally accepted accounting standards' does not provide any reference to the specific set o f explanations and definitions that are available in formally issued accounting standards. These explanations are a useful reference point for readers and users o f the accounts. The IAS and IFRS should be adopted by the Royal Government and be specifically referred to in the report on the financial statements as having been adopted. 6 The relevant schedule of the Companies Act should be so amended. The proposed Accounting and Auditing Standards Board would advise the Ministry of Finance and the Royal Audit Authority on the implementation of the international standards. 7 111. Public Sector Auditing A. Institutional Framework for Public Sector Auditing 21. Effective scrutiny by the legislature through comprehensive, competent external audit underpinned by international standards on auditing enables accountability for the implementation o f fiscal and expenditure policies. The environment for an effective supreme audit institution (SAI) requires a comprehensive approach to public financial management. Supreme audit institutions are not stand-alone institutions; they are part o f a PFM architecture that also includes budgeting, accounting, internal control, audit and legislative oversight, and government response. Improving the way the Supreme Audit Institution functions is integral to providing information for improving the overall PFM system, but the action must be within the executive branch under the watchful eyes o f the legislature and the public. A strong demand for good public sector external auditing i s necessary for the Supreme Audit Institution to have any impact. This requires willingness o fthe executive branch to accept and respond to external scrutiny over its management o f funds, and to ensure that steps for reforms are taken. 22. The diagnostic questionnaires, in addition to providing information regarding the current arrangements, indicatedthe apparent gaps inthe following areas: Institutional framework for the supreme audit institution, Process for setting auditing standards, Use o f Code o f Ethics or Codes o f Conduct, Arrangements to ensure accountability inthe supreme audit institution, Arrangements to ensure independence, Arrangements to ensure adequate skills and qualifications for the auditors, Arrangements for providing training, Arrangements to ensure auditor competence, and Arrangements for quality assurance. 1. Institutional Framework 23. A new NationalAudit Act has been passed in June, 2006. The appointment and powers o f the Auditor General are specified ina new National Audit Act. An assessment o f this Act in comparison with the UNDP model law shows that the Audit Act i s very comprehensive and will provide a good foundation for the proper implementation o f the audit function. 24. Continuing monitoring of high-level PFM indicators should be conducted. Given the strong interdependencies among the elements o f the PFM system, coordinated or integrated development programs are important for successful implementation. Strengthening the RAA alone will not work well without also strengthening internal controls and the complementary legislative scrutiny processes. Inthis context, the use o f 8 indicators for measuring PFM performance provides a useful monitoring mechanism for the Royal Government of Bhutan; a preliminary assessment has already been conducted by the World Bank. 25. The new National Audit Act should be used to undertake all forms of audit. Forensic and performance audit are neededas part of a balanced audit program, and there will be a need for training and implementation assistance. The Anti-Corruption Commission has recently begun its work. 2. SettingAuditing Standards 26. The NationalAudit Act provides an enablingenvironment for the RoyalAudit Authority to establish auditing standards. It does not specify the adoption of INTOSAI or IAASB standards. The INTOSAI Auditing Standards supported by the detailed IFACIIAASB-issued International Standards on Auditing underpin a modern audit process. The International Audit and Assurance Standards Board i s progressively rolling out international auditing standards. The INTOSAI is moving from maintaining its own auditing standards by seeking to support the IAASB's development o f audit standards. This is being done particularly so that the IAASB audit standards appropriately reflect the interests of the international public- sector audit community. The current auditing approach is basedon the Auditing Standards of Bhutan, which are in line with the INTOSAI Auditing Standards but do not incorporate the IFACIIAASB International Standards on Auditing. 27. The IFACIIAASB-issued International Standards on Auditing represent best international practices for the auditing profession, particularly in such areas of fundamental auditing practice as the following: audit evidence documentation audit materiality fraud audit errors audit opinions audit planning control environment assessments supervising the work of audit staff 3. Code of Ethics 28. Policies and proceduresfor protectingwhistle blowers should be adopted. The Royal Audit Authority has adopted a specific Code of Ethics that i s relevant to auditors. All auditors are sworn in to uphold the RAA Code, which forms an integral part of the employment contract. The National Audit Act provides a strong ethical framework and provides that the Royal Audit Authority shall maintain the confidentiality of the source of 9 any information received about potential offences, ingood faith and trust, under the laws of the Kingdom. Additional elements should be considered to assist with implementation o f these requirements as part of the execution o f the National Audit Act and Public Finance Act. The INTOSAI Code o f Ethics i s considered an essential complement to the INTOSAI Auditing Standards, and should be adopted, applied, and communicated to all staff. 4. Accountability in the Supreme Audit Institution 29. The Royal Audit Authority needs to review its accountability and reporting arrangements in the light of the new Laws. The Royal Audit Authority follows the Financial Rules and Regulations, the Bhutan Civil Service Rules and Regulations, the General Auditing Rules and Regulations, all o f which provide the internal control framework for the Audit Office. The Royal Audit Authority prepares and issues an Annual Audit Report, which includes comprehensive information o f its operations and performance during the year. There i s need for a more comprehensive corporate plan covering the general developments neededby the Audit Office. 5. Independence 30. The National Audit Act provides more effective independenceto the Auditor Auditor General; this term i s short in comparison to international standard^.^ General. The new Audit Act provides for a five-year non-renewable term for the Greater powers to the Auditor General as regards staffing are also provided inthe Audit Act, but no specific powers over the budget are provided. The legislation does propose that if, in the opinion of the Auditor General, there was insufficient budget to conduct hidher responsibilities, it should be mentioned in the Annual Report. This i s not fully satisfactory (a better formulation i s outlined in section 13 of the UNDP model law). This provides for the Auditor General's budget proposal to be submitted to the Legislature by the Auditor General at the same time and in the same format as the Executive Branch submits its budget. 6. Qualifications and Skills for the Auditors 31. Some developments in the accounting and auditing educational and training arrangements need further support. A training needs analysis4 indicated that the quality o f accounting and auditing educational and training arrangements inthe academic bodies i s not fully satisfactory. The Audit Act provides for a separate cadre o f officers and employees to be constituted with their terms and conditions of services prescribed in the rules to be framed under the Act. The rules are yet to be framed, but the principles are contained in the Act. When the requirements o f the Position Classifications System ~~~ ~ 3A ModelNational Audit Office Act, Association of CharteredCertifiedAccountants, UK, 2004, Section 38 Training Needs Analysis of the Financial and Accounting Capacity within the Public Sector and a SimultaneousAssessment of the RoyalInstitute of Management,CPA Australia, 2004. 10 (under which the skills needs are expected to be formalized) have been completed, a needs analysis for training individual officers would be useful. The Royal Institute o f Management i s developing its courses to support training o f potential recruits for the Royal Audit Authority. Strengthening support through association with a foreign accounting institution would be helpful. 7. Training 32. Better training arrangements that meet international educational standards should be introducedfor RAA staff. The Royal Audit Authority has a professionaland international relations division responsible for arranging and providing training for staff. Though the Royal Audit Authority has plans and programs to provide in-house and external training inthe future, it i s severely constrained by the lack o f financial resources to develop and implement the programs. There i s a need for more extensive arrangements for professional training. The outreach programs o f the ACCA and CIPFA could help bridge the gap, possibly with the help o f the Royal Institute o f Management or other in-country academic institution. 33. A skills analysis program based on internationalstandards for competencies should be conductedfor the RoyalAudit Authority. The Royal Audit Authority does not itselfhave adequate facilities for training, research, and development. A proper need- based approach is required that will support the introduction o f the audit methodologies under development. The Department o f Finance and the Royal Institute of Management have conducted training needs analysis programs, and a similar exercise in the Royal Audit Authority would be appropriate. 8. Audit Competence 34. It is necessary to strengthen the technical and professional competence of the Royal Audit Authority and improve its operational capacity to produce and disseminate quality audit reports that meet internationalstandards and serve the needs of the stakeholders. Systems, methodologies, and facilities should be updated and modernized to enable efficient and effective audits by the staff. Properly designed audit sampling techniques in the certification audit are difficult to use without computer support. Use o f sampling techniques and computer-aided auditing techniques especially for the Budget and Accounting System, should be developedto increase the efficient use o f audit resources. Currently the Supreme Audit Institution has no detailed financial audit manuals. Twelve manuals are planned for development. It will be necessary to review the adequacy o f this work and provide supplementary development in due course. There is a need to develop specialized forensic audit and computerized audit capabilities. The audit orientation has to change from transaction to risk-based systems. 