Report No. 25738-JO Hashemite Kingdom of Jordan Country Financ Accountabiity Assessment October 10, 2001 Country Support Services Department Middle East and North Africa Region The World Bank Document of the World Banil WB10953 P \!UNfTfS\MNACS\vfd\CFAACoverzModel.doc Document of The World Bank HASHEMITE KINGDOM OF JORDAN COUNTRY FINANCIAL ACCOUNTABILITY ASSESSMENT (CFAA) October 2001 Middle East Department Middle East and North Africa Region The World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties Its contents may not otherwise be disclosed without World Bank authorization ABBREVIATIONS AND ACRONYMS ACIB Administrative Control and Inspection Bureau ARABOSAI Arab Organization of Supreme Audit Institutions CFAA Country Financial Accountability Assessment CPA Country Procurement Assessment CPAR Country Procurement Assessment Review- FO Financial Orders GAAP Generally Accepted Accounting Standards GTZ German Agency for Technical Cooperation IAS Intemational Accounting Standards IFAC Intemational Federation of Accountants INTOSAI Intemational Organization of Supreme Audit Institutions ISA Intemational Standards of Auditing JD Jordanian Dinar JACPA Jordanian Association of Certified Public Accounts JSC Jordanian Securities Commission MOF Ministry of Finance MTEF Medium-Tern Expenditure Framework SBD State Budget Department SC Steering Committee - Auditing and Accounting Project SOE State-owned enterprise UNCTAD United Nations Conference on Trade and Development UNDP United Nations Development Programme Vice President: Jean-Louis Sarbib Country Manager/Director: Joseph Saba Team Leader: Nabil Shehadeh Jordan: CFAA - 11- October 2001 HASHEMITE KINGDOM OF JORDAN COUNTRY FINANCIAL ACCOUNTABILITY ASSESSMENT CONTENTS 1. OVERVIEW AND CONCLUSIONS .1................................................... A. Objectives and Scope of the Assessment ...................................................l I B. Public Sector Control Environment ....................................................2 C. Private Sector Governance, Accounting and Auditing ...............................................3 D. Recent Initiatives and Recommendations ........................ .....................................3 2. GOVERNMENT BUDGET SYSTEM ......................................5 A. Background, Organizational Structure ......................................5 B. Budget System ......................................6 C. Weaknesses in the Budget System ......................................7 D. Proposed Performance Budgeting ......................................8 E. Recommendations - Budgeting ......................................9 3. GOVERNMENT MANAGEMENT CONTROLS, ACCOUNTING AND REPORTING ....................................................11 A. Management Controls .....................................................11 B. Accounting and Reporting .................................................... 11 C. Weaknesses in Management Controls and Accounting ............................................ 13 D. Recommendations - Management Controls and Accounting ................................... 13 4. GOVERNMENT AUDITING ................................................... 14 A. Audit Bureau ............................................. 14 B. Weaknesses in Govemment Auditing .............................................. 16 C. Recommendations - Govemment Auditing .........................1... ........................... 16 5. PRIVATE SECTOR ACCOUNTING AND AUDITING ............................................... 17 A. Overview .................................................... 17 B. Companies Law .................................................... 17 C. Jordan Securities Commission .................................................... 18 D. Banking Supervision .................................................... 19 E. Public Auditing Law ...................................................... 20 F. Jordanian Association of Certified Public Accountants ........................................... 21 G. Weaknesses in the Accounting Profession .................................................... 22 H. Recommendations - Private Sector Accounting and Auditing ................ ................. 24 Annex: Documents on File Jordan: CFAA - iii - October 2001 HASHEMITE KINGDOM OF JORDAN COUNTRY FINANCIAL ACCOUNTABILITY ASSESSMENT 1. OVERVIEW AND CONCLUSIONS A. Objectives and Scope of the Assessment 1.01 The CFAA is a diagnosis of the country's public and private financial accountability framework, financial management systems and practices. The main objective being to: (a) assess whether the existing accountability framework, as designed and practiced, is sufficient to ensure effective and efficient use of public funds; and (b) support the country in the design and implementation of financial management capacity building programs in order to promote transparency and strengthen investor confidence in the management of public and private funds. 1.02 The present CFAA is being undertaken as part of the Government program for Public Sector Reform. This CFAA report is based on discussions with Jordanian government officials, private sector officials land the desk review of related studies and papers undertaken by the government and the Bank regarding: * Public Sector Financial Management: budgeting, accounting and auditing; regulations, staffing and practices at the level of public administration, local government and public sector authorities. * Private Sector Accounting and Auditing: regulations; organizations, standards and practices. * Education and Training in financial management, and accounting. 1.03 In particular, the CFAA preparation builds on the analysis of three major studies, that have been undertaken under separate initiatives overlapping considerably with the analysis required for the present CFAA. As it was agreed during the CFAA preparation mission (January 2000), the CFAA provides comments on those studies as well as recommendations from a comprehensive financial accountability perspective to be l / A final draft of the present report was shared with the Jordanian authonties (letter dated October 17, 2000) with the view of seeking a common understanding of the financial accountability issues and ensuring that the final report reflect the views of the relevant Jordanian parties A Bank mission visited Jordan (January 2001) and discussed the report with concerned entities including, in particular, the Ministry of Planning, the Ministry of Finance, the Audit Bureau and the Central Bank of Jordan, who provided written comments on the final draft The present report incorporates the comments received and updates the contents of the final draft on the basis of the discussions with the concerned authorities Jordan CFAA October 2001 pursued as part of the follow up on this report or on the plans for follow up on the individual studies; those studies are: * UNDP, in collaboration with the Swedish Fund for Consultative Service: Program and Performance Budgeting (1998). * Ministry of Finance (Gereral Budget Department), in collaboration with GTZ, Germany: Introduction of program and performance budgeting (1999). * Ministry of Industry and Trade (Controller of Insurance) in collaboration with Clanwilliam Consultants: Accounting and financial disclosure and capacity building of accountancy and auditing profession (1999). B. Public Sector Control Environment 1.04 Overall, the public sector appears to operate within an environment that is conscious of the importance of management controls including financial accountability. The Government's financial accountability framework has a great deal of controls, possibly too much, with controls anchored in very detailed rules rather than efficiency and effectiveness. The majority of its controls are largely embodied in laws, rules and regulations, and the exercise of such controls and financial accountability is largely centered on the adherence to these laws, rules and regulations. Oversight and monitoring of these controls are through several different institutions (the more important being the Audit Bureau and The Administrative Control and Inspection Bureau). 1.05 However, the control systems need to be modernized and streamlined for efficiency and effectiveness. The control systems are cumbersome and decision - making tends to be centered in high levels based on multi-level reviews and committees that slows the process. Fmancial reporting does not facilitate decision-making at various levels of government hierarchy, particularly in connection with the cost of the services provided by the Government and the linkage between the budget allocations and the targeted output of services. Anchored also in adherence to some rigid formnats prescribed by rules and regulations rather than by considerations of efficiency, effectiveness and transparency, reporting is generally inadequate. While there appear to be adequate controls over expenditures (the assessment was mainly concerned with expenditures), financial information does not contribute to assessing how efficiently the government and its programs operate. Many of the participants in the control systems have overlapping responsibilities, with many layers within government ministries concerned with reviews, checking and counter-signing. The result of the above is that efficiency and effectiveness play a less important part in government than conformity with laws, rules and regulations. The recent Country Procurement Assessment (CPAR)2 confirmed the above observations. It noted a highly centralized procurement system that was basically effective with a considered low level of corruption but one that focuses on process and less on aspects of efficiency. 