Report No. 40089-MV Maldives Public Sector Accounting and Auditing A Comparison to International Standards June 2007 Financial Management Unit South Asia Region Document of the World Bank Abbreviations and Acronyms AG Auditor General CFO Chief Financial Officer CIPFA Chartered Instituteof Public Finance and Accountancy, United Kingdom GoM Government of Maldives IAASB International Auditing and Assurance StandardsBoard IAS International Accounting Standard IDF Institutional Development Fund IES International Education Standards for Professional Accountants IFAC International Federation of Accountants IFRS International Financial Reporting Standard INTOSAI International Organizationof SupremeAudit Institutions IPSAS International Public Sector Accounting Standards(of IFAC) IPSASB International Public Sector Accounting StandardsBoard ISA International Standardfor Auditing MoFT MinistryofFinance & Treasury NAO UKNationalAudit Office PAS Public Accounting System PEFA Public Expenditureand Financial Accountability PFM Public Financial Management PSC Public Service Commission PSTI Public Service Training Institute SA1 Supreme Audit Institution SOE State-Owned Enterprise iii Acknowledgments This assessment o f accounting and auditing standards and practices inthe public sector was carried out in active collaboration with the Government and various stakeholders, particularly the Auditor General and his staff; and the Ministry o f Finance and Treasury. The review was conducted through a participatoryprocess that involved these stakeholders whose responses to issues raised in the diagnostic questionnaires were especially useful. The team o f advisors and development partners also contributed greatly to the early stages o f the concept note and framework development, as well as drafting o f earlier reports for this study which ultimately covers the countries o f the South Asia Region: Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka. The following World Bank Task Team was responsible for this report with general guidance from the advisors on this review program and the development partners who collaborated in this program. The Maldives report benefited from the comments o f its peer reviewers, M. Mozammal Hoque, Senior Financial Management Specialist and Christian Eigen-Zucchi, Economist in the World Bank. The final report was developed after a consultative workshop held inMale on January 14, 2007 and was providedto the Government for comment. Subsequent to the workshop, the Audit Bill (2002) has also recently been enacted as an Audit Act on March 13, 2007 and accordingly, revisions have been made inthe report. Task Team P. K. Subramanian, Lead Financial Management Specialist Manoj Jain, Senior Financial Management Specialist Ronald Points, Lead Consultant, Accounting Michael Jacobs, Lead Consultant, Auditing ReviewProgram Advisors Simon Bradbury, Loans Department, World Bank David Goldsworthy, InternationalTechnical Cooperation Program, UK National Audit Office Noel Hepworth, Chartered Institute o f Public Finance and Accountancy, London Abdul Mudabbir Khan, Fiscal Affairs Department, InternationalMonetary Fund Ian Mackintosh, Chairman, UK Accounting Standards Board Paul Sutcliffe, International Public Sector Accounting Standards Board, International Federation o f Accountants DevelopmentPartner Collaborators on the ReviewProgram David Biggs, Financial Management Advisor, UK Department for InternationalDevelopment Kathleen Moktan, Asian Development Bank iv Contents Executive .. I INTRODUCTION 1 I1 PUBLIC SECTOR ACCOUNTING .. ......................................................................................................................... vu ........................................................................................................ .......................................................................... 2 A. InstitutionalFramework for Public Sector Accounting ............................................ 2 (1) Accounting Laws and Regulations ....... ........................................ .........2 (2) Education and Training........................ ........................................................... 2 (3) Code of Ethics....................................................................................................... 3 B.(4) Public Sector Accountant Arrangements.............................................................. 3 Accounting Standards as Practiced ............................................................................ 4 (1) Setting Public Sector Accounting Standards........................................................ 4 (2) Presenting Financial Reports............................................................................... 4 I1 PUBLIC SECTOR AUDITING . .................................................................................. 6 A. InstitutionalFrameworkfor Public Sector Auditing................................................. 6 (1) Institutional Framework....................................................................................... 6 (2) SettingAuditing Standards................................................................................... 