11 9. Quality Assurance 35. The new Audit Methodology Manuals need to continue to assure quality. The Royal Audit Authority does have a satisfactory quality control and quality assurance procedure in place for its audit work. It is significant to note that the new manuals are being prepared by M A staff in consultation with external consultants providing guidance but not actually writing the manual so that ownership and local relevance of the material canbe assured. B. Auditing Standards as Practiced 36. The diagnostic questionnaires have uncovered information about the current arrangements for the audit methodology andthe apparent gaps inthe country for: audit planning audit supervision reviewing internal controls reviewing compliance with laws ensuring adequate audit evidence is collected analyzing whether the financial statementsaccord with accounting standards preparing audit opinions reporting on fraud reporting on compliance Out of this exercise came recommended activities that will help bring local standards in line with international standards. 1. Audit Planning 37. The new Audit Methodology Manuals should introduce more comprehensive planningrequirementsbased on the specificobjectivesof the audits. A Peer Review in 2005 by the Supreme Audit Institution of India recommended that audit manuals be prepared. During June and July of 2005, teams were established to prepare audit guides invarious areas of audit. The Royal Audit Authority should reviewthe success of these development activities and develop further plans as needed to prepare appropriate audit manuals for the tasks that are established by the Audit Act. Capacity inadequacies prevent reliance on internal audits. Internal audit has been declining and the new Audit Act and the proposed Finance Act provide for a stronger internal audit function. This needs to be supportedby a more formal approach to training and monitoring the activities of internal audit. 12 2. Audit Supervision 38. A more comprehensively structuredworking paper and supervisory system is needed for the audits that will be undertaken using the new audit manuals. The supervision arrangements in the Royal Audit Authority are reasonable but would benefit from increased leadership and knowledge skills for the areas covered by the new audit manuals. 3. Reviewing Internal Controls 39. New Audit Methodology Manuals should include and support overall audit procedures to conduct reviews of internal controls. Audit staffs do have a good understanding o f the environment in which the audited institution operates. However, assessments o f the internal control systems o f the audited institutions are not carried out nor relied upon for MA's audit work, This is essentially because internal control practices in government agencies are not fully functional. Improvements in internal control will be implemented if internal and external auditors make recommendations for improvements. The audit manuals should provide for the audit reports to make assessments o f internal control adequacy and make recommendations for improvements. The Royal Audit Authority will be supported in this process o f reviewing internal controls when the new Public Finance Act i s in place. The Public Finance Act makes additional requirements for internal audit and internal controls. 4. Reviewing Compliance 40. All audit reports should introduce recommendations, implementation of the recommendationsshould be monitored, and the process should be reported in the Annual Report. The Royal Audit Authority uses much o f its resources for compliance type of audit work, and there are strong systems in place for dealing with instances o f noncompliance. There needs to be some increase in the efforts made to test internal controls and to recommend improvement in internal controls to reduce the incidence o f noncompliance. The proposed manual on certification audit will rectify these defects. 5. Audit Evidence 41, The audit methodology and necessary supporting working papers should be more precisely defined inthe new Audit Methodology Manuals. Currently working papers deal mostly with individual compliance defects rather than systems o f internal controls and accounting systems. The manual on certification audit that i s to be prepared will rectify these defects, provided a policy decision i s made by the Royal Audit Authority for audit reports to make recommendations on improvement o f internal controls. 13 6. Analyzing the Financial Statements 42. The new Audit CertificationManual should improve the way the Royal Audit Authority analyzes the RoyalGovernment'sfinancial statements once the accounts are presented in IPSAS format. The Royal Audit Authority includes analysis o f the annual financial statements inits report on these statements. 7. PreparingAudit Opinions 43. The requirements of ISA 700, The Auditor's Reports on Financial Statements, should be adopted in full. The most recent, available Auditor's Report (FY2002-03) has a two-part certificate and opinion. These provide most o f the elements o f an audit opinion that accords with ISA 700, but the presentation suffers from various substantial differences from the standard. In particular the opinion i s expressed negatively-"The audit had not detected any material mis-statement." The defects in the format of the opinion have been corrected as per the requirements o f ISA 200, Objective and General Principles Governing an Audit of Financial Statements,which are stated more positively: We planandperformthe audit to obtainreasonableassurance about whether the schedule i s free of material misstatement.An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the schedule. An audit also includesassessing the accountingprinciples usedand significant estimatesmade by management, as well as evaluating the overallpresentation of the schedule.We believe that our audit provides a reasonablebasis for our opinion. As matters stand now, the user o f the statement is not certain as to whether the auditor has done enough testing to provide assurance about the financial figures inthe statement and for which figures the auditors have some doubt. 8. Reporting on Fraud 44. Muchof the audit reportingrelatesto incorrectrather than fraudulentbehavior butit is not clear from the reports. This orientation comes from the compliance testing approach. Some training in the use o f specific forensic audit methods would assist with the effectiveness o f the reporting on whether deficiencies arise from fraud rather than error or oversight. An Anti-Corruption Commission has recently started work, and greater clarity in the reporting o f possible fraudulent behavior by the Royal Audit Authority would be timely. The Royal Audit Authority operates a website with summaries o f its reports, its audit plans, and other material. This provides a very effective means o f contact with the public. 9. Reporting on Compliance 45. The effectiveness of the audit report should be enhanced by improving the system for checking and resolving clearance matters. The Royal Audit Authority prepares an Inspection Report, which i s a mix o f financial audit, compliance audit, and 14 performance audit. All such reports are addressed to the ministers/chairmen concerned and are summarized in the RAA's Annual Report. The reports include identification o f the persons who should be held accountable for defects for which adverse reports are entered against their name in the RAA Audit Information Management System. The Bhutan Civil Service Rules and Regulations require that every civil servant obtain an Audit Clearance Certificate prior to requesting processing of promotion, training, post- retirement benefit, further studies, and participation in conferences and seminars. The Royal Audit Authority issues an Audit Clearance Certificate only if the Audit Information Management System does not contain any adverse report against the applicant. This has encouraged personal and professional discipline in the discharge o f fiduciary duties. The Royal Audit Authority has been experiencing manpower constraints in adequately staffing and maintaining the Audit Information Management System. Recent initiatives have been taken to reduce the workload. 15 5 Q) \d 0 0 N 0" m c, 3 c 0 B + 0 rd G33 \o 0 0 N c 2 cu m 0 B Y B U s3 0 z rd Annex A. Methodology of the Assessment As part of the general support program in South Asia for assessment and improvement of public-sector accounting and auditing against international standards, the World Bank with the cooperation of member governments is conducting the Review of Public-Sector Accounting and Auditing Practices inmember countries. The development of the PFM Performance Measurement Frameworks by the Public Expenditure and Financial Accountability (PEFA) Program6has opened the way for a diagnostic tool to be developed that is referenced to the accounting and auditing standards of IFAC and INTOSAI, and other relevant international benchmarks. This exercise provides substantial insight into country performance in regard to the external auditing and financial statement reporting FMindicators. A set of six questionnaires is used to collect relevant information on country practices: The public sector accounting environment-collecting basic information about financial laws and standards-setting arrangements, educational requirements for accountants compared with IFAC International Education Standards, ethical requirements compared with the IFAC Code of Ethics for Professional Accountants. Public sector accounting practices for the general budget sector if using the cash basis o f accounting-compared with the requirements of the Cash Basis International Public Sector Accounting Standards (IPSAS). Public sector accounting practices for the general budget sector if using the accrual basis of accounting-compared with the IPSAS requirements that govern accrual reporting for the public sector. Public sector auditing environment compared with the provisions of the International Organization of Supreme Audit Institutions (INTOSAI) Code of Ethics and the INTOSAIgeneral standards. Public sector auditing practices compared to the requirements of the INTOSAI field standards and reporting standards, and the IFAC International Standardson Auditing. Accounting and auditing practices for state-owned enterprises-compared with the requirements of the International Financial Reporting Standards (IFRS) and International Standards on Auditing that govern commercial reporting. The PFM Performance Measurement Framework has been developed as a contribution to the collective efforts of many stakeholders to assess and develop essential PFM systems, by providing a common pool of information for measurement and monitoring of PFM performance progress, and a common platform for dialogue. The PEFA Program is a partnership among the World Bank, the European Commission, the UK Department for International Development, the Swiss State Secretariat for Economic Affairs, the French Ministry of Foreign Affairs, the Royal Norwegian Ministry of Foreign Affairs, the International Monetary Fund and the Strategic Partnership with Africa. A Steering Committee, comprising members of these agencies, is managing the Program. A Secretariat has been set up and is located in the World Bank in Washington, DC. 20 The responses to the diagnostic questionnaires, prepared by the relevant country authorities with the help as necessary o f in-country experts retained by the Bank, are supplementedby a due diligence review conducted by members o f a World Bank task team from the country. Various documents are examined as part o f the review including relevant laws, codes o f conduct, national accounting and auditing standards, accountant selection and promotion processes, training needs assessments, accountancy training course outlines, curricula and accreditation methods, sample accounts, and sample audit reports and working paper sets. A country report on the assessment is prepared for each country and reviewedby a panel o f expert advisors before examination by the World Bank country team. The draft i s then shared with the Government for response before finalization. 