2World Bank Hashemite Kingdom of Jordan, Country Procurement Assessment (CPAR) June 1999 Jordan. CFAA - 2 - October 2001 C. Private Sector Governance, Accounting and Auditing 1.06 The private sector operates within a framework of adequate corporate governance and financial accountability with the main components being: a modem Companies Law (1997); the Jordanian Securities Commission (JSC; incorporated in 1997); the Banking Law (no. 28 of the year 2000, replacing thel971 law) and Auditing Law (1986). All companies have to be registered with Controller of the Companies, which also monitors compliance with the Law. Companies are subject to accounting and disclosure requirements and audits with additional, specific requirements for public shareholding companies by the JSC. Financial management and disclosure by the banking system and the insurance companies seems adequate with strict monitoring by the Central Bank and the Controller of Insurance. However, the local accounting and auditing profession is generally considered weak, albeit the presence of big international, and to some extent large local firms, with established working relationships with local firms and are subject to the peer review and quality control requiremerts of their international firms. This weakness is particularly evident in connection with the adoption and enforcement of internationally acceptable accounting and auditing standards, a matter that has an adverse impact on the reliability of financial information provided by the accounting and auditing profession. D. Recent Initiatives and Recommendations 1.07 The above issues affecting financial management and accountability in both the public and private sectors have not been absent from the reform agenda of the Government of Jordan. The majority of the basic legislation relating to modernizing the corporate governance have been put into effect over the past four years: a serious effort to modernize the country's accounting and auditing profession and practices -the weakest link in that structure- is now underway (since 1999; para. 1.03 above); it follows up on the findings of studies aimed at defining the financial disclosures and auditing requirements for listed companies under the JSC law. Equally, plans are being developed for a major revision of the Government's budgeting system through the adoption of performance-based budgeting system, in collaboration with UNDP and GTZ (para. 1.03 above). The present report builds on the analysis of the afore- mentioned initiatives and complements them from a perspective of comprehensive financial accountability. Related recommendations are presented separately in the following sections of the report; the following highlights the key recommendations of the report. 1.08 Public Sector Financial Management. A central element in the on- going plan for reform of the public sector financial management is the modernization of the budgeting system (expenditure and revenue forecasting, investment planning and financial management systems). Such a plan will have to be pursued as a part of an overall plan for modernizing the public financial management practices, with adequate attention to the interface of the budgeting system with requirements of management controls, accounting and reporting and internal and external auditing. More importantly, the decision to proceed with the introduction of performance-based budgeting should be made after careful consideration of the particular issues involved, in terms of systems requirement, resources and technical assistance (paras. 2.19-2.21). The key Jordan: CFAA - 3 - October 2001 recommendations of the report are given below; they are discussed in more detail m paragraphs 2.19-24, 3.11-14 and 4.12-13 * The Implementation Arrangements for Budgetary Reform. Adequate attention should be given to thorough, well coordinated planning, and an effective organization management structure, which should be separate from, but adequately interfaced with, the day-to-day management of the budget function. * The Pilot Phase for the Introduction of Budgetary Reform. The prioritization and the design of the pilot phase are critical elements in the success of the proposed change. The pilot exercise may need to concentrate on activities that are commercial in nature and could be easily identified and measured. * Links of Budgeting with Other Public Financial Systems. The proposed reform and modermization of the budgeting system and the introduction of financial management in government should be used as an opportunity to review relevant government systems to ensure that they are appropriate for the planned decentralization and generally, to streamline them for efficiency and effectiveness. * The Audit Bureau Plans for the revision of the Audit Law should aim at initiating a full trans formation of the Audit Bureau into a fully independent, Supreme Audit Institution, if it is to function as the external auditor of government. This would require, in particular: (i) transferring AB's current functions, that are associated with the decision making process (such as pre audits) to internal audit departments; and (ii) granting AB a full budgetary independence, whereby the Parliament exercises the financial and budgetary oversight instead of the Executive. 1.09 Private Sector Accounting and Auditing. The report's analysis focuses on improving compliance in the area of public financial disclosures, and by extension, the general accounting and auditing practices in Jordan. The legal framework of disclosure, as set forth in the existing and planned amendments of Companies law, the Jordan Securities Commission regulations and the Banking Supervision law and practices, is generally adequate and compares favorably with international practices. 1.10 The key element of the report's recommendation targets the auditing profession, which is called upon to ensure that the profession contribute effectively to enhancing private and foreign investment environment through the promotion of sound, internationally accepted disclosure practices. In this context, the proposals for reform of the accounting profession outlined in the recent study by Clanwilliam (para 5.2 1)report proved as sound starting point for a debate among the parties concerned in the Government and the private sector regarding the issues involved at the level of the organization of the profession, its practices and the standards to be applied. Particular attention need to be given to the following, as part of preparation and development of a comprehensive plan for reforming and strengthening the profession; detailed recommendations are given in paragraphs 5.30-5.44: Jorclan: CFAA - 4 - October 2001 * Organization of the Profession The reform should aim at enhancing the role of professional accountants (as compared to auditors) in promoting sound accounting practices and standards across public and private enterprises. The reform plans need to explore ways of involving the accountants in the general organization of the profession under either one single institute comprising also auditors, or under a separate association with a strong links with the auditors' general organization, (the Jordanian Association of Certified Public Accountants, JACPA). * The Public Auditing Profession Board. The mandate and composition of the existing PAPB should be changed to that of an oversight body of the profession, particularly in terms of adoption of standards and their enforcement, representing the main stakeholders of the profession in the private sector and Government. * Auditing Quality Control. The JACPA should consider introducing a peer review system. Ultimately, the maintenance of standards and the reputation of the profession will depend very much on the demand of the users of their audits, enforcement of auditing principles and standards and the quality procedures and practices established by the profession. * Classification of Auditors. Auditors' classification under three classes may eventually be abandoned over time. ISA requires among other aspects that the auditor should be independent and have the required skills and conpetence; auditors should be required to carry out an audit in accordance with recognized auditing principles and ensure that relevant standards are observed * Implementation of the Changes. As in the case of other parts of the proposed reforms, the planned reform needs access to considerable amount of technical assistance funding. In the immediate future, special government support, and possibly support from private sector professional organizations, would help in mobilizing donors support. In the longer run, the JACPA should subsequently endeavor to become self- sufficient. 1.11 The present report is divided into five sections: public sector accountability framework is given in Section 2 ( Government Budgeting); Section 3 (Government Management Controls and Accounting) and Section 4 (Government Auditing). Private Sector Accounting and Auditing is presented in Section5. Each section highlights the issues that need to be addressed as part of the reform agenda, namely as part of the public sector reform program. 2. GOVERNMENT BUDGET SYSTEM A. Background, Organizational Structure 2.01 The government structure consists of three (3) branches: Legislative, Executive, and Judiciary. The Legislative branch is the Parliament, with an Upper and Lower house. The Upper house consists of forty members including a Speaker appointed by the King Jordan: CFAA - 5 - October 2001 for a four-year period. The Lower house consists of eighty members, elected by the people for a four-year period. The house elects a Speaker from among itself. Each house forms Working Committees that discusses and formulates proposals to Parliament. 2.02 The Executive branch comprises the Prime Minister, his Cabinet, the Ministries, departments and independent governmental institutions. The Prime Minister appoints his Cabinet (Council of Ministers) subject to the King's approval. However, the Cabinet requires the support (confidence) of the Parliament, without which either the Cabinet resigns or the King dissolves Parliament. 2.03 In addition to the Prime Minister's office, there are twenty-six sector ministries, often organized in ministenal councils that may also include other senior government officials. Ministries carry out their work through departments, government institutions or independent institutions. Departments are separate organizations governed by laws and regulations funded under the State Budget. Examples are the Customs, Income Tax and Budget departments under the Ministry of Finance. A General Director is usually the head of a department. In addition, there are the state-owned enterprises (SOEs) which are independent government institutions of a commercial nature, such as the Water Authority of Jordan, the Aqaba Railway, the Postal Savings Fund, and the Royal Jordanian Airlines. 2.04 From a financial perspective, the role of the Cabinet is to submit the annual Budget law to Parliament; execute the budget through the Ministries and other parts of the Executive branch; evaluate and audit implementation and performance. It is the Budget Department (SBD), a semi-autonomous agency within the Ministry of Finance, that provides the central control withm the government's administration. B. Budget System 2.05 The Constitution requires the Prime Minister to submit to Parliament a draft Budget law no later than one month before the beginning of each fiscal year with provision to finance the government on a monthly basis until the Budget Law is approved. The Advisory Council headed by the Prime Minister, oversees the budget process, advises on estimated revenue and overall expenditures and taxes, with the Prime Minister issuing a general policy statement requiring budget drafts on the basis of programs and expected performances. 