7 (3) Code of Ethics........................................................................................................ 7 (4) Accountability in the SupremeAudit Institution.................................................... 7 (5) Independence......................................................................................................... 8 (6) Qualifications and Skillsfor theAuditors ............................................................. 8 (7) Training.......................... ........................................................................... (8) Audit Cornpetence........... ........................................................... (9) QualityAssurance .......... ........................................................... B. Auditing Standardsas Practiced................................................................................ 9 (1)Audit Planning....................................................................................................... 9 (2) Audit Supervision................................................................................................... 9 (3) Reviewing Internal Controls................................................................................ 10 (4) Reviewing Compliance........................................................................................ 10 (5) Analyzing the Financial Statements.................................................................... 10 I11 ACTION PLANS . ...................................................................................................... 11 ANNEX A: METHODOLOGY OF THE ASSESSMENT .......................................... 14 ANNEX B: ACCOUNTING AND AUDITING STANDARDS .................................. 16 International Public Sector Accounting andEducation Standards ............................... 17 International Financial Reporting Standards and International Accounting Standards 18 INTOSAICode of Ethics and Auditing Standards....................................................... 19 International Standards on Auditing ............................................................................. 21 ANNEX C: NATIONAL ACCOUNTING LEGISLATION 22 ANNEX D: NATIONAL AUDIT LEGISLATION ...................................................... ....................................... 24 ANNEX E: BENEFITS OF ACCRUAL BASIS OF ACCOUNTING ....................... 34 IPUBLICSECTORACCOUNTING . .......................................................................... 39 A. Assessment ofthe NationalPublic Sector Accounting Environment..................... 39 B. Assessment ofNationalPublic Sector Accounting Standards ................................ 41 I1 PUBLIC SECTOR AUDITING .C. Assessment of Accounting andAuditing inState-OwnedEnterprises...................42 ................................................................................ 44 A. Assessmentofthe Public Sector Auditing Environment........................................ 44 B. Assessment ofPublic SectorAuditing Standards andPractices............................. 51 SupplementalTable of Standardsand Gaps vi MALDIVES PUBLIC SECTOR ACCOUNTING AND AUDITING A COMPARISON TO INTERNATIONALSTANDARDS EXECUTIVESUMMARY 1. This assessment o f public sector accounting and auditing standards is generally meant to assist with the implementation o f more effective public financial management (PFM) through better quality accounting and public audit processes in Maldives. It is intended to provide greater stimulus for more cost-effective outcomes o f government spending. The specific objectives are (a) to provide the country's accounting and audit authorities and other interested stakeholders with a common well-based knowledge as to where local practices stand in comparison with internationally developed standards o f 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. The World Bank is supporting initiatives to develop local systems so that donors can increase their use o f country systems for their own grants and loans. Other donors are cooperating with the Bank inthis approach. 2. Adoption o f international standards for accounting and auditing provides the basis for 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 InternationalPublic Sector Accounting Standards (IPSAS) for accrual-based systems, as well as one for cash basis o f accounting. These establish an authoritative set o f independent international financial reporting standards for governments and others in public sector organizations. 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 meant for promoting social and economic development. The IPSASB has also developed guidelines for the migration from cash basis to accrual-based financial reporting.' The traditional emphasis on cash basis o f accounting has been found inadequate because o f its failure to recognize true costs, and all assets and liabilities. Cash basis o f accounting can too easily neglect asset management, accumulating arrears, future liabilities (e.g., pensions), and contingent liabilities (e.g., guarantees). 