21 Annex B. Accounting and Auditing Standards This annex contains a summary of the frameworks that have been used for the public- sector accounting and auditing assessment The International Accounting Standards Board (IASB), the International Federation of Accountants (IFAC) and the International Organization of Supreme Audit Institutions (INTOSAI) are cooperating in setting international standards for accounting and auditing. The IASB i s an independent, privately fundedaccounting standard-setter based in London, UK. The Board members come from nine countries and have a variety of functional backgrounds. Inthe public interest, IASB is committed to developing a set of high quality, understandable, and enforceable global accounting standards that require transparent and comparable information in general purpose financial statements. In addition, the IASB co-operates with national accounting standard-setters to achieve convergence in accounting standards around the world. The IASB issued International Accounting Standards (IAS) from 1973 to 2000. Since 2000, they have issued International Financial Reporting Standards (IFRS). IFAC has its headquartersinNew York, USA and comprises 163 member bodies, mainly the national professional accountancy bodies of most countries around the world. The IFAC Board establishedthe International Public Sector Accounting Standards Board (IPSASB) to develop high quality accounting standards for use by public sector entities around the world inthe preparation of generalpurpose financial statements. These are the International Public Sector Accounting Standards (IPSAS). The full text of Standards and Exposure Drafts currently on issue is available at http://www,ifac.ordpublicsector. The first 20 IPSAS are based on IAS to the extent appropriate for the public sector. IFAC also has established the International Auditing and Assurance Standards Board (IAASB) to prepare and promulgate International Standards on Auditing (ISA) and is now working in cooperation with INTOSAIon preparingpublic sector guidance on the use of ISA. INTOSAI includes the Auditors General from almost all national government audit departments around the world and has its Secretariat in the Vienna offices of the Auditor General of Austria. Its Auditing Standards Committee, chaired by the Auditor General of Sweden, producesthe INTOSAI Code of Ethics and Auditing Standards, a set of standards at a higher and more generic level than the IFAC-issued ISA. The Auditing Standards Committee is working with the IAASB to prepare practice notes explaining the application of each ISA inthe public ~ector.~ The various standards are listed on the following pages. 'Working Group on FinancialAudit Guidelines, INTOSAI Auditing Standards Committee, Swedish NationalAudit Office, 2004. 22 International Public Sector Accounting Standards IPSAS 1,Presentation of Financial Statements IPSAS 2, Cash Flow Statements IPSAS 3, Net Surplus or Deficit for the Period, Fundamental Errors and Changes in Accounting Policies IPSAS 4, TheEffects of Changes in Foreign Exchange Rates IPSAS 5, Borrowing Costs IPSAS 6, Consolidated Financial Statementsand Accountingfor ControlledEntities IPSAS 7, Accountingfor Investments in Associates IPSAS 8, Financial Reporting of Interests in Joint Ventures IPSAS 9, RevenuefFom Exchange Transactions IPSAS 10, Financial Reporting in Hyperinflationary Economies IPSAS 11, Construction Contracts IPSAS 12, Inventories IPSAS 13, Leases IPSAS 14, Events after the Reporting Date IPSAS 15, Financial Instruments: Disclosure and Presentation IPSAS 16, Investment Property IPSAS 17, Property, Plant and Equipment IPSAS 18, SegmentReporting IPSAS 19, Provisions, Contingent Liabilities andAssets IPSAS20, RelatedParty Disclosures IPSAS21, Impairment of Non-cash Generating Assets CashBasis IPSAS,Financial Reporting under the CashBasis of Accounting International Education Standards IES 1,Entry Requirements to a Program of Professional Accounting Education IES 2, Content of Professional Accounting Education Programs IES 3, Professional Skills IES 4, Professional ValuesEthics andAttitudes IES 5, Practical Experience Requirements IES 6,Assessment of Professional Capabilities and Competence IES 7, Continuing Professional Development IES 8, CompetenceRequirementsfor Audit Professionals 23 InternationalFinancial Reporting and InternationalAccounting Standards IFRS 1,First-timeAdoption of InternationalFinancial Reporting Standards IFRS 2, Share-basedPayment IFRS3, Business Combinations IFRS 4, Insurance Contracts IFRS 5, Non-current Assets Heldfor Sale and Discontinued Operations IAS 1,Presentation of Financial Statements IAS 2, Inventories IAS 7, CashFlow Statements IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors IAS 10, Events after the Balance Sheet Date IAS 11,Construction Contracts IAS 12, Income Taxes IAS 14, SegmentReporting IAS 16, Property, Plant and Equipment IAS 17, Leases IAS 18, Revenue IAS 19, Employee Benejts IAS 20, Accountingfor Government Grants and Disclosure of GovernmentAssistance IAS 21, TheEffects of Changes in Foreign Exchange Rates IAS 23, Borrowing Costs IAS 24, Related Party Disclosures IAS 26, Accounting and Reporting by Retirement BeneJit Plans IAS 27, Consolidated and Separate Financial Statements IAS 28, Investments in Associates IAS 29, Financial Reporting in Hyperinflationary Economies IAS 30, Disclosures in the Financial Statementsof Banks and Similar Financial Institutions IAS 31, Interests in Joint Ventures IAS 32, Financial Instruments: Disclosure and Presentation see also: See also Financial Instruments - Other Issues IAS 33, Earningsper Share IAS 34, Interim Financial Reporting IAS 36, Impairment of Assets IAS 37, Provisions, Contingent Liabilities and Contingent Assets IAS 38, Intangible Assets IAS 39, Financial Instruments: Recognition and Measurementsee also: See also Financial Instruments - Other Issues IAS 40, Investment Property IAS 41, Agriculture 24 INTOSAI Code of Ethics and Auditing Standards Code of ethics Integrity. Auditors have a duty to adhere to highstandards ofbehavior (e.g. honesty and candidness) inthe course oftheir work and intheir relationships with the staff of audited entities. Independence, objectivity and impartiality. The independence of auditors should not be impaired by personalor external interests. There is aneedfor objectivity and impartiality inthe work andthe reports, which should be accurateand objective. Conclusionsinopinions andreports should be basedexclusively on evidence obtained and assembled inaccordance with the SA1auditing standards. Professional secrecy. Auditors should not disclose information obtained inthe auditing process to third parties except for the purposesof meeting the SA1statutoryresponsibilities. Competence. Auditors must not undertakework for which they are not competent to perform. Basic postulates for the auditing standards (a) The SA1should consider compliance with the INTOSAI auditing standards inall mattersthat are deemed material. Certain standards may not be applicableto some of the work done by SAIs, including those organized as Courts of Account, nor to the non-audit work conductedby the SAL The SA1 should determinethe applicable standards for such work to ensure that it is of consistently high quality. (b) The SA1should apply its ownjudgment to the diverse situations that arise in the course of government auditing. (c) With increasedpublic consciousness, the demand for public accountability of personsor entities managingpublic resources has become increasingly evident so that there is aneedfor the accountability processto be inplace and operating effectively. (d) Development o f adequate information, control, evaluation andreporting systems within the governmentwill facilitate the accountability process. Managementi s responsiblefor correctness and sufficiency of the form and content ofthe financial reports and other information. (e) Appropriate authorities should ensure the promulgation of acceptableaccounting standards for financial reporting and disclosurerelevant to the needs of the government, and audited entities should develop specific and measurableobjectives and performancetargets. (0 Consistentapplicationofacceptableaccountingstandards shouldresultinthe fair presentationofthe financial position andthe results of operations. (g) The existenceof an adequate systemof internal control minimizes the risk oferrors and irregularities. It is the responsibility ofthe audited entity to develop adequate internal control systems to protect its resources. It is also the obligation ofthe auditedentity to ensure that controls are inplace and functioning to help ensure that applicable statutes and regulations are complied with, and that probity and propriety are observedindecision making. The auditor should submit proposals and recommendationswhere controls are found to be inadequate or missing. (h) Legislative enactmentswould facilitate the cooperationofauditedentities inmaintaining and providing access to all relevant data necessary for a comprehensiveassessmentof the activities under audit. (i)AllauditactivitiesshouldbewithintheSA1auditmandate.* (i) Legislative enactments would facilitate the cooperationofauditedentitiesinmaintainingandproviding access to all relevant data necessary for a comprehensiveassessment ofthe activities under audit. (k) SAIs should work toward improvingtechniques for auditing the validity ofperformancemeasures. (1) * The SAIs should avoid conflict of interestbetweenthe auditor and the audited entity. full scope of governmentauditing includesregularity andperformance audit. Regularity audit embraces: i.Attestationoffinancialaccountabilityofaccountableentities,involvingexaminationand evaluation of financial recordsand expressionof opinions on financial statements; ii. Attestationoffinancialaccountabilityofthegovernmentadministrationasawhole; iii.Auditoffinancial systemsandtransactionsincludinganevaluationofcompliancewithapplicable statutes and regulations; iv. Audit of internal control and internal audit functions; v. Audit of the probity and propriety of administrative decisions taken within the auditedentity; and vi. Reporting of any other matters arising fiom or relating to the audit that the SA1considersshould be disclosed. 