2.06 The State Budget Department manages the budget process. It provides detailed guidelines for budget preparation to sector ministries and all government entities, including the required dates for budget submission. The SBD reviews draft submissions, discusses and negotiates changes to proposals including the performance of ongoing activities. Final submissions are consolidated by the SBD as the Draft Budget Law, presented to the Advisory Council and Cabinet for review and revision, after which it is submitted to Parliament for its approval. The Draft Budget Law is discussed by the Finance Committee of Parliament and then by the full Parliament where it is approved, and then submitted to the King for ratification before it becomes Law. Jordan: CFAA - 6 - October 2001 2.07 The respective government ministries, and other government entities are responsible for implementing the activities financed through the budget, subject to the appropriate rules and regulations. Budget expenditures are by way of Financial Orders prepared by SBD and approved by Ministry of Finance (Treasury Department). These Financial Orders are based on estimated cash flow requirements submitted by the government implementing entities and form the basis of monthly cash transfers from Treasury to the respective entities' bank accounts. 2.08. The Budget is not ordinarily subject to supplementary revisions, however, there is a minor reserve for emergencies to be used at the discretion of the Cabinet. Where funds are inadequate, less urgent expenditures are usually postponed. The SBD monitors budget implementation through monthly financial statements required from entities within a week of each month end. It issues monthly financial statements of revenues received and expenditures, followed by a quarterly report by the Ministry of Finance (MOF) to the Cabinet, comparing actual with budget. In addition, an annual report is submitted by the MOF to Parliament, usually about five months after the year - end (May), with the audited version available about a year after. This report is limited to financial information and it does not provide any information on outcomes and achievements or performance. 2.09 In the past, arrears created by the accumulated effect of commitments and expenditures were pushed forward from one year to another due to inadequate funds. However, MOF had settled all inter-ministenal accumulated receivables as well as amounts payables to SOEs in 1998. Government accounts do not carry any accumulated payables since 1999; accumulation of payables is no longer allowed and payments on account of loans guaranteed by Government are since then included m the Budget. 2.10 State-owned Enterprises (SOEs), of which there are twenty- four are not included in the State Budget but instead, in a separate budget "Budgets and Employment - Table of Independent Government Institutions"; the national budget would include one line item covering subsidies provided by the Government to the SOEs. Equally, the SOEs' budgets are prepared in accordance with the respective financial regulations of the SOEs and are subject to approval of the Ministry of Finance and Ministry of Planning in connection with their investment budgets. SOEs follow accounting and auditing practices of the private sector. C. Weaknesses in Budget System 2.11 The budget system is based on an incremental budgeting process using line-item fornat, cash based accounting, and a traditional financial audit. Internal review by the SBD and a UNDP team in 1998 recognized the inability of the current system to determine what various programs and projects cost, and what services and consequences of the services are provided.3 The reviews concluded that the current system leaves the 3Swedish International Services - Swedserv AB: Jordan, Project INT/94/R13 JOR 3270, Programme and Performance Budgeting. Final Technical Report (1998) Jorclan: CFAA - 7 - October 2001 government with (a) reduced macroeconomic control; (b) severely limited possibilities for strategic focus; and (c) poor delivery of public services to the citizens of Jordan. In addition, the recent Public Sector Review 4carried out by a Joint Government of Jordan and World Bank team in early 1999 also identified certain weaknesses in the budget system including the one-year horizon of the budget. D. Proposed Performance Budgeting 2.12 In an effort to modernize the budget process and introduce financial management concepts in government, including the linkage of outputs and performance to plans and resources provided, the SBD together with both technical and financial assistance from the German Agency for Technical Cooperation (GTZ), prepared a Master Plan5 for budgetary and financial management systems reform. 2.13 The plan requires the reform of the financial management system - with performance budgeting at its core - to affect government performance in the following three dimensions: * Macroeconomic balance: As a main component of an overall fiscal balance, it provides effective tools for aggregate revenue and expenditure planning. Budgets will be more transparent and more comprehensive and will reflect a medium-term honzon in policy making. * Strategic policy planning: Through full transparency with respect to the cost of public programs and services, the reform will facilitate to make the right choices in view of the country's strategic goals and its limited financial resources. * Public service delivery: Performance budgeting will be the backbone of an approach to public administration that puts the desired policy outcomes and outputs of the government's work at the center of attention. 2.14 The Master Plan acknowledges the technical difficulties that will face the introduction of performance budgeting. Performance budgeting is intended to introduce a shift from the focus on inputs to a focus on outputs. However, it will require significant changes in political and management culture as the proposed reform will mtroduce a level of transparency that will modify narrow interests, power structures, archaic managerial behaviors, and difficult cultural habits. Its success will be directly related to government commitment, including leadership, reform management, resources and incentives, supported by revised legislation and regulations. 4World Bank, The Hashemite Kingdom of Jordan, Public Sector Review (Executive Summary and Main Report) Septenmber 22, 1999 5Ministry of Finance, General Budget Department Financial Management Reform in Jordan, Introducing a Systemfor Programme and Performance Budgeting, Draft Master Plan (1999) Jordan: CFAA - 8 - October 2001 2.15 The setting of goals and performance indicators will present technical difficulties. They will need to be identifiable and clearly definable, and should be manageable, measurable and have agreement for adoption. For example, some activities lend themselves by their nature to easier organizmg than others. The selection and organizing of programs is directly linked with reporting for results. The system will require cost accountmg, entailing the move from the current government cash based system of accounting to accrual accounting. The development of the accounting and other record keeping systems and the introduction of management information systems will require a significant expansion in computerization and training with respect thereto. 2.16 The resulting move to decentralized management is premised on empowerment, requiring appropriate management control systems. The control systems including the system of auditing will need to be re-examined to compensate for the devolution of authority and responsibility that would accompany the introduction of perfornance budgeting. 2.17 Sequencing. The planning for performance management is a five-year horizon. Year one will seek to obtain the necessary buy in; focus on cash management, accounting and financial auditing; preparation and introduction of macroeconomic goals; human resource deve lopment and review of institutional arrangements. Also, the first year will address legal mandate and other aspects for the reform. Year two will focus on re- bundling of the activities of the line ministries and independent institutions into programs and projects. In parallel, the development of the management information systems will be started on a broad range. It will address the planning of the budget cycle - resource allocation and budget proposals. Measures will be introduced for result-oriented management, along with further development of institutional arrangements. 2.18 Year three will introduce efforts on preparation of budget, proposals (activities will be rearranged into programs). It will address the costing of programs and projects, performance monitoring, internal audit and control as well as the widening of the range and quality of external performance auditing. Year four will bring the first round of output-oriented budgeting. It will promote attention to negotiating an output-based Draft Budget Law in Parliament. It will develop cost accounting, performance management, performance auditing, and an extension of internal audit. Year five will show improvement in quality as well as an increase in the number of institutions satisfying the requirements of performance budgeting. E. Recommendations - Budgeting 2.19 The decision to introduce Performance Budgeting will require a careful consideration of the feasibility issues involved, particularly in terms of resources, systems and technical assistance. The implementation of performance budgeting involves quite a long period and considerable difficulties, it has to be based on well-coordinated planning and day-to-day management. More importantly, the plan should be part of an overall plan for modernizing the public financial management practices, with adequate attention to the interface of the budgeting system with requirements of management controls, accounting and reporting and internal and external auditing as discussed in the following Jordan: CFAA - 9 - October 2001 two sections. The following points may need to be considered at the planning of the introduction of Performance Budgeting and budget reform. 