3. The International Organization o f Supreme Audit Institutions (INTOSAI) supports the development o f auditing standards developed by the International Auditing and Assurance Standards Board (IAASB). The INTOSAI Auditing Standards, which are supported by the detailed IAASB International Standards on Auditing (ISA) underpin a modern audit process. The IAASB is progressively rolling out international auditing standards in order to appropriately reflect the interests o f the international public sector audit community. 4. Annex A explains the methodology used for the study. Annex B provides a summary of international accounting and auditing standards referred to in this study. Annex C and D provide country accounting and auditing legislation, respectively. Lastly, Annex E includes a description o f I Transition to theAccrual Basis ojdccounting: Guidancefor Governmentsand Government Entities,Study 14, IFAC Public Sector Committee, December2003. vii the benefits o f accrual accounting. The desired actions indicated by this assessment are summarized below. 5. Build on the current cash basis of financial reporting under the Cash Basis IPSAS and chart a path to subsequent implementationof the Accrual Basis of Accounting. The IPSASB encourages governments to progress to the Accrual Basis o f accounting and to harmonize national requirements with the IPSAS. Immediate reporting in the format of the Cash Basis IPSAS, and then progressive adoption o f Accrual Basis reporting i s needed to meet the requirement o f the Public Finance Act. 6. A Supplementary Table o f Standards and Gaps o f this report provides a matrix detailing the accounting standards, the present position, and options for improvement. A summary o fthese accounting issues is shown inTable ES1. iards Issues in the Maldives Standard Current status Action to move towardsinternational standards The Auditor Generalwould prescribethe Law adopt IPSAS? adoption of IPSAS for Maldives (to be confirmed and communicatedby GoM by March. 2007). 2. Does educationandtraining o f No Distance learning education arrangements accountants accordwith IES? are needed. A proposal is required to be draftedjointly by Ministryof Higher Education, Public Service Training Institute (PSTI), Public Service Commission (PSC), Ministry of Finance and Treasury (MoFT) and the AG by June, 2007 (led by MoFT) 3. Doesthe Code of Ethicsmatch No There is a needto develop a Code. The international standards? MoFT is to develop aCode of Ethics for public sector accountants -by December, 4. I s there abody to prescribepublic The Auditor MoFT will be issuing implementation sector accounting standards? Generalhas this guidelines as per the principles and responsibility standardsprescribedby the AG. underthe proposedAudit Act. 5. Are the financial statements in No By June, 2007, MoFT would form a accordwith international standards? Committee to define the reporting entity. 6. I s the statement o f CashReceipts No IPSAS format will be usedas part ofthe roll and Payments inIPSAS form? out ofthe Public Accounting System (PAS) 7. Are accountingpolicies and No project -by January, 2009. explanatorynotes required? The IPSAS formats for statements, 8. Are other disclosures inaccord No explanatory notes and disclosures will be with IPSAS? used as part ofthe roll out ofthe PAS project -by January, 2009. 9. Does the government issue a No consolidatedfinancial statement which consolidates all controlled entities? viii 1. 7. Adopt the IFAC-issued International Standards on Auditing to the more specific INTOSAI Auditing Standards, as well as to existing audit manuals and procedures. The new, amended Audit Act mandates the adoption of international standards. The Auditor General currently uses an Audit Manual which follows the prescriptions of the INTOSAI Auditing Standards but they have not been formally adopted. The implementation of the new Audit Act and the implementation of an Institutional Development Plan for the Office of the Auditor General should introduce modern audit reporting and a modern audit organizationU2 Audit recommendations and observations should bemade public. 8. A Supplementary Table of Standards and Gaps of this report provides a matrix detailing the current standards, present position, and options for improvement. A summary of these auditing issues are shown in Table ES2. Table ES2. Summary of L diting Standarc Issues in the Maldives Standard Current status Action to move towards international standards 1. I s the SA1statutory framework inaccord Yes" The Republicof Maldiveshas recently with the needs o fthe INTOSAIAuditing enactedthe Audit Act (includedinAnnex D) Standards? following the workshop inJanuary2007, which provides an adequate statutory framework.The effectivenessofthe implementationofthe new Audit Act is yet to be seen 2. I s there a bodyto prescribepublic sector yes4 The Audit Act needs to prescribethe AG as auditingstandards? the responsiblebody and S. 5 ofthe recently enactedAudit Act (included in Annex D) providesthis. The AG couldworkjointly with the proposedprofessional body to develor, imulementationguidelines. 