25 Performance audit entails the audit of economy, efficiency and effectiveness and embraces: vii. Audit ofthe economyof administrativeactivities inaccordance with sound administrative viii. Audit ofthe efficiencyofutilizationofhuman, financial and other resources,including ... principles andpractices, andmanagementpolicies; examinationof informationsystems, performancemeasuresandmonitoringarrangements, and proceduresfollowedby auditedentities for remedyingidentifieddeficiencies; and ix. Audit ofthe effectivenessofperformanceinrelationto the achievement of the objectivesofthe auditedentity, andaudit of the actual impactofactivities comparedwith the intendedimpact. General auditing standards The auditor andthe SA1mustbe independent. The auditor andthe SA1mustpossessthe requiredcompetence, The auditor andthe SA1must exercisedue care andconcern incomplying with the INTOSAIauditing standards. This embraces due care inplanning, specifying, gatheringand evaluatingevidence, and in reportingfindings, conclusions andrecommendations, The SA1shouldadoptpolicies andproceduresto recruitpersonnelwith suitable qualifications. The SA1shouldadopt policies andproceduresto develop andtrain SA1employeesto enable them to performtheir tasks effectively,andto define the basisfor the advancement of auditors andother staff. The SA1shouldadoptpolicies andproceduresto preparemanuals andother written guidanceand instructions concerningthe conduct ofaudits. The SA1shouldadopt policies andproceduresto supportthe skills andexperience available within the SA1 and identifythe skills which are absent; provide a gooddistributionof skills to auditingtasks and assign a sufficientnumber ofpersons for the audit; andhaveproper planningand supervisionto achieveits goals at the requiredlevelof due care andconcern. The SA1shouldadopt policies andproceduresto reviewthe efficiency andeffectivenessof the SA1internal standards andprocedures. Field standards (a) The auditor shouldplanthe audit in a mannerthat ensuresthat an audit of highquality i s carriedout in an economic,efficient andeffective way, andina timely manner. (b) The work ofthe audit staffat each levelandaudit phase shouldbeproperly supervisedduringthe audit; and documentedwork shouldbe reviewedby a senior member ofthe audit staff. (c) The auditor, in determiningthe extent andscope of the audit, shouldstudy andevaluate the reliability of internalcontrol. (d) Inconductingregularity(financial) audits, a test shouldbe made ofcompliance with applicablelaws andregulations.The auditor shoulddesignaudit steps andproceduresto provide reasonableassurance o f detectingerrors, irregularities, and illegalacts that could have a direct andmaterialeffect on the financial statementamounts or the results o f regularityaudits. The auditor also shouldbe aware o f the possibilityof illegalactsthat couldhave an indirect andmaterialeffect on the financial statements or results ofregularityaudits. Reporting standards (a) At the endof each audit the auditor shouldpreparea writtenopinionor report, as appropriate, setting out the findings inan appropriateform; its contentshouldbe easy to understandand free from vagueness or ambiguity, includeonly information which is supportedby competentandrelevantaudit evidence, andbe independent, objective, fair andconstructive. (b) It is for the Auditor Generalto decide finally onthe actionto be taken inrelationto fraudulent practices or seriousirregularities discoveredby the auditors. 26 InternationalStandards on Auditing Framework: Audit Evidence: International Frameworkfor Assurance 500 Audit Evidence Engagements 501Audit Evidence Additional Considerationsfor - Specific Items GeneralPrinciplesand Responsibilities: 505 External Confirmations 5 10 Initial Engagements Opening Balances - 200 Objective and GeneralPrinciples Governing 520Analytical Procedures an Audit of Financial Statements 530 Audit Sampling and Other Means of Testing 210 Termsof Audit Engagements 540 Audit of Accounting Estimates 220 Quality Controlfor Audits of Historical Information 545 Auditing Fair ValueMeasurements and Disclosures 230 Documentation 550 Related Parties 230RAudit Documentation 560 SubsequentEvents 240 TheAuditor's Responsibility to Consider Fraud in an Audit of Financial Statements 570 Going Concern 240A Fraud and Error 580 Management Representations 250 Consideration of Laws and Regulations in an Audit of Financial Statements Usingthe Work of Others: 260 Communications of Audit Matters with Those Charged with Governance 600 Using the Work of Another Auditor 6I 0 Considering the Work of Internal Auditing RiskAssessment andResponseto Assessed 620 Using the Work of an Expert Risks: Audit Conclusionsand Reporting: 300 Planning anAudit of Financial Statements 3 15 Understanding the Entity and Its 700 TheAuditor's Reports on Financial Statements Environment and Assessing the Risks of Material 700R TheIndependentAuditor's Report on a Misstatement CompleteSet of General Purpose Financial 320 Audit Materiality Statements 330 TheAuditor's Procedures in Responseto 701Modifications to the Independent Auditor's AssessedRisks Report 402 Audit Considerations Relating to Entities 710 Comparatives Using Service Organizations 720 Other Information in Documents Containing Audited Financial Statements SpecializedAreas: 800 TheAuditor's Report on Special Purpose Audit Engagements 27 Annex C. Accounting Legislation Extracts from the Financial Regulations: 1.1.2.3 Government accounting shall be maintained on cash basis. 1.3.6.1 The Government shall hold Government Consolidated Account at the RMA as the Principal account for the budgetary operations o f the Government. The daily cash position of the budgetary operations o f the Government shall be ascertained from this account. 5.1.1.1 An expenditure shall be recognised immediately upon making payment incash or signing a cheque in case o f a Disbursement Voucher and on authorization o f a Journal Voucher subject to the following: a. In the case o f payments made from Permanent or Temporary Advances, the expenditure shall be recognised when an account together with the relevant supporting documents are approved and authorized for adjustment. b. Direct disbursements from a loan account shall be recognised on the dates o f such disbursements irrespective o f the actual date o f receipt o f the goods or services in the project. c. Direct disbursements from grant accounts shall be recognised only after the receipt o f goods or services inthe project. 5.1.1.2 Fiscal Year o f a payment shall be determined by the issue date of the cheque or the date ofpayment incash. 5.1.2.1 Every unit incurring expenditure shall maintain proper books o f accounts.. .... 11.1.1.1 The Department o f Budget & Accounts shall prepare the Annual Financial Statements o f the budgetary operations for each fiscal year within six months after the close o f the fiscal year. 11.1.1.2 The statements shall be audited and certified by the Royal Audit Authority before submission to the Government. The audit shall be completed within four months after preparation o f the statement 11.1.1.3 The total receipts and expenditures o f the Government during a fiscal year shall be the basis for preparation o fthe Annual Financial Statements. 11.1.1.4 The Annual Financial Statements shall include the following statements and schedules: 28 a. Consolidated receipts & payments statement (FAM- 11.1); b. Summary o f original andrevised budget estimates and variations with actual outcome (FAM- 11.2); c. Statement o f outstanding loans (FAM- 11.3); d. Statement o f equityportfolio ofthe Government (FAM- 11.4); e. Statement o f operations on Refundable Deposit Account, Revolving and Trust Funds (FAM- 11S); f. GovernmentConsolidatedAccount ReconciliationStatement; g. Schedules giving details o f Internal Revenue, Grant assistance, Borrowings, Loan recoveries and Other Receipts; h. Schedules ofBudgetary Expenditure by object, by administrative agencies at programme level compared with budgetprovisions and by function; i.Schedulesofloanprincipalsrepaidandlendingmade;and j. Any other informationheport asmaybedecided bythe MinistryofFinance. 29 Annex D-1 Audit Legislation . Extractsfrom the Financeand AccountingManual 1.3.10.1 The Royal Audit Authority (MA) shall operate a current account styled "Audit Recoveries Account" outside the Government ConsolidatedFundAccount for the deposit and management o f audit recoveries remittedto it on its instance. 1.3.10.2 The amounts recovered at the instance o f the RAA shall be remitted by the Heads o f Offices within the prescribed dateline to the RAA. Such remittances shall be supported by a statement indicating the Audit report No. & date, relevant audit paragrapldmemo number and date, name o f the party, amount recovered and the balance amount recoverable, if any. Incase, the amounts are directly received by the RAA from the party concerned, it shall provide all the above information to the Head of Finance Section o f the relevant office among others. 1.3.10.3 The RAA shall remit the proceeds o f the Audit Recoveries Account on a quarterly basis. 10.1.2 Preservation period o f financial records. 10.1.2.1 The minimum preservation period shall be reckoned from the date o f completion o f audit by the Royal Audit Authority and settlement o f audit observations pertaining to the contents o f the records, ifany. 11.1.1.1 The Department o f Budget & Accounts shall prepare the Annual Financial Statements o f the budgetary operations for each fiscal year within six months after the close o fthe fiscal year. 11.1.1.2 The statements shall be audited and certified by the Royal Audit Authority before submission to the Government. The audit shall be completed within four months after preparation o f the statements. 30 Annex D-2 Audit Act. 2006 TABLE OF CONTENTS Title Page PREAMBLE ....................................................................................................................... 33 CHAPTER 1:PRELIMINARY ................................................................................................ 34 TITLE, COMMENCEMENT AND EXTENT ................................................................ 34 REPEAL ...................................................................................................................... 34 CHAPTER 2: ROYALAUDIT AUTHORITY .................................................................. 34 ESTABLISHMENT ...................................................................................................... 34 THE APPOINTMENT OF AUDITOR GENERAL .......................................................... 34 ELIGIBILITY AND QUALIFICATIONS OF AUDITOR GENERAL .............................. 34 OATHOR AFFIRMATION ......................................................................................... 35 TERMS AND CONDITIONS OF SERVICE ................................................................. 35 RESIGNATIONAND REMOVAL ................................................................................. 