2.20 Resources and Technical Assistance. The implementation of Performance Budgeting would require a considerable amount of resources, technical assistance and trainig in addition to effective project management and coordination among a wide range of public institutions to be affected by the change. While the difficulties have been fully recognized by the promoters, the breadth of the reform throughout government and the experience in other countries, the sequencing of the Master Plan seems far too ambitious and need to be reexamined. Resource mobilization and technical assistance will have to be launched as early as possible and preferably at the planning and design phase. It will take much longer than envisioned to obtain the wide commitment needed from the senior managers in government; to revise laws, rules and regulations; to re-skill and retrain the staff (with some degree of civil service reform); develop and introduce new systems of accounting including the move from cash based to accrual based accounting; to obtain computers and develop appropriate computer systems; to identify targets and develop measurement indicators; and to train the users of the resulting financial information, includmg members of the Parliament. 2.21 Phasing in and Pilots. The SBD may consider extending the introduction of Pilots for a longer period than currently planned while reducing the number of pilot ministries/Departments. An approach could be to introduce performance management progressively across ministries concentrating on those activities that are commercial in nature and that can be easily identified and measured. This approach would help to promote wide acceptance of performance budgeting and provide the time necessary for developing the necessary underpinnings. 2.22 Interface of SOEs' Budgets with National Budget. Given the particular, commercially onented nature of the SOEs, the SBD may need to create a separate unit for the review of SOEs and their budget requirements. While, as a part of the budget process, the SBD has recently begun to receive improved information from these independent institutions, it is quite essential that such a unit has to be staffed with adequate expertise and experience to review these commercial type operations. For example, it is possible that some aspects of government support are not made transparent in the financial statements, as they may have been financed through government guaranteed loans. 2.23 Budget Coverage. For accountability and financial control, the government needs to look beyond direct expenditures. In addition to legal commitments, the government has other explicit or implicit commitments that can have an immediate effect or future fiscal impact. In addition to those commitments included in the annual Budget Law, there are those liabilities that require consideration of their possible application and impact on the economy. These include contingent liabilities arising from legal or contractual obligations that may be triggered by an event that may not occur, such as guarantees for loans contracted by non-central government entities. It is worth noting that the Budget laws of 1999 and 2000 are inclusive of all expenditures borne by the Jordan: CFAA - 10- October 2001 Treasury including repayment of loans guaranteed by the Government; such guarantees are extended only to financially viable public entities. 2.24 Regularized Budget Reviews. It is recommended that the annual budget approach be expanded towards the preparation of Medium Term Expenditure Framework (MTEF). Given the difficulties and timeframe associated with the budgetary reform, the MTEF would help achieve key intended results of the budgetary reform in the short run. This would evolve from current MOF plans to include projected costs for a three year horizon, and contribute to the ceilings required for the annual budget, and increase predictability in sector management and efficiency in public spending. There are several approaches to MTEF but at least, it is necessary that the government should project the forward costs of major categories of expenditures, and no new large initiative should be considered for funding without consideration of its future implications. 3. GOVERNMENT MANAGEMENT CONTROLS, ACCOUNTING AND REPORTING A. Management Controls 3.01 On the surface the government's internal control system appears adequate with many layers of checking and counter checking. However, these controls and procedures are usually driven by adherence to laws, rules and directives. Financial Regulations address at length internal control procedures to ensure proper execution and recording of transactions by public entities. The principal controls are proper authorizations, segregation of duties, safeguard over assets and records and independent checks and reconciliation. Each government department is required to have a Financial Control Unit responsible for verifying revenue and their deposit. This Unit is also responsible for checking expenditures to ensure their adherence to laws, regulations and instructions; to ensure that funds are used for purposes intended (conform with budget); and for available liquidity. They are also involved in the monthly closmgs and financial reporting. 3.02 In addition to the above control procedures, expenditures are subject to venfication by internal auditors, special staff from Ministry of Fmance (controllers), and Audit Bureau resident staff that are involved in pre-audit activities. Sector ministries are required to inform MOF of all frauds and actions taken, includmg investigation by special committee. There are limitations with respect to documents with specific procedures for the correction of errors. B. Accounting and Reporting 3.03 Government accounting is closely linked to the budget system and its control. It is governed by the Government Financial Regulations, based on cash accounting, provides for double entry bookkeeping, and consolidation of accounts by the MOF's Public Accounting Department. Cash management, but for minor exceptions, are centralized for revenues (submitted to the Central Bank for the account of the Treasury) Jordan: CFAA - 11 - October 2001 and decentralized for payments, with individual bank accounts for government entities usually maintained at the Central Bank. There is a unified format of accounts for all government entities, conforming to the general budget classifications. 3.04 There are Regulations governing the accounting for advances, deposits, and bank accounts. It stipulates the procedures to be followed by all departments upon opening bank accounts and explains the procedures to be followed for executing funds transferred by the Treasury as approved by the SBD. 3.05 The MOF's Accountmg Department consolidates, monthly, all Government expenditures and revenues on the basis of information provided by the respective ministries and departments. The SBD issues a monthly report on the status of the budget execution, highlighting actual perfornance against the planned estimates and allocations. In addition , quarterly and annual reports are issued by the MOF on status of the budget and public finances. Those reports are shared widely with the government departments. MOF's annual report on the Government final accounts is submitted to the Parliament within 12 months of the end of the fiscal year (para. 4.04) 3.06 A central Financial Monitoring Unit, comprising senior officials in charge of revenues, expenditures, accounting and treasury, in rarticular, was established in the MOF in 2000. In addition to the analytical work that it is required to provide to decision- makers, the Unit issues a monthly "Bulletin of Public Finances" which gives a summary of the status of government finances and a wide range of public finance performance and indicators. The Bulletin is widely distributed Government departments and to the public; it is available on the Internet. 3.07 The Municipalities Financial Regulation serves as the Accounting Standard for Municipalities, which is a basic cash accounting system. There is limited computerization in some larger cities but basically most accounting, including the Ministry of Municipalities, rely on manual accounting. While Municipalities submit monthly reports on their revenues and expenditures to the Ministry of Municipalities, there is no overall consolidation of these figures. 3.08 Eventually, performance-based budgeting would require the introduction of accrual accounting whenever it is introduced for it to achieve all expected benefits. While accrual accounting should be considered imperative for all independent government institutions (i.e., SOEs), the cost/benefit for the government for a move to introducing full accrual based accounting on the whole needs to be carefully examined; this should equally consider other alternatives to full accrual based accounting, such as modified cash-based or modified accrualbased accounting. One of the difficulties in accrual accounting within government is the determination of those assets to be included in the financial statements, and the costs or valuation to be attributed for the use of those assets. Many governments maintain the cash basis for central government while using accrual accounting for the commercial aspects within government. Regardless of the accounting system employed, the government will always require cash reporting for its cash management. As an alternative to a direct switch to a full accrual based accounting, cash based accounting could be complemented by applying accrual method to certain Jordan. CFAA - 12 - October 2001 types of assets and liabilities, including listings of all arrears and commitments, guarantees (showing expected losses), fixed assets and government indebtedness. C. Weaknesses in Management Controls and Accounting 3.09 While the internal control systems appear adequate, they require modernization to be more effective and efficient - moving from rules-oriented approach to one of overall effectiveness and efficiency. For example, there is a large degree of overlap in the duties between staff assigned to control duties, internal auditors, MOF controllers and the Audit Bureau (in their pre audit functions). Most important from a control aspect, is the involvement of the Audit Bureau in management functions such as their participation in procurement committees and in pre audits. This affects their independence as external auditors (discussed further under Auditing). 