3. Have INTOSAIandIFAC audit The Audit standards beenadopted? Manualis based on them. 4. Has acode of ethics equivalent to the No A code will be developedas part ofthe INTOSAIstandards beenadopted? ongoingIDF grant and it needs to be adopted by the AG. (by Jan.2008) 5. I s the accountabilityprocess inthe SA1in No An annualreport is requiredby 2007. accordwith INTOSAIAuditing Standards? 6. Does the SA1legal frameworkmeet the No The new Audit Act at Annex Dprovidesfor INTOSAIstandards for independenceand these and satisfactorily adoptsthe powers? recommendationsmade by the UKNational Audit Office (NAO) team andthe Task Team (World Bank)) on the draft Audit Bill examined duringthis study . 7. Does education andtraining of auditors No A needs analvsis is beingcarried out bv the This is proposedto be completed under an IDF grant financed by the World Bank for institutional development and capacity building ofthe audit office of Maldives. Current status has recentlychangeddue to enactment ofthe Audit Act on March 13,2007 4Current status has recentlychangeddue to enactment of the Audit Act on March 13, 2007 ix Standard Current status Action to move towards international standards accordwith INTOSAIand IES standards? NAO institutional strengtheningteam. Formation of the proposedprofessionalbody and opportunities like overseas practical experience or secondment andjoint audits with other SAIs andor professionalfirms couldhelp. A proposal is to be draftedjointly byMinistry ofHigher Education, PSTI, PSC, MoFT andthe AG by June, 2007 (led by MoFT) for creating institutional educationand training facilities inMaldives supported, if needbe, by distance learning syllabi from academic and professional bodies overseas. 8. I s the SA1equippedwith the audit No The ongoing IDF grant will give assistancefor methods and technologiesto meetthe developing this, but additional computer INTOSAIAuditing Standards? software and hardware are neededby 2008 for certification auditing. 9. Does the SA1have the quality assurance No The ongoing technical assistancethrough IDF programs to meet international standards? will introduce this programby Sep.2008. 10. Doesthe processto planthe audits meet Yes international standards? 11. Doesthe process to supervisethe audits Yes meet international standards? 12. Doesthe process to evaluatethe Yes reliability of internal controls meet international standards? 13. Does the process used in audits to assess Yes compliancewith laws meet international standards? 14. Doesthe audit process usedto obtain Yes evidence to support conclusionsmeet international standards? 15. Doesthe audit analyzethe fmancial No Certification audits from 2009 will needthis statements to establishwhether acceptable capacity and the technical assistance will accountingstandards for financial reporting provide it. and disclosure are complied with? 16. Doesthe auditor prepare an audit Yes for the Certification audits from 2009 will needthis opinion on the financial statements ina SOEs capacity andthe technical assistancewill form that accords with international provide it. standards? 17. Doesthe considerationof fraud and Yes error inan audit of financial statements accordwith international standards? 18. Is the process for taking action on audit No, because The recently enactedAudit Act allows public recommendationssufficiently effective to the audit reporting. Its implementation and meet international standards? reportsare not effectiveness needsto be examined made public 19. I s the process for taking action on audit No The IDF grant TA will cover the preparation recommendationssufficiently effective to ofrecommendationsfor this. X 9. Improve publicfinancialmanagement through a more effective chieffinancial officer arrangement.' The Public Finance Act relies on a comprehensive and timely accounting and financial reporting system that is supported by competent assurance from a professional audit function that the system is working properly and that the information is reliable. The accountable officers required for the new public finance system should undertake the functions of maintaining systems of internal financial controls that manage risks, and for preparing the accounts for signature. There should be a requirement for all government bodies including state-owned enterprises to make their audited accountspublic. 10. Improve accounting and auditing skills. Improved compliance with international standards requires properly trained staff. Basic accounting and auditing skills needto be enhanced. Distance learning education arrangements with foreign accounting institutions could be used to strengthen public sector accounting and auditing skills. 