35 INDEPENDENCEOF THE AUTHORITY ................................................................ 35 CHAPTER3: CODE OF PROFESSIONALCONDUCT ..................................................... 36 COMPLIANCE .......................................................................................................... 36 RESPONSIBILITY ...................................................................................................... 36 ACCOUNTABILITY ................................................................................................... 36 CONFIDENTIALITY ................................................................................................... 37 INTEGRITY ................................................................................................................ 37 SELFLESSNESS ......................................................................................................... 37 TRANSPARENCY ..................................................................................................... 37 PERSONALCONDUCT ........................................................................................................ 37 CONFLICTS OF INTEREST ......................................................................................... 38 VIOLATION ................................................................................................................ 39 CHAPTER 4: FUNCTIONS,JURISDICTIONS AND SCOPE OF AUDITING ...............39 FUNCTIONSOF THE ROYAL AUDIT AUTHORITY .................................................. 39 AUDIT JURISDICTION ............................................................................................... 39 SCOPEOF AUDIT ....................................................................................................... 40 CHAPTER 5: POWERS,RESPONSIBILITIESAND RIGHT OF ACCESS TO INFORMATION......................................................................................... 41 41 RESPONSIBILITYOF THE AUTHORITY ................................................................... POWERS OF THE AUTHORITY ................................................................................... 42 POWERS OF THE AUDITOR GENERAL 42 RESPONSIBILITIESOF THE AUDITOR GENERAL ................................................... ..................................................................... 43 RIGHT OF ACCESS TO INFORMATION ..................................................................... 43 CHAPTER6: AUDITING AND REPORTINGSTANDARDS ........................................... 44 STANDARDS AND PRACTICES ................................................................................. 44 AUDIT REPORT .......................................................................................................... 45 ANNUAL AUDIT REPORT (AAR) ............................................................................... 46 31 PUBLICATION OF REPORTS ..................................................................................... 47 ADMISSIBLE PERIODTO RESPOND ......................................................................... 47 FOLLOW-UPOF AUDIT REPORTS ............................................................................ 47 CHAPTER7: TESTIMONY ...................................................................................................... 47 47 EXPERTOPINION .................................................................................................................. TESTIMONY, OPINION AND REPORTS ..................................................................... 48 CHAPTER8: ACCOUNTABILITY OFTHE AUTHORITY ........................................... 48 AUDITING THE AUTHORITY AND PEERREVIEW .................................................. 48 PROTECTIONOF INFORMATION, SOURCES AND PERSONS ................................. 48 CHAPTER9: OFFENCESAND PENALTIES ....................................................................... 49 OFFENCES.................................................................................................................... 49 PROSECUTION............................................................................................................. 49 PENALTIES ................................................................................................................... 50 CHAPTER 10: MISCELLANEOUS......................................................................................... 50 IMMUNITY FROMPROSECUTION ............................................................................. 50 RULE MAKINGPOWER ............................................................................................... 50 AUTHORITATIVE TEXT .............................................................................................. 50 AMENDMENT ............................................................................................................. 50 DEFINITIONS ................................................................................................................ 50 32 P R E A M B L E Whereas the Constitution provides the Royal Audit Authority o f Bhutan as an independentAuthority; and Whereas in keeping with His Majesty's vision to enhance accountability and proper utilization o f public resources through effective auditing and reporting without fear, favour or prejudice, and to promote Good Governance; The National Assembly o f Bhutan in its 85th Session held on 5th Daytho f the 5th Month o f the Male Dog Year o f the Bhutanese Calendar, corresponding to 30 June, 2006 hereby enacted the Audit Act o f Bhutanas follows: 33 CHAPTER 1 :PRELIMINARY Title, Commencement and Extent 1. This Act shall: (a) Be called the AUDIT A C T OF BHUTAN, 2006; (b) Come into force on the Day o f the SixthMontho fthe Male DogYear o f the BhutaneseCalendar, corresponding to August 2,2006; and (c) Extendto the whole ofthe Kingdomo f Bhutanor otherwise within the jurisdiction o f Bhutan. Repeal 2. This Act hereby repeals any provisions of any law, by-law, rules or regulation which i s inconsistent with this Act CHAPTER 2 :ROYAL AUDIT AUTHORITY EstabIishment 3. There shall be a Royal Audit Authority to audit and report on the economy, efficiency, and effectiveness inthe use o fpublic resources. 4. The Authority shall be an independent and non-partisan institutionheaded by the Auditor General. The Appointment of Auditor General 5. The Auditor General o f Bhutan shall be appointed by the Druk Gyalpo from a list o f eminent persons recommended jointly by the Prime Minister, the Chief Justice o f Bhutan, the Speaker, the Chairperson o f the National Council and the Leader o f the Opposition Party. Eligibilityand Qualifications of Auditor General 6. A person shall be eligible for appointment as the Auditor General ifheis: (a) A natural born citizen of Bhutan; (b) Not married to a personwho is not a citizen o f Bhutan; (c) Not convicted o f any criminal offence; 34 (d) Not inarrears o f taxes or other dues to the Government; (e) Not holding any office o f profit inany public companies and corporations; (f) A senior government official suitably qualified for the post; (g) Have no political affiliation; and (h) Have not been terminated from Public Service. Oath or Affirmation 7. The Auditor General shall, upon assuming office, take an Oath or Affirmation of office and secrecy as provided inthe Thirdand Fourth Schedule of the Constitution respectively. 8. The Oath and Affirmation shall be taken before His Majesty the Druk Gyelpo or Chief Justice of the Bhutanas per the command o f His Majesty the Druk Gyalpo. Terms and Conditions of Service 9. The term o f office o f the Auditor General shall be five years or until attaining the age o f sixty-five years, whichever is earlier. 10. The Auditor General shall not be eligible for re-appointment. 11. The Auditor General shall receive such salary, allowances and other benefits as may be prescribedby law inparity with holders o f other constitutional offices. Resignationand Removal 12. The Auditor General may resign from office at any time in writing to the Druk Gyalpo. 13. The Auditor General can be removed only by impeachment. 14. The vacancy o fthe post o fAuditor General shall be filled withina period o fthirty days from the date o f such vacancy. Independenceof the Authority 15, The Authority shall enjoy full organizational and functional independence including programming, investigative and reporting. 16. The Authority shall have full authority to determine and administer its organizational structure, budgetary and personnel requirements. 35 17. The State shall makeadequate financial provisions for the independent administration of the Authority. 18. The Authority's budget shall be approved by the Parliament as a part of the National Annual Budget. If the decision of the Parliament on National Budget is delayed, the Ministry of Finance shall provide the Authority with interim funds, which shall be at least equal to the previous year's budget. 19. Except for the Auditor General, the Authority shall prescribe the service conditions and personnel policies for its staff broadly in accordance with the Civil Service Act. CHAPTER 3 : CODE OF PROFESSIONAL CONDUCT Compliance 20. The Auditor General shall ensure that his conduct is, inappearanceand infact, in compliance with this Code. 21. The Auditor General shall: (a) Have the moral integrity required to competently, efficiently and professionally carry out histasks; and (b) Not only abide by the provisions of this Act but ensure that all auditors comply with the Good Code of Conduct, Ethics and Secrecy of the Authority. 22. The Auditor General, auditors and staff shall individually and collectively ensure that the integrity of the Authority is maintained. ResponsibiIity 23. The Auditor General shall ensure that his conduct i s consistent with the dignity, reputation and integrity of the Authority and the sovereignty and integrity of Bhutan. Accountability 24. The Auditor General shall have a duty to account and be held accountable for the policies, decisions and actions of the Authority. 36 Confidentiality 25. The Auditor General shall maintain confidentiality in cases where the decisions, documents and deliberations should not be disclosed inthe public interest. Integrity 26. The Auditor General shall not be influenced in any manner whatsoever by any individual or body o f individuals inthe discharge o f his official duties. SeIfIessness 27. The Auditor General shall take decisions solely based on the public interest and not on any other factors. Transparency 28. The decisions and actions o f the Auditor General shall be transparent and he shall give reasons for his decisions. Personal conduct 29. The Auditor General having been entrusted with the sacred responsibility to serve the Tsawa-Sum, shall: (a) Refrain from indulging in habits and behaviour that infringe upon the performance o f official duties or tarnish the image o f the Auditor General, the Authority or the Country; (b) Not do or direct to be done, in abuse o f his office or power, any act prejudicial to the rights o f any other person knowing that such act i s unlawful or contrary to any government policy; (c) Not maintain or operate a bank account inany country outside Bhutan; (d) Not provide information, which i s detrimental to the prestige, territorial integrity and sovereignty o fthe Kingdom; and (e) The Auditor General shall not accept any gifts, presents or benefits. 