3.10 The Administrative Control and Inspection Bureau (ACIB), considered an arm of the Prime Minister's office, reports to the Cabinet as a part of the control system. It is headed by President (Director General equivalent) and has a staff of 140 of whom 80 are inspectors. It considers its role to include the review for the simplification of government procedures, overstaffing and manpower planning in general. In an Ombudsman role, the Administrative Control and Inspection Bureau receives and investigates complaints from the public and from within ministries, organizing inspection committees as it considers necessary. D. Recommendations - Management Controls and Accounting 3.11 The proposed reform and modernization of the budgeting system and the introduction of financial management in government should be used as an opportunity to review all government systems to ensure that they are appropriate for planned decentralization and generally, to streamline them for efficiency and effectiveness. There should be special attention to the Internal Audit department and its functions as it can be an important part of any organization The Institute of Internal Auditors promulgates the following standards with respect to their work. These include: * Independence from the activities audited; * Proficiency they should have and the requirement for professional care in their duties; * Scope of work to include the examination and evaluation of the adequacy and effectiveness of the organization's system of internal control; * Management of the internal audit department. 3.12 The classification system of the budget items needs reformulation to reflect policy formulation, to identify the activities of the government and the level at which performance should be assessed. Expenditures must be classified for different purposes such as: preparation of reports that fit the needs of report users (policy decision makers; Jordan: CFAA - 13 - October 2001 budget managers), the administration of the budget and the presentation of the budget to the legislature. 3.13 There should be an annual consolidated financial report to cover all government including independent entities owned or controlled by the government. Regardless of the accounting system used by the government, the accounts and financial statements of public entities carrying out business activities should be on a full accrual basis of accounting. Such information is needed for policy-making - notably subsidies and financing of capital expenditures of public enterprises, etc. 3.14 Consideration should be given to restricting the ACIB to that of its Ombudsman role once the management control systems have been reformed. Many of its current duties overlap with that expected of an efficient management control system and with the Audit Bureau. 4. GOVERNMENT AUDITING A. Audit Bureau 4.01 Within the ambit of the job it carries out, the Audit Bureau seems to do a good job through adequate attention to planning, and training, including the development of audit programs. It is also actively updating its audit skills e.g. in computerization and performance audits. The audit work is organized through detailed and well - planned allocation of work, with team members given a thorough and comprehensive training for field - work. However, financial audits are geared towards the general system of budgetary control and strong adherence to laws, rules and regulations. Reports are therefore strongly targeted to deviations of expenditures from appropriations and lack of compliance with laws and regulations. The Bureau carries out a certain number of performance audits each year with a current goal to complete five each year. 4.02 The Audit Bureau is the supreme audit institution within the government and it reports to Parliament with a copy of its reports submitted to the Prime Minister and the MOF. The Audit Bureau is constituted under the Audit Bureau Law and is currently under revision. The Bureau is headed by a President, appointed by Royal Decree upon the recommendations of the Cabinet (Council of Ministers) and requires the consent of Parliament for his retirement or resignation. He has the same rank, authority and responsibilities as a Minister. 4.03 The Audit Law states that in addition to normal audit duties, the Audit Bureau is responsible for: * Supervising the government revenues and expenditures, deposits, advances, loans, settlements, and warehouses accounts; and Jordan* CFAA - 14 - October 2001 * Providing advice for official Departments subject to the Audit Bureau's supervision - ministries, government departments, general official establishments and municipal and village councils. 4.04 The MOF is required to submit final accounts to the Bureau for each fiscal year within twelve months of the end of such year. The Audit Bureau is required to audit them and submit to Parliament an annual report to include observations on the departments and institutions audited, including a description of violations committed and the consequences thereof. The President also has access to Parliament to report any unlawful practices and important matters that need urgent consideration and attention. Usually the AB is required to submit its report to the Parliament at the beginning of the Parliament ordinary session; the last annual report of the AB covered FY 1999 and was submitted to the Parliament in October 2000. The AB issues to Parliament semi-annual reports on its activities and audit missions' findings. Such reports may be made public by the Parliament after being discussed with the Government; the last such report, covering the second half of 2000 was published in Jordanian newspapers in January 2001. 4.05 The Audit Bureau holds active membership in the International Organization of Supreme Audit Institutions (INTOSAI) and the regional associated bodies of supreme audit institutions such as the ARABOSAI (Arab Organization of Supreme Audit Institutions). The Bureau has about 535 employees of which ibout 85 percent are financial auditors, supported by other skills such as engineers. About 80 percent of all employees are located at ministries, departments, government institutions and enterprises, the eleven governor's offices, municipalities and local government entities. 4.06 A considerable segment of the Bureau's resources is being directed toward ex- post audits; presently some 16% of AB's resources are spent on ex-ante audits, which are provided at the requests of previous governments who were not comfortable with the efficiency of the internal controls in place. The Bureau acknowledges that this should not be a part of its core work and is progressively raising the threshold of items subject to this type of audit. Eventually, the Bureau would ike to fully eliminate these audits as governments become more comfortable with management controls. 4.07 The Audit Bureau has developed a strategy for the next ten years. In the short term, it plans to complete guidelines for audit reporting, carrying out at least five performance-based audits annually, and strengthen its monitoring system to improve quality. Its medium-term plans include the review of the internal audit systems and procedures; introduce statistical sampling and include appropriate guidelines in its manuals; develop and design more appropnate audit work sheets; strengthen its training programs and its system for staff evaluation; reconsider the Bureau's work in various committees; and extend the performance of capital projects including the making of recommendations with respect to project performance. 4.08 Its more long-term plans include introducing computers in auditing; shifting the focus from pre-audit to post audit; extending its audit of final accounts enablmg the Bureau to produce audit opinions on annual financial statements; and amending the Bureau Law to reflect the above proposed changes. Jordan: CFAA - 15 - October 2001 B. Weaknesses in Government Auditing 4.09 While the Audit Bureau has some degree of independence in its structure, this has been offset by its involvement in non-audit functions. The very Law that gives it independence by giving it direct access to Parliament also gives it a decision making role through its supervisory role, requiring participation in committees (e.g. procurement), and requiring it to give advice on performance issues. Its participation in decision making and its role in pre audits takes from it the most important requirement to be an external auditor - that of its independence. It may also lose some aspect of independence through its current system of having its financing approved by the SBD. Also, the current situation where 85 percent of the Audit Bureau staff is located at the agencies to be audited may create difficulties of independence for the staff. 4.10 The Laws, rules and regulations and financial directives influence what should be audited and as such, the internal control system and the auditors approaches to financial audits are very much one of extensive checking of documentation and comparison with laws and regulations with very little relation to comparative risks and reliance on systems and controls. 4.11 The Audit Bureau, aware of the above limitations, has introduced a draft legislation to amend its basic law, which is being currently processed. The AB plars to phase out its Ex ante control role and move to a full fledged Ex post audit institution. The phasing out is being introduced gradually, while concerned government entities, currently subject to the AB's Ex ante audit, put in place their proper control and internal audit functions to replace before the AB could phase out such functions. The AB expects to achieve this transformation by 2003. C. Recommendations - Government Auditing 4.12 The revision of the AB law, assuring the elimination of the AB's role in Ex ante audit, as well as the consolidation of AB's independence, should be the top priority in the reform agenda. Restructuring the Audit Bureau as Jordan's Supreme Audit Institution would require transferring all of its current functions associated with the decision making process to management, and internal audit functions (such as pre audits) to an internal audit department (to be developed and strengthened), if it is to function as the external auditor of government. Full independence will also require that its budget be approved directly by Parliament and not form a part of the budget approved by SBD. It may well be that a review of the revised role of the Bureau will result in an excess of staff, some of which could be transferred to form the nucleus of an effective internal audit department. These changes should be concurrent with the assurance that there is an efficient and effective internal control system, while avoiding the current overlap of several agencies such as the MOF controller, Administrative Control and Inspection Bureau. 4.13 The Audit Bureau's approach to audits should be modified to move it away from its concentration on the adherence to laws and regulations and more towards efficiency and effectiveness of programs, including the identification and targeting of areas of high Jordan: CFAA - 16 - October 2001 risks. In addition, the proposed introduction of performance management into the government will provide for more decentralization in government, empowering more people while holding them responsible for their actions. This provides the opportunity to introduce strong management systems and change the focus of the Audit Bureau to one of a true external audit function, providing greater emphasis on (a) identification of waste and inefficiencies and (b) comments on program results as a basis for future allocations. 