11. Improve audit impact. Prepare a PFM indicators survey to provide the basis for monitoring progress in adopting and applying international standards. Improvement of audit impact should be monitoredthrough the progress of the Institutional DevelopmentPlan proposed to strengthenthe Office ofthe Auditor General over the nextfew years. A financial controller for the Government was appointed in March 2006, as required under the recently enacted Public FinanceAct 2005. xi I. INTRODUCTION 1. This assessment o f public sector accounting and auditing is to facilitate more efficient implementation of Public Financial Management (PFM) in Maldives through better quality accounting and public audit processes. It i s intended to provide greater stimulus for more cost- effective outcomes o f 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 comparison with 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. In conducting this assessment of the Maldives, 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 from diagnostic questionnaires that were completed in cooperation with country authorities. The diagnostic questionnaires incorporated the principles contained in the public sector accounting and auditing standards promulgated by InternationalOrganization o f Supreme Audit Institutions (INTOSAI) and International Federation of Accountants (IFAC). The responses to these questionnaires were further explored through discussions conducted by a World Bank team with the country authorities. These discussions includedexamination of accounts and audit reports and working papers, to explore the quality of the processes and the products. Annex A further explains the methodology used for the assessment. 3. The analysis inthis report has been conducted inthe light o f PFM reform plans that the Government of the Maldives has been implementing. A Public Finance Act was enacted in 2005. In response to the Act, the Ministry of Finance and Treasury is engaged in implementing an accounting system to support annual accounts for each ministry and for the State. The legislature is in the process o f approving a new National Audit Act. The Auditor General has been invited to form a committee that will provide comments on the proposed law. The legislation of a new National Audit Act and the implementation of an Institutional Development Plan for the Office of the Auditor General should introduce modern audit reporting and a modern audit organization. A program for provision of technical assistance to the Office of the Auditor General is under implementation through an Institutional Development Fund (IDF) grant provided by the World Bank. 4. Annex B provides a summary o f international accounting and auditing standards referred to in this study. Annex C and D provide country accounting and auditing legislation, respectively. Annex E includes a description of the benefits of accrual basis of accounting. The report is accompanied by a Supplemental Table of Standards and Gaps, which summarizes for each component of current accounting and auditing standards, the present position, and the options for improvements that would bring Maldives into closer conformance with the international standards. 1 11. PUBLIC SECTORACCOUNTING A. Institutional Framework for Public Sector Accounting 5. The institutional framework should include adherence to IFAC-issued International Accounting Standards. And it should support the groundwork for 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 in this assessment collected information on the current arrangements and the apparent gaps in Maldives for accounting laws and regulations; education and training o f public sector accountants; application o f a code o f conduct; and numbers and characteristics o f public sector accountants. (1) Accounting Laws and Regulations 6. The Public Finance Act and the Financial Regulations are prescriptiveabout the maintenanceand compilationof accountsbut make no mentionof InternationalAccounting Standards. The Public Finance Act (see Annex C) should require conformance with International Public Sector Accounting Standards (IPSAS). However, under the Public Finance Act, there are proposed rules that would promulgate the allowance o f IPSAS to be followed. The future accounts should be based on Cash Basis IPSAS with notes providing other information on assets, liabilities, and contingent liabilities as required by the Public Finance Act. Progression to accrual-based statements would occur as adequate computerized accounting systems are rolled out. 7. A modern financial reporting framework is required for better accountability. The accounting function has been located in the Treasury. However, this has not provided a good separation o f duties among departments. As new computerized public accounting systems are implemented, more suitable accounting units must be established, preferably in the ministries. Producing annual audited accounts within each government department will hold senior departmental managers accountable for their operations and use o f budget funds. Development o f the computerized accounting system has a tight timeline requiring intensive efforts for meeting the targets. The World Bank will provide the Ministry o f Finance and Treasury with technical advice on the progressive design and implementation o f the computerized public accounting system. (2) Education and Training 8. Better opportunities for educating and training government accountants should be developed. Government accountants are recruited with limited accounting knowledge due to the lack o f proper curricula in universities. Government accountants need exposure and training in international accounting standards from professional institutions. Many training institutions provide a foundation for public sector accountancy qualifications o f international standards, on an outreach basis. There is no comprehensive local training institution in Maldives, but the professional certification offered by the UK Association o f Chartered Certified Accountants is available locally up to Stage 2. These professional accounting outreach programs will provide the core competencies needed for public sector accounting and reporting. 