37 Conflicts of interest 30. The Auditor General shall ensure that no conflict o f interest arises or appears to arise, between his public duties and his private interests, financial or otherwise. 3 1. A conflict o f interest may exist whenthe Auditor General is influenced or appears to be influenced by private interests. Private interests include not only the Auditor General's financial or other interests but also the financial or other interests of the Auditor General's spouse or dependant. 32. The Auditor General shall: Declare the assets and liabilities, including the assets and liabilities in the name o f his spouse and dependants within 3 months after the appointment, annually thereafter and 3 months before leaving the office, to the Anti- Corruption Commission; Not undertake any private trade or commercial activity or additional employment; Not hold chairmanship or membership in a public or private company whether it carries remuneration or i s honorary other than as may be requiredinhisofficial capacity as the Auditor General; Not act as consultant to any company, business or association or provide assistance to any such body, except as may be appropriate in his official capacity as the Auditor General; Not be a member of, belong to, or take part inany society the membership o f which i s incompatible with the functions or dignity o f his office; and Not make any unauthorized commitment or promise that purports to bind the Government. 33. All auditors, including the Auditor General, shall declare any potential conflict of interest before undertaking any particular audit or other duties concerning a particular person or entity. 34. All auditors, including the Auditor General, shall maintain the highest degree of incorruptibility. 35. The Auditor General may exclude anofficial from an audit ifhe considers there is a reasonable cause to doubt the existence of a conflict o f interest. 38 Violation 36. Violation o f this Code by the Auditor General shall be a ground for his impeachment for misbehaviour. 37. Violation o f the Good Code of Conduct, Ethics and Secrecy o f the Authority by the auditors shall be a ground for disciplinary action. C H A P T E R 4 : F U N C T I O N S , J U R I S D I C T I O N S A N D S C O P E O F A U D I T I N G Functions of the Royal Audit Authority 38. The functions ofthe Authority shall beto: (a) Carry out financial, propriety, compliance, special audits and any other form o f audits that the Auditor General may consider significant and necessary; (b) Conduct Performance audit to ascertain and report on the economy, efficiency and effectiveness o f the operations o f agencies audited; (c) Conduct in depth audit of any aspects o f the accounts, operations, systems and management practices ofthe agencies; (d) Conduct the audit o f assessment, collection and accounting o f revenues & taxes; (e) Conduct the audit o f aid, grants and public debt o f the Nation; (f) Certify the Consolidated Annual Financial Statements o f the Royal Government; (g) Report its findings and recommendations to the relevant authorities; and (h) Follow-up on the compliances o f the Audit Reports. Audit Jurisdiction 39. The Authority shall conduct without fear, favour or prejudice the audits of the following: (a) Government or any o f its instrumentalities which include, Ministries, Departments, Divisions, Units, Dzongkhags, Gewogs, Thromdues, autonomous bodies, foreign-assisted or special projects o f the Royal Government; 39 Zhung Dratshang, Rabdeys and all relatedinstitutions; Judiciary and Judicial Bodies; Legislature and related institutions; Constitutional bodies; Defence and Security Services; All corporations, Financial Institutions including the Central Bank and their subsidiaries established under the laws o f the Kingdom in which the Government has an ownership interest; All entities including non-governmental organizations, foundations, trusts, charities and civil societies fully or partly funded by the Government; whose loans are approved or guaranteed by the Government; and those receiving funds, grants and subsidies directly or through the Government and collections and contributions from people and fund raised through lottery; and Any entity or activity upon Command o fthe DrukGyalpo. 40. Notwithstanding the provisions o f any laws relating to the accounts and audit o f any public authority, the Parliament, if satisfied that the public interest so requires, shall direct that the accounts o f such authority be audited by the Auditor General. Scope of Audit 41. The Authority shall audit the following matters to ascertain whether: The amount appropriated have been expendedfor the specified programs and tasks within the approved budget limits; The financial transactions comply with the existing laws and the evidence relating to items o f income and expenditure are sufficient; The accounts have been maintained in the prescribed forms and such accounts fairly represent the position o f the transactions; The program implementations are adequately monitored to avoid incidences of cost and time overruns; The inventory o f publicproperties is accurate and up-to-date, and custody, control, management and physical safeguard measures instituted are adequate; 40 (f) Physical assets and infrastructures reported actually exist and confirm to the requiredspecifications andstandards; (g) The available resources including human, financial and other assets are properly utilized; (h) The accounting and related system o f controls, financial or otherwise including the arrangements for internal audit and internal control o f cash, kind and other public property against any loss, damage and abuse are adequate; (i) The accounts of revenue, taxes, other incomes and deposits are accurate and the systems relating to assessment, realization, recording and methods o f reporting are adequate; (i) The debts, liabilities and specific purpose funds are recorded accurately and managed properly; (k) The ICT and other technological systems developed are appropriate and adequate controls and security measures are instituted to prevent unauthorized access to the system; and (1) The implementation o f programs and activities are as planned and the intended objectives achieved. C H A P T E R 5 : P O W E R S , R E S P O N S I B I L I T I E S A N D R I G H T O F A C C E S S T O I N F O R M A T I O N Powers of the Authority 42. The Authority may: (a) Develop rules, procedures and guidelines to carry out auditing economically, efficiently and effectively; (b) Determine the objectives, scope, frequency and findings o f audits in accordance with the laws and Generally Accepted Auditing Practices; (c) Determine the audit findings to be included in the report in the light of observations made by the auditors and explanations, justifications and evidence furnished by the auditee agency; (d) Develop investigative auditing procedures designed to increase the likelihood of detection of fraud and corruption thereby reducing the incidence o f their occurrences; 41 (e) Adopt procedures for the issuance of audit clearance certificates; ( f ) Establish requirements that copies o f audited financial statements, performance and other reports o f agencies be delivered to it; (g) Represent the Kingdom in the fields o f auditing in national, regional and international arena; and (h) Cooperate with international and regional accounting and auditing associations and bodies in the development and application o f the generally accepted auditing standards, principles and practices inline with acceptable international standards and practices. 43. The Authority shall have the power to settle the audit observations inthe light o f justifications provided, compliance made, and improvement noted as may be appropriate. Responsibility of the Authority 44. Itshall bethe duty o fthe Authority to: (a) Carry out its responsibilities by conducting proper and timely audits o f public funds utilized by the ministries, departments, corporations and other organizations o f the Government; (b) Report on whether the concerned agencies complies with the will o f the Parliament, as expressed through budgetary appropriations; and (c) Promote economy, efficiency and effectiveness o f the use o f public resources through its reports and recommendations. Powers of the Auditor General 45. The Auditor General shall have power to: Enforce the provisions o f this Act; Issue statements on the generally accepted auditing standards and principles and related guidelines; Appoint other persons, organizations or companies to perfonn any particular audits; Station an auditor in any agency in order to carry out the functions o f the Authority effectively; Require every person employed in the Authority to comply with any security requirements; 42 (f) Develop and implement training programmes which ensures that Audit staff remain competent to carryout their duties in accordance with the prevailing standardsand practices; (g) Make financial commitments on behalf o f the Authority, including contracting for professional services in accordance with the governing policies and procedures o fthe Government; (h) Enterinto agreements with, andreceive and manage funds from donors for capacity building o f the office in accordance with the governing policies and procedures o fthe Government; and (i) Represent the Authority at home and abroad. 46. The Auditor General shall have the power to require the agencies to provide technical and professional support as may be necessary and warranted in proper discharge o f audit function. 47. The Auditor General may delegate the exercise o f any o f his powers to other auditors but such delegation shall not remove him of the responsibility and accountability for acts by those individuals delegated with such powers. Responsibilities of the Auditor General 48. The Auditor General shall have the duty to: (a) Carry out his responsibilities with utmost loyalty and dedication to the Tsawa-Sum, unaffected by any consideration for those in positions o f power and influence and showing no discrimination whatsoever inthe line o f his work; (b) Inform the Anti-corruption Commission or relevant authority on any activity or person identifiedinthe course o f an audit that may constitute as offences under this Act or other laws; and (c) Perform such other duties, in relation to the accounts o f bodies administeringpublic funds, as may be prescribed by law. 49. The Auditor General shall be held accountable for the Authority's non- compliance with the provisions o f this Act and for any acts contrary to the objectives and functions o f the Authority. Right of Access to Information 50. Subject to the provisions o f other laws, the Authority shall have the right o f access to the personnel records, information and premises o f the entities being audited and parties involved. 