5. PRIVATE SECTOR ACCOUNTING AND AUDITING A. Overview 5.01 The private sector appears to have a framework of good financial accountability with companies subject to accounting and disclosure requirements and audits, while monitoring of compliance with the Companies Law is the responsibility of the Controller of Companies, in the Ministry of Trade and Industry, with additional checks for public shareholding companies by the Jordan Securities Commission. In addition, financial management and disclosure by the banking system seem to be working effectively with strict monitoring by the Central Bank. However, financial accountability is dependent both from a fiduciary and development aspect on the reliability of financial information provided by the accounting and auditing profession. While the local profession is considered weak, it is currently undergoing much needed modernization and strengthening (para. 5. 21). In addition, several "big-five" international firms have working relationship with established local firms and are subject to the peer review and quality control requirements of their international firms. 5.02 Training in accounting is carried out by both public and private universities with what is considered mixed standards. The results of the examinations set by the JACPA gives no reliable indication of the quality of the curriculum and the teaching. Statistics show that approximately 7 percent pass the examinations. However, it seems clear that there is little or no relationship between curricula offered by the universities and examinations set by the JACPA, which seems to be very unpredictable. In addition, there seems to be very little pre-examination coaching available and no continuing education for members of the profession. An in depth review of the curriculum and the teaching of the universities was not carried out as a part of the Assessment. B. Companies Law 5.03 All public shareholding companies, limited liability companies, and branches of foreign companies are required to prepare annual financial statements that should be audited under the provisions of the Companies Law, Securities Law and the Income Tax Law. 5.04 The Companies Law prescribes that all public shareholding companies should prepare their financial reporting in accordance with Generally Accepted Accounting Principles (GAAP). However, the existing laws and regulations, do not give specific Jordan: CFAA - 17 - October 2001 definition of such GAAP; neither do they assign the task of promulgating the accounting standards to any particular entity, except in the case of the JSC and the financial sector. As a result, in 1989, the Jordanian Association of Certified Public Accountants (JACPA) adopted the International Accounting Standards (IAS their standard for GAAP), a matter that raises the issue of the enforcement of IAS in the absence of clear guidance or endorsement of such by the laws. Banks and insurance companies are required to prepare their financial statements with additional information in accordance with guidelines issued by their respective regulatory agency. 5.05 All public shareholding companies, limited liability companies, and branches of foreign companies are required to file audited financial statements annually with the Controller of Companies in the Ministry of Trade and Industry to ensure compliance with the law's provisions. The JSC Law requires all shareholding companies to submit annual audited financial statements and semi-annual, audited financial statements to the JSC). All banks and other financial institutions must submit annual and semi-annual, audited financial statements to the Central Bank of Jordan. 5.06 The Companies Law requires: * The auditor's report to state whether the company has an adequate internal control structure and whether the company has maintained a proper set of accounts; * The auditor to render a final opinion on the financial statements; * The auditor to be deemed an agent for the shareholders within the limit of the duties vested; and * The auditor to be liable to the public shareholding company for any damage that the company may incur as a result of errors committed by the auditor while conducting the audit. The Controller of Companies acts primarily as a Registrar of Companies, which monitors their compliance with the Company Law. The Controller maintains a register of all types of companies in Jordan, monitors compliance of joint stock companies, follows up for timely receipt of financial statements, and publication thereof, audit, and meetings of shareholders assemblies. The Controller also monitors compliance with capital adequacy, with GAAP, adequacy of audit and other legal requirements. The Controller also issues an annual business license. C. Jordan Securities Commission 5.08 The Jordan Securities Commission (JSC) was created in 1997 (Law 23), with the objective of separatmg the capital market regulatory function form that related to trading of securities, both of which came under the former Amman Financial Market. JSC is established as an autonomous public entity, in charge of regulating the capital market and trading of securities including disclosure regulations; issuance and registration of securities; and licensing of mutual funds, financial services companies and certified Jordan:. CFAA - 18 - October 2001 financial professionals. JCS oversees the Amman Stock Exchange (ASE) and the Securities Depository Center, both autonomous, pnvate sector-managed entities; it also monitors listed companies, financial services companies, mutual funds, and Certified Financial Agents. 5.09 JSC plays a substantive role in promoting transparency and sound disclosure practices in Jordan's private sector, although its oversight is limited only to the listed public companies and other entities providing financial services and investment instruments. Currently, there are 163 companies listed on ASE; they represent some 80% of all registered joint stock companies and about two thirds of Jordan's GDP. Listed comparnes have to comply with JSC law and regulations, which set forth among others, the securities registration and disclosure requirements. Disclosure regulations (effective September 1, 1998) require joint-stock companies that are under JSC jurisdiction to apply International Accounting Standards, and to disclose any deviation there from; they are required to have their financial statement audited by licensed (Class A; para 5.14) auditors, who should fulfill certain qualification requirements as established in the regulations. International Standards on Auditing are to be applied in the audits of all companies that are under the JSC's oversight; those companies are required to appoint auditors from among those listed on a JSC pre-approved list. In addition to regular reporting by the listed companies, JSC undertakes on-site monitoring of the companies, including frequent examination of mutual funds and financial services companies and banks in connection with their financial services activities. JSC is an active participant in the ongoing reform of the accountmg and auditing profession (para 5.21); it also coordinates with JIPCA to ensure that the auditing practices meet the requirements set forth in JSC's disclosure rules. D. Banking Supervision 5.10 The Banking Law no. 28 dated June 21, 2001, which updates the Banking Law of 1971, sets out the rules pertaining to banks licensing and their operations and management, and particularly in the areas of banking supervision, accounting and disclosure and control of money laundenng. Licensing and supervision are entrusted to the Central Bank of Jordan, which has a special department for that purpose, headed by a director. The CBJ governor issues instructions relating to the application of law and monitoring compliance. 5.11 CBJ's supervision uses on-site and off-site examinations of all licensed banks (some 21, including 5 branches of foreign banks). On-site examinations are carried out once a year, with possibly an additional, follow up mission, when warranted. Off-site supervision involves examination of reports by banks as prescribed in CBJ instructions; the banks report monthly on a number of financial and operational parameters, including capital adequacy and provisions, and credit, foreign exchange and loan portfolio exposures. The off-site reporting for June and December of each year have to be submitted together with the banks' audited financial statements. 5.12 Banks are required by the law to keep records and organize their accounts in accordance with generally accepted practices. Banks' disclosure and financial statement Jordan: CFAA - 19 - October 2001 should also follow generally accepted standards and the CBJ instructions, which require the banks to apply IAS 30 (Disclosures in Financial Statements for Banks), and other related standards such as IAS 39. Bank's annual financial statements are to be audited by auditors that are pre-approved by CBJ. The latter issues annually a list of acceptable auditors, selected from practicing auditors with the highest classification (Class A; para. 5.14). Audited financial statements are to be published in two local newspapers within six months of the end of the fiscal year. Branches of foreign banks should also publish, in addition to their financial statements, simultaneously the annual accounts of the Mother Company. 5.13 The CBJ issues instructions for the prevention and control of money launderng. The Banking Law requires banks to report, to CBJ, transactions that are related to unlawful activities or crimes. It also requires the Controller of the Companies to coordinate with the CBJ to control suspic ious activities. CBJ's special instructions (November 1997), give guidance to the banks regarding methods to identify suspicious transactions and procedures to spot and prevent money laundering activities or transactions. E. Public Auditing Law 5.14 The Public Auditing Law is administered through the Public Auditing Profession Board (the Board), comprising twelve members - the President and Vice President of the Audit Bureau, four semor government officers, Director General of the Stock Exchange, two university faculty members and three public auditors. The Board is responsible for the licensing and classification of auditors. Class A auditors are required for the audit of banks, financial and insurance companies, branches of foreign companies, government entities and official public institutions. Class B for public shareholding companies except those mentioned as requiring Class A; and Class C for private shareholding companies, societies, clubs, and other entities that do not fall in either Classes A or B. 5.15 Membership in the JACPA is a pre requisite for practicing as an auditor. In addition to auditing, the auditor is allowed to (a) provide consulting and other professional services in the fields of accounting, finance and taxes; and (b) perform arbitrations, liquidations, and offer expert opinion in the fields mentioned above. The Audit Law lays out other rules and regulations, some of which cover aspects of independence and ethics. 