2 9. A training program that meets the IFAC-issued International Education Standards (IES)for ProfessionalAccountants is neededfor the publicsector accountantsand auditors. Consideration should be given in due course to adopting the public sector program of institutes likethe Chartered InstituteofPublic Finance andAccountancy (CIPFA) inUnitedKingdom. This course can be adapted for local conditions and would provide a path for sustained, improved training. The advantage o f this is that the CIPFA learning materials take into account international audit and accounting standards as required for adoption by public sector organizations. Among the CIPFA learning materials are modules covering financial reporting, accounting for decision-making, financial management, law and taxation, and information systems management. 10. The Ministry of Finance and Treasury needs to develop training plans. There is a need for constant upgrading of training for government accountants in the requirements of the Public Finance Act and the Public Financial Regulations and in the standards for preparing financial statements. (3) Code of Ethics 11. A code of ethics is needed to improve financial compliance and build the professionalismof the government accounting staff. The current code in practice is part of the government employment contract and relates to public service behaviour. It has little relevance to the IFAC Code o f Ethics for Professional Accountants. A strongly directed code of ethics could help build public support that would aid in improving the state of public financial management in the country. The IFAC Code of Ethics should bethe model usedinpreparingthe national code. 12. The training programs should include ethics training and how the code ensures proper behaviour. With certification under the professional qualifications outreach programs, accounting staff will be required to follow a code of ethics and conduct. For example government accountants who are accepted into membership of professional institutes -whether as affiliates (for the Diploma holders) or as qualified accountants (for those who complete the full professional qualification) -would be requiredto abide by the code of ethical standards o f the respective institute, which is based on the IFAC Code. (4) Public Sector Accountant Arrangements 13. The preparation of financial statements for each ministry requires a system of internal control. For each public sector body that prepares annual accounts, there should be a professionally qualified chief financial officer function.6 The person in this position would be responsible for maintaining systems of internal financial controls that manage risks, and for preparing the accounts for signature by the chief accounting officer. The need to produce financial statements for each ministry would require well-working systems of internal financial controls. At the present time audit results are not being translated sufficiently into remedial action. The Public Finance Act provides for an accountable officer (with the functions o f a chief financial officer) for each ministry. The duties of the accountable officer are yet to be defined in the Public Finance Instructions, butthey should includethe following functions: A financial controller for the Government was appointed in March 2006, as required under the recently enactedPublic FinanceAct 2005. 3 0 maintain systems o f internal financial controls that manage risks, 0 ensure that accounting and financial approval duties are properly carried out, 0 ensure that the staff perform their duties in accordance with the Public Finance Instructions, 0 prepare regular financial accounts, 0 maintain the chart o f accounts, 0 ensure the most appropriate technological support for financial management practices, 0 manage training and education needs for financial management, 0 report on key performance indicators, and 0 assist program managers in developing an effective financial approach to the delivery o f expected outcomes. B. Accounting Standards as Practiced 14. The diagnostic questionnaires have collected information on the current arrangements and the apparent gaps for setting public sector accounting standards and for presenting financial reports. Out o f this exercise came recommended activities that will help bring local standards in line with international standards. (1) Setting Public Sector Accounting Standards 15. More formal administrativeactions should be taken by the Auditor Generalto set public sector accountingstandards. Under the Constitution, the accounts o f the State are kept