43 51. The Authority shall have right o f access to the records, bank statements o f agencies audited, suppliers, taxpayers and other third parties in accordance with the laws, iffound relevant and material to the audit o f an entity. 52. The Authority shall have powers to enforce or initiate enforcement action to secure access to needed records, which are not produced. 53. The Authority shall be provided with copies o f any documents or materials, access to premises, office space and other facilities necessary for auditing. 54. The Auditor General or anyone authorized by him upon written notice may require anyone currently or previously involved inthe activities under audit to: (a) Provide a written explanation o f any related matter; or (b) Attend and give evidence, affirmation or otherwise, before the Auditor General or the designated person. 55. The Auditor General shall have power to obtain information from individuals who have been participants or beneficiaries, and those who may be providers of services. C H A P T E R 6 : A U D I T I N G A N D R E P O R T I N G S T A N D A R D S Standards and Practices 56. The Authority shall establish auditing, reporting standards and practices that will meet the highest auditing and reporting standards. 57. The Authority shall publish standards and practices in an appropriate manner to make the proposal knownto the public and invite comments before adopting such standards. 58. An auditee shall submit annual financial statements for their operations for audit inaccordance with standards andrequirements established by laws. 59. The Authority may rely on the audits performed by other organizations including internal auditors if it has reasonable assurance through such means as prior experience, tests or other indicators that the audits and the reports on those audits are accurate, reliable and meet its standards. 60. Audit methods shall be adapted to the progress of the sciences and techniques relating to sound financial management and reporting. 61. The Authority shall intimate an entity to be audited before starting the audit unless it i s a special investigation audit. 44 Audit Report 62. The report covering the financial operation o f the agency shall contain the Authority's opinion on the financial statements indicating, whether the financial statements have been fairly presented in accordance with applicable laws and generally accepted accounting principles. 63. The report shall invite attention to the cases and indications o f fraud, abuse or illegal acts. 64. The report shall also disclose appropriate supplementary explanation and information about the financial statements, monthly and annual accounts, as well as violations o f legal or the regulatory requirements, including instances o f non- compliance. 65. The Auditor General shall address an Audit Report to: (a) The concerned Minister and head o f the audited entity requiring the follow-up action and copy endorsed to others where appropriate; (b) The Chief Justice o f Bhutanfor audits o f the Courts; (c) The Speaker o f the National Assembly for the audit o f Legislative Offices; (d) The Chairman for the audit o f the National Council; (e) The Minister o f Finance for the audit o f Defence and Security Services; ( f ) The Ministry o f Finance for certification audits inrespect of donor funded projects; and (8) The Chairpersons o f the Board o f Directors for the audits o f the Corporations and Financial Institutions. 66. Confidential information may be covered in a separate report. Such information shall not be divulged or released prior to its authorized release, or revealed to other parties not concerned, without prior clearance and approval o f the Auditor General or his duly designated representative. 67. The Authority shall submit copies o f the Audit Report to the Druk Gyalpo, the PrimeMinister and the Chairperson o fthe Royal Civil Service Commission or the Chairperson o f the Anti-Corruption Commission, where offences are serious and require urgent attention. 68. The concerned agency shall immediately take action on audit observations and ensure that any fund or property misspent, misusedor wasted i s recovered without undue delay. 45 Annual Audit Report (AAR) 69. The Auditor General shall submit the Annual Audit Report (AAR) during the fourth quarter o f the fiscal year on the audits carried out duringthe previous fiscal year. 70. The Annual Audit Report shall contain the result o f the audit of the Annual Financial Statements o f the Government, the overall financial condition and recommendations to improve the economy, efficiency and effectiveness of the Government. The report shall assess whether the administration as a whole has been economical, efficient and effective inthe utilization o f the public fund. 71. The Annual Audit Report shall include: The Audit Report on the operation o f the Royal Audit Authority for the fiscal year; Works performed by the Authority duringthe period defined; Significant audit findings and recommendations for improvement of agencies audited; Cases where the Authority did not receive acceptable responses or cooperation; Cases where, in the Auditor General's opinion, the follow-up reports submitted by an entity are not adequate, or are not being carried out as recommended; Future course o f action in the interest o f enhancing accountability and improving auditing operational capacity; and Any other matter based on audit findings that the Auditor General, in his opinion, considers to be significant and o f a nature that needs to be brought to the attention o f H i s Majesty the Druk Gyalpo, the Parliament and the people o f Bhutan. 72. The Auditor General shall submit the Annual Audit Report to the Druk Gyalpo, the Prime Ministerandthe Parliament. 73. The Auditor General shall endorse copies o f the Annual Audit Report to the Lhengye Zhungtshog, concerned Head o f the audited entity, the Chairperson o f the Anti-Corruption Commission and the Chairperson o f the Public Accounts Committee. 46 Publication of Reports 74. The Auditor General shall publishits Annual Audit Report every fourth quarter o f the fiscal year on the activities carried out duringthe previous fiscal year. Admissible Period to Respond 75. All audited entities must respond to the Audit Reports within the time frame as specified here under: a) Response to initial audit - within one month o f the issue o f field audit observations memos b) Response to agency specific - within three months o f the issue o f the reports reports by the Authority c) Response to draft Annual Audit - within one month o f the issue o f the draft by Report the Authority Follow-up of Audit Reports 76. The Lhengye Zhungtshog, Ministries, and other concerned authorities shall be responsible to take timely follow-up actions on Audit Reports under this Act. 77. The Royal Audit Authority shall issue reminders on reports not being acted upon and ifthere be further non-compliance and non co-operation, a defaulting auditee mustbe questioned andrequiredto submit explanation. CHAPTER 7 : TESTIMONY Testimony, Opinion and Reports 78. The Auditor General or an official authorized by him from the Authority shal be obligated to testify before the Parliament or the Judiciary. 79. The Auditor General shall review every five years the auditing system for maximizing and utilizing the use o f public funds and optimizing the values for its intendedpurpose. 80. The Auditor General, or anyone designated to do so by him from the Authority may provide advice or information to a person or entity relating to the responsibilities of the Authority. 47 Expert Opinion 81. The Authority may provide the Parliament and the administration with their professional knowledge in the form o f expert opinions, including comments on financial bills when requested. C H A P T E R S : A C C O U N T A B I L I T Y O F T H E A U T H O R I T Y Auditing the Authority and Peer Review 82. The operations of the Authority shall be subject to the same standards and requirements established by this Act or other relevant Law. 83. The Parliament shall appoint independent auditors drawn from professional firms or bodies not within the audit jurisdiction o f the Authority for auditing the annual accounts of Royal Audit Authority. 84. The Authority shall provide its financial statements and operational informationto appointed auditor within 45 days after the end o f a fiscal year. 85. The Auditor shall: (a) Submit a report on any matter related to the operations o f the Authority without fear or favour or prejudice, to the Parliament; and (b) If required testify before the Parliament or entities of the Parliament on matters related to the operations o fthe Authority. 86. The Authority may undertake a peer reviewby a member o f peer organizations or other professional bodies from time to time to ensure consistency and high standard o f auditing. Protection of Information, Sources and Persons 87. Auditors shall respect the security requirements applicable to the information that they receive andobtain. 88. The Authority shall maintain the confidentiality o f the source o f any information received about potential offences, in good faith and trust, under the laws of the Kingdom. 89. The Authority shall not provide information to any member o f the public or any person or authority, ifin its opinion, the information has: 48 (a) To be heldconfidential under national laws and acceptedlegal practice; (b) Commercial and industrial confidentiality of national significance; and (c) National Security and larger public interest implications under laws of the Kingdom. 90. The Authority shall give the same level of confidentiality and protection as is requiredby laws of the Kingdom for any secret or sensitive material or evidence, written or otherwise, obtained by or made available to the Authority from an entity pursuantto this Act. 91. The Authority shall: (a) Provide for the safety of person whose assistance and cooperation had beensignificant andmaterial for an audit inupholding the public interests; (b) Requirethe appropriate authorities to provide protection and ensure safety of person whose support to the Authority is significant and material for enhancement or safeguardingofthe national interest; and (c) Requireauthorities to provide protection and ensure safety of auditors, where, in the opinionofthe Auditor General, there is apparentrisk andthreat to their safety. C H A P T E R 9 : O F F E N C E S A N D P E N A L T I E S Offences 92. Any person who has committed an offence under this Act or who fails to comply with any provisionof this Act shall be guilty of an offence. 93. A complainant or informer, who knowingly gives or causes to be given any false or misleading information relating to any offence committed by an entity or a personwith malicious intent shall be guilty of an offence. Prosecution 94. No person shall be liable for an offence under this Act unless found guilty and Convicted by a court of law. 95. A personalleged of commission of an offence shall beprosecutedby the Office of the Attorney Generalinaccordancewith its Act andother relevant laws. 49 Penalties 96. Any person who is found guilty o f an offence shall on conviction be liable to punishment provided for such offence under the Penal Code of Bhutan or other relevant laws o f the Country. 