5.16 There is currently no provision in the Law to allow licensed practitioners to practice and sign as a firm and accordingly, audited financial statements are signed in the name of the individual licensee rather than the audit firm. The Law permits non- Jordanians to practice as auditors in Jordan as long as they hold a valid license in their home country and have fulfilled all the licensing requirements of Jordan. The Public Auditing Law is not concerned with accountants who are not auditors. An Association of Accountants was established in 1996 for the purpose of organizing accountants in Jordan. It aims at promoting and regulating the accountants in a unifying body with prescribed educational requirements. The current Auditing Law is currently under discussion for Jordan: CFAA - 20 - October 2001 revisions, most of which relate to the proposed reform of the JACPA including a proposal to incorporate accountants (non-certified auditors) as a part thereof. 5.17 Since the 1985 Public Auditing Profession Law, all those fulfilling the requirements to apply for a license, excluding holders of "doctorate in accounting" and those holding "a internationally recognized professional certification", must also pass an exam prepared by the Board in accounting, auditing, and the Jordanian Business and Tax Laws. However, persons licensed as auditors before the 1985 Law were "grand- fathered" to practice under the Law. Prior to the passing of this Law, the technical requirements were minimal, without the requirement for a comprehensive knowledge of modem accounting and auditing standards and practices. It is estimated that the majority of these members practice in small firms mainly carrying out accounting services and are classified as Class C (par. 5.14). However, they are believed to constitute the larger percentage of JACPA membership. 5.18 Examinations set by the Audit Licensing Board show noticeably low passing record, with around 7 percent of the candidates having passed the examination over recent years. Although this may convey a positive indication and enforcement of the examination requirements, several reasons have been offered for this low result, all of which point to the need for a major review of the examination process; they include: * Vague requirements as to what will be expected from the students with the absence of a clear syllabus that outlines the basis of the examinations - this affects both the university syllabus and the pre exam preparations; * Inconsistent level of teaching among universities and other training institutions partially due to inadequate number of suitable accounting teachers - e.g., one university has several lecturers from eastern block countries with limited knowledge and experience of International Accounting Standards (IAS) and International Standards on Auditing (ISA); * Inadequate preparation by many students partially due to lack of motivation to pass examinations. Because students have low exam fees, a relatively low image of the profession in general, and a substantial hiatus (at least three years) between university training and the date allowed for sitting exams, students are not motivated to do their best. F. Jordanian Association of Certified Public Accountants (JACPA) 5.19 It is the Board that determines the rules and regulations of the JACPA. As mentioned above, all licensed auditors are required to become members. The Public Auditing Profession Law summarizes the objectives of the Association, also setting the rules of professional behavior. It does not provide for the participation of accountants who are not qualified as auditors . Its principal objectives are to promote efficiency and technical ability of its members, preserve professional ethics, and encourage research. Jordan: CFAA - 21 - October 2001 JACPA is a member of the International Federation of Accountants (IFAC) and as such requires its members to apply ISA. 5.20 The JACPA board comprises nine members including a Chairman who is elected by its general assembly for a two-year period. Membership is restricted to Jordanian nationals, who must be a practicing auditor and who has paid all financial commitments. Fees are nominal (currently JD 50 per annum) and the JACPA does not have a full time secretariat. Membership is estimated at 425 of which about 125 reside and work outside Jordan. Of the remaining 300, approximately eighty are on the staff of the larger auditing firms, 200 engaged in small audit firms m Jordan, and about 20 on the staff of industrial/commercial firms as financial directors, managers or accountants. 5.21 In January 1999, the government (Mmistry of Planning) appointed consultants (Clanwilliam Consultants) to review and make recommendations for the proposed "Development Program to Implement an Appropriate Accounting and Financial Disclosure Standard and to build the Capacity of the Auditing and Accountancy Profession."6 The findings and conclusions of that study are addressed in the following paragraphs.. The government had introduced initiatives to reform and modernize the financial sector in Jordan and had concerns in relation to perceived weaknesses in the auditing and accounting profession. These concerns related both to the audit of companies and the financial administration of industrial and commercial companies. 5.22 A Steering Committee (SC) was recently constituted to manage and evaluate the work of the Consultants and to introduce an Auditing and Accounting Project for the reform of the profession. The SC has its secretariat in the office of the Controller of Insurance in the Ministry of Trade and Industry Chairman. G. Weaknesses in the Accounting Profession 5.23 In addition to technical weaknesses, other concerns include: * Poorly defined rules; * Lack of an effective governing body; * No requirement for continuing professional education; * Absence of formal disciplinary procedures; * Lack of quality control review; * Low audit fees which result in lower audit and inadequate procedures. 6 Clanwilliams Consultants Development Programme to Implement Appropriate Accounting and Financial Disclosure Standard and Build the Capacity of the Auditing and Accountancy Profession in Jordan (Interim Report, September 1999) Jordan.- CFAA - 22 - October 2001 5.24 Competition and Auditors Fees. The consultant report observed that there was strong competition for auditing assignments and that as a result auditors were at times subject to pressure where such companies were controlled by closely connected families who were also the major decision makers. This pressure also impacted on the low level of audit fees charged. Reform proposals and recommendations address this deficiency, through the strengthening of the accounting and auditing profession and the introduction of quality control will help mitigate this issue. 5.25 Fragmentation. There is the lack of a unified accounting profession in Jordan as in most other countries where the accounting profession has been developed. While most in Jordan have recognized the need to strengthen and reform accounting and auditing, efforts to date have concentrated on the auditing aspect with very little attention to the role of the accountants. The primary responsibility for ensuring that companies and other entities produce.proper financial statements in accordance with IAS lies directly with the senior financial officers of the company and with their board of directors. 5.26 Control and Supervision. In countries with developed accounting professions, control and supervision is on the basis of self-regulation. Under this system, the responsibility for the development of the profession lies in its governing body that is formally recognized by the government. In Jordan, the Board regulates the profession without any voice from the JACPA. The current governing body, the Board is concerned only with auditing. This Board meets infrequently, with the majority of its members not being members of the profession and neither engaged in accounting or in auditing. 5.27 Organization of the Profession. The consultants recommended that a new body should be created to replace the existing Board with the ultimate transfer of its responsibilities to an all accountants/auditors Board. In Jordan, there is also the growing influence of the security markets and the growth in the size of companies and corporate activity that is resulting in the demand for greater visibility, transparency and accountability. 5.28 The consultants suggest the creation of new professional body to replace the JACPA. It would be a body comprising of accountants and licensed auditors. Only accountants licensed as auditors will be allowed to carry out audits of public shareholding companies, limited partnerships in shares and limited liability companies. 5.29 Accounting and Auditing Standards for Smaller Companies. The consultants have proposed that consideration should be given to adopting guidelines whereby IAS and ISA are only applicable to larger companies (based on turnover), public shareholding companies, and those in which the State has a shareholding. For all other smaller companies, a reduced standard of compliance would be required even though the auditor's report would be required to state that the accounts and balance sheet give a true and fair view of the results for the period and that the balance sheet at the date audited is in agreement with the books of account. Jordan: CFAA - 23 - October 2001 H. Recommendations - Private Sector Accounting and Auditing 5.30 The proposals for reform of the accounting profession outlined in the Clanwilliam report proved as sound starting point for a debate among the parties concerned in the Government and the private sector regarding the issues involved at the level of the organization of the profession, its practices and the standards to be applied. In addition, the following points would need to be considered as part of preparation and development of a comprehensive plan for reforming and strengthening the profession. The ultimate objective is to ensure that the profession contribute effectively to the enhancing private and foreign investment environment through the promotion of sound, internationally accepted disclosure practices and reliable financial information. 