and maintained in such form and manner as prescribed by the Auditor General in consultation with the President o f Maldives. The Public Finance Act sets the form o f the annual accounts but does not specify the accounting standards required in preparing financial statements. The Auditor General should advise the President that Cash Basis IPSAS should be used as the international accounting standard in preparing financial statements with a road map to move to full accrual- based reporting over a period o f time. (2) PresentingFinancial Reports 16. Annual financial statements should be prepared in accordance with Cash Basis IPSAS, with some early planning for effecting a transition to adopt accrual-based IPSAS. The current annual reporting statements do not accord with the format o f the Cash Basis IPSAS but steps should be taken that allow them to do so inthe future. The Auditor General should hold discussions with the Ministry o f Finance and Treasury to arrange for the setting o f standards in a formal manner and to reach an agreement that future accounts be presented in the format o f Cash Basis IPSAS. Also 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) should be considered. 17. State-owned enterprises should comply with new governance requirements established by the Public Enterprise Monitoring Board. State-owned enterprises follow International Financial Reporting Standards (IFRS), as issued by the International Accounting 4 Standards Board (IASB) which require that the financial accounts should be produced annually within three months o f the year-end, in accordance with good accounting practice, and should include the following: 0 Profit and loss accounts for the year. 0 Cash flow statements for the year. 0 Balance sheet showing the position at year end. 0 Notes to support the financial accounts that set out the company's accounting policies and the main components o f the accounts as required by good practice. The financial accounts should also be accompanied by a director's report that details financial activities o f the company inthe past and future. 18. All government bodies should be required to make all audited accounts available to the public. At present few accounts are available publicly, and governance requirements about the public availability and transparency requirements for these annual accounts should be made clearer. 19. The Auditor General should arrange consultations with the accountancy professions in the neighboring countries to consider ways of establishing similar professional accountancy arrangements in the Maldives. The Public Enterprise Monitoring, which receives the audited accounts o f state-owned enterprises, notes that in a few cases there have been audit qualifications to the accounts that have mainly been related to assets issues. This i s one example o f accounting problems that exist in the Maldives. The country does not have a professional accountancy body to help regulate and support the profession. Other countries in the Region have larger numbers o f professionals and operate professional bodies to regulate and support the accountants. The level o f professionalism in the Maldives may be improved by regional consultations and cooperation to develop similar arrangements inthe country. 5 II. PUBLIC SECTOR AUDITING A. Institutional Framework for Public Sector Auditing 20. Effective scrutiny by the legislaturethrough comprehensive, competent external audit underpinned by internationalstandards on auditingenables accountability for the implementation of fiscal and expenditure policies. The environment for an effective Supreme Audit Institution (SAI) requires a comprehensive approach to public financial management. Supreme Audit Institutionsare not stand-alone institutions; they are part of a PFMarchitecturethat also includes budgeting, accounting, internalcontrol, audit and legislativeoversight, and government response. Improving the way the Maldives Supreme Audit Institution functions is integral to providing information for improvingthe overall PFM system, but the action must be within the executive branchunderthe watchful eyes ofthe legislatureandthe public.A strongdemandfor goodpublic sector external auditing is necessary for the Supreme Audit Institutionto have any impact.This requires willingness of the executive branch to accept and respond to external scrutiny over its managementof funds and to ensure that reform action is taken. It also requires public disclosure of the audit reports inorder to ensurepublic support for effectiveaction. 21. The diagnostic questionnaires used in this assessment collectedinformationdescribing the current audit arrangementsinMaldivesandthe apparent gaps inthe following areas: Institutionalframeworkfor the SupremeAudit Institution, Processfor settingauditingstandards, Use ofcode of ethics or codes of conduct, Arrangements to ensureaccountabilityinthe SupremeAudit Institution, Arrangements to ensure independence, Arrangements to ensureadequate skills andqualificationsfor the auditors, Arrangements for providingtraining, Arrangements to ensurea desiredlevelof competence for the auditors, and