97. Every person convicted o f an offence o f corruption under this Act or any other law, for which no penalty is specifically provided under the Penal Code o f Bhutan or any other law, shall be liable to a fine or to imprisonment, or both, as graded by the court. 98. Any disciplinary action against the auditors or other staff can be imposed only with the Service Rules framed underthis Act. C H A P T E R I O : M I S C E L L A N E O U S Immunity from Prosecution 99. The Auditor General and its auditors shall enjoy immunity from prosecution for any lawful act arising from the due discharge o f their duties under this Act. Rule Making Power 100. The Authority may make rules necessary to carry out its functions economically, efficiently and effectively inaccordance with law. Authoritative Text 101, The Dzongkha text shall be the authoritative text, if there exist any difference in meaning between the Dzongkha and the Englishtext o f this Act. Amendment 102. The amendment o f this Act may be effected only by the Parliament. Definitions 103. For the purpose o f this Act unless the context indicate otherwise, the words, phrases and acronym are defined as follows: 50 "Accounts" means the records, ledgers and books, maintained under existing laws showing particulars o f transactions, and other documents substantiating such transactions. "Act" means the Audit Act o fthe Kingdom o f Bhutan. "Audit" means formal inspection, investigation, examination or review of an individual's or organization's accounting records, operations, financial position, or compliance with applicable laws, rules, regulations and standards and ascertaining whether or not the intended objectives are achieved. "Auditor General" means the Auditor General o f Bhutan appointed under the Constitution and this Act. "Authority" means the Royal Audit Authority o f Bhutan established by the Constitution of the Kingdomwith power to enforce this Act. "Corruption" means as defined inthe Anti Corruption Act. "Government" means the Royal Government o f Bhutan. "Kingdom" means the Kingdom o f Bhutan. "Misbehavior" means any action or inaction in violation o f the code o f professional conduct mentioned inthis Act. "Peer Review" means a periodic outside review o f an organization's quality control system to maintain and improve the quality o f the services performed by peer organizations committed to excellence and professionalism. "Performance Audit'' means the aspects o f value-for-money (VFM), operational and management audits including an audit o f the economy, efficiency and effectiveness with which the audited entity uses its resources in carrying out its responsibilities and any other review or examination o f any aspect o f the operations o f an entity including audit of any performance report prepared by the management. 51 Annex E. Benefits of Accrual Accounting Extract from Study No. 14 "Transition to the Accrual Basis o f Accounting: Guidance for Governments and Government Entities," IFAC Public-Sector Committee, December 2003. 1.18. The PSC has commented extensively on the benefits o f accrual accounting for governments and individual public-sector entities in previous Studies (Studies 5, 6, 8, 9 10 and 11) and Occasional Papers (Papers 1, 3, 5, 6 and 7). In order to provide some context for readers who are not familiar with the Public-Sector Committee's other publications, this section contains a summary o f the benefits o f reporting on the accrual basis. 1.19 The information contained in reports prepared on an accrual basis is useful both for accountability and decision-making. Financial reports prepared on an accrual basis allow users to: assess the accountability for all resources the entity controls and the deployment o fthose resources; assess the performance, financial position and cash flows o f the entity; and make decisions about providing resources to, or doing business with, the entity. 1.20 At a more detailed level, reporting on an accrual basis: shows how a government financed its activities and met its cash requirements; allows users to evaluate a government's ongoing ability to finance its activities and to meet its liabilities and commitments; shows the financial position o f a government and changes in financial position; provides a government with the opportunity to demonstrate successful management o f its resources; and i s useful in evaluating a government's performance in terms o f its service costs, efficiency and accomplishments. Financial Position 1.21 Accrual accounting provides information on an entity's overall financial position and current stock o f assets and liabilities. Governments need this information to: make decisions about the feasibility o f financing the services they wish to provide; demonstrate accountability to the public for their management of assets and liabilities recognizedinthe financial statements; plan for future fundingrequirements o f asset maintenance and replacement; 52 plan for the repayment of, or satisfaction of, existing liabilities; and manage their cash position and financing requirements. 1.22 Accrual accounting requires organizations to maintain complete records o f assets and liabilities. It facilitates better management of assets, including better maintenance, more appropriate replacement policies, identification and disposal of surplus assets, and better management o f risks such as loss due to theft or damage. The identification o f assets and the recognition o f depreciation help managers to understand the impact o f using fixed assets in the delivery o f services, and encourage managers to consider alternative ways o f managing costs and delivering services. 1.23 Accrual accounting provides a consistent framework for the identification o f existing liabilities, and potential or contingent liabilities. The recognition o f obligations meeting the definition o f a liability and the criteria for recognition: compels governments to acknowledge and plan for the payment o f all recognized liabilities, notjust borrowings; provides information on the impact o f existing liabilities on future resources; means that it i s possible to allocate responsibility for the management o f all liabilities; and provides necessary input for governments to assess whether they can continue to provide current services and the extent to which they can afford new programs and services. 1.24 Accrual accounting highlights the impact o f financing decisions on net assetdequity and may lead governments to take a longer term view when making financing decisions than i s generally possible when relying on cash or modified cash reports. Information on net assetdequity also means t hat governments may be held accountable for the financial impact o f their decisions on both current and future net assets/equity. Changes in an entity's net assetdequity between two reporting dates reflect the increase or decrease in its wealth during the period, under the particular measurement principles adopted and disclosed inthe financial statements. Under the accrual basis o f accounting, the financial statements will include a Statement o f Financial Position which discloses information about assets and liabilities. Where assets and liabilities are not equal, a residual figure for net assetdequity will be reported. Where this figure i s positive it can be interpreted as the net resources that may be applied for the provision o f goods or services in the future, and therefore the community's investment in the reporting entity. Where the figure is negative, it may be viewed as the amount of future taxation or other revenues which are already committed to paying off debt and other liabilities. Net assetdequity can comprise some or all o f the following components: 53 0 contributed capital; 0 accumulated surpluses and deficits; and 0 reserves (for example revaluation reserve; foreign currency translation reserve). Financial Performance 1.25 Accrual accounting provides information on revenues and expenses, including the impact o f transactions where cash has not yet been received or paid. Accurate information on revenues i s essential for assessing the impact o f taxation and other revenues on the government's fiscal position, and in assessing the need for borrowing in the long term. Information on revenues helps both users and governments themselves to assess whether current revenues are sufficient to cover the costs o fcurrent programs and services. 1.26 Governments need information about expenses in order to assess their revenue requirements, the sustainability o f existing programs, and the likely cost o f proposed activities and services. Accrual accounting provides governments with information on the full costs of their activities so that they can: consider the cost consequences o f particular policy objectives and the cost o f alternative mechanisms for meetingthese objectives; decide whether to fund the production o f services within government sub- entities, or whether to purchase goods and services directly from non- government organizations; decide whether user fees should cover the costs associated with a service; and allocate responsibility for managing particular costs. 1.27 Accrual accounting can provide financial information on whether sub-entities are delivering specified services, and delivering them within agreed budgets. The same information, at a more detailed level, can also be used within sub-entities for the management o f activity and program costs. 1.28 Accrual accounting allows an individual entity to: record the total costs, including depreciation o f physical assets and amortization o f intangible assets, o f carrying out specific activities; recognize all employee-related costs and to compare the cost o f various types o f employment or remunerationoptions; assess the most efficient way o f producing their goods and services and o f managing the resources over which they have beendelegated authority; determine the appropriateness o f cost-recovery policies; and monitor actual costs against budgeted costs. 54 CashFlows 1.29 Accrual accounting provides comprehensive information on current cash flows and certain projected cash flows, including the cash flows associated with debtors and creditors. It can therefore lead to better cash management and may assist in the preparationo f more accurate cash budgets. 55 SUPPLEMENTARY TABLE OF STANDARDS AND GAPS (6) Analysis of Financial Statements 76 (7)Reporting on Financial Statements 76 (8) Reporting on Fraud 77 (9) Reporting on Compliance 78 56 ....... r- a .9 M 0 +s K 3 -a 5 3m G3 cr 0 0C .3 Y 0 U -5E .-$ Sa, QL .e 0 3 2 3 s 0 0 m a, sm 5 .I a, C L 2 a .--as Y c, 4T td 3m : YG a, X 5 U r n 0 + c, d, ks 3; cd E .-a,* > 8 .I .I 2 F c, 3 4a9 E s 3 M s 0 M 4 .I c, E 1 3 4u - .e m a, M a, cr 5 0 P x B c, .-6 m 4sm 2M - 6 r sa, 0 2 a .9 M V 9 a 8 2 c n t. C 0 .3 Y V cnQ) ._C0m2 Y 8 V vi 8 wM> Y E 3Y d 5 2 W b m .-*0 C 0 vi a, I d 0 0 CY g" 5 Y * c Y Q 28 2.-E 9 u -0 5$ Jz u ru0 a .-C0 ...a Y