5.31 Organization of the Profession. The reform should aim at enhancing the integration of accountants (as compared to auditors) in proposing sound accounting practices and standards across pnvate and public enterprises. The reform plans should explore ways of involving accountants in the general organization of the profession under either one single institute comprising also auditors, or under a separate association having strong links with the auditors' association. Experience around the world has been mixed regarding adopting either an only-auditors entity or a single entity, with pros and cons practically concentrating on the relevance of each model in the context of the stage of development profession in each country. Although the consultants' suggested one single entity may seem advantageous for Jordan at this stage; it is essential that both streams of the profession, under either forms of organization, have mutual support and empowerment given the present perceived weakness of the profession. This would also enable a closer cooperation between accountants and auditors in connection with international accounting and auditing standards, as JACPA is Jordan's representative at IASC and IFAC, respectively responsible for IAS and ISA. Equally such a cooperation would create room for effectiveness and synergy in trainig and professional growth of its members. In general, the same basic training and qualification criteria apply to both. For an accountant to practice as an auditor requires prescribed experience in the technique of auditing. Also very important is the need to provide continuing education to both accountants and auditors not only from a fiduciary aspect but also from the aspect of development. 5.32 The mandate and composition of the existing Public Auditing Profession Board should be changed to an Oversight Body of the profession, particularly in terms of adoption of standards and their enforcement, representing the main stakeholders of the profession in the private sector and Government. Membership has to include more members of the JACPA (say five from outside JACPA's Managing Committee) ) to represent the profession at large, preferably with provision that the JACPA representatives include two members who have recognized overseas qualifications with international firms to provide the wider vision of the international professional bodies. 5.33 The functions of the new Board would be to: * Supervise the integration of accountants and auditors ensuring that the new rules and by- laws are appropriate; Jordan: CFAA - 24 - October 2001 * Ensure the adoption and enforcement of international accounting and auditing standards; * Ensure the adoption and enforcement of internationally acceptable rules of ethics for the profession; * Oversee and control the issue of certification to JACPA members and issue licenses for auditing; * Ensure that the securities market and the business world in general have confidence and trust in the independence and professionalism of the body; and * Receive periodic reports (at least annually) from the JACPA with respect to its activities and its finances. * Monitor training of students and continuing education of JACPA members * Work with JACPA and the universities to develop an appropriate curriculum for accountants and oversee the examination process. 5.34 The Board needs to become more active than it currently is, meeting at least monthly, with greater involvement in enforcement of its rules and regulations. Taking into consideration that the greater number of members of the JACPA will be grand- fathered members who have not passed the examinations of the JACPA, self regulation of the JACPA should only be a long term vision for such time when it is a much stronger organization comprising a significant majority of members through examinations. 5.35 The Managing Committee of the JACPA should reflect the integration of qualified accountants currently excluded. Initial membership in the reformed JACPA should be limited to the current members plus qualified accountants who are not auditors. Who is a "qualified accountant" for this purpose will need to be determined, as it will be necessary to include those members of the existing Association of Accountants who have appropriate accounting degrees. It may also be necessary to grand father some very senior and experienced accountants with inadequate qualifications. Subsequently, membership should only be through examinations, with accountants with international qualifications required to take only one paper covering Jordanian company and income tax laws. 5.36 Auditing and Accounting Practices. Only JACPA members with an audit license should be able to issue audit opinion. ISA spells out the criteria to be considered for an auditor to accept appointment for a "special assignment" (such as one limited to a special review only) and the type of report necessary in such instances. 5.37 The JACPA should consider introducing a peer review system. Ultimately, the maintenance of standards and the reputation of the profession will depend very much on the demand of the users of their audits and the reputation of the profession. A Jordan: CFAA - 25 - October 2001 confidential peer review system would allow auditors to review each other's work on a test basis and use the resulting information for training and development within the profession. It may even be feasible to introduce this on a regional basis involving other Arab countries. 5.38 Classification of auditors may eventually be abandoned over time. ISA requires among other aspects that the auditor should be independent and have the required skills and competence. With respect to independence, it would be important to clearly define the non-audit duties that the auditor may be allowed to carry out. The proper application of skills and competence requires that the auditor only accept those assignments for which they have the technical competence, and the physical ability to carry out the assignment in a timely and efficient manner. As the profession grows and is strengthened over time, classification would eventually become unnecessary in the long run. 5.39 In all cases auditors should be required to carry out an audit in accordance with recognized auditing principles and ensure that relevant standards are observed. It is not feasible to develop a lower standard for auditing. The degree of auditing required depends on the complexity of the entity to be audited and the degree of risks associated with a particular audit. However, instead of an audit, it may be feasible in certain circumstances to carry out a special review procedure such as a compilation procedure for small entities and ISA does prescribe for such a review. 5.40 Consideration may be given for small companies to be given some leeway with respect to full adherence to IAS, particularly with respect to some aspects relating to disclosure. In any case, most of the more onerous requirements of IAS will not normally affect small companies. The Public Auditing Profession Board should discuss this further with the Controller of Companies. 5.41 IAS and ISA should be made available in Arabic to all members of the profession, with regular seminars and discussions to educate and provide up to date knowledge on particularly the more common and relevant areas applicable to the Jordanian environment. 5.42 Training. The examination curriculum for the JACPA needs to be revised and reimin predictable to fit the needs of an accounting profession; the universities need to participate in its development and be able to gear its teaching thereto; the rules should restrict the number of sittings and the exam fees increased to discourage the bss than serious student; and the examinations should be set by an examination committee comprising university professors, experienced and well-trained professionals conversant with international standards and the latest developments in the profession A very useful point of reference is UNCTAD/ISAR global qualification curriculum and IFAC education guidelines. 5.43. The proposed Technical Assistance program for the reform of the accounting profession should include expertise to review current training arrangements for accountants in Jordan and to develop an appropriate proposal for reform. Jordan: CFAA - 26 - October 2001 5.44 Implementation of the Changes. As in the case of other parts of the proposed reforms, the SC may need access to considerable amount of technical assistance funding. In the immediate future, special government support, and possibly support from private sector professional organizations, would help in mobilizing donors support. In the longer run, the JACPA should subsequently endeavor to become self - sufficient through measure such as: * Increased fees from what would be a larger JACPA membership; * The promotion of ongoing professional education (a requirement for all to retain their membership); and * The conducting of seminars and other activities for the financial community 5.45 The SC should obtain Technical Assistance (TA) from an international accounting body with experience in developing an accounting profession, to provide guidance and direction in the formulating of the new structure including sub committees, determining those to be grand fathered, and developing rules and regulations including ethics. TA is also necessary for the development of an appropriate and consistent curriculum and examination procedure, and for continuing education. Jordan. CFFAA - 27 - October 2001 Annex JORDAN Country Financial Accountability Assessment Documents on File 1. Working Paper I - Government Budget 2 Working Paper 2 - Government Accounting and Management Controls 3 Programme and Performance Budgeting - 1998, Swedish International Services 4 Financial Management Reforn in Jordan - 1999, Jordan - General Budge Department in cooperation with GTZ 5 Development Programme to Implement Accounting and Fmancial Disclosure Standard and Build capacity of Auditing and Accounting Profession in Jordan- 1999, Cornwilliam Consultants 6 Country Procurement Assessment Report - Jordan - 1999, World Bank 7 Public Sector Review of Jordan - 1999, World Bank 8 Country Profile of Financial Accountability - 1999, World Bank JORDANIAN LAWS Companies Law - No 22 of 1997 Public Auditing Profession Law - No 32 of 1985 Audit Bureau Law - No 28 of 1952 amended 1987 Income Tax Law -No 57 of 1985 amended 1992 and 1995 Securities Law - 1997 Investment Promotion Law and Regulations - 1997 Disclosure, Accounting and Auditing Standards - Directive No I of 1998 (Secunties Commission) Banking Legislation - Central Bank - 1994 Banking Law No 28 of 2000 Jordan CFAA - 28 - October 2001 I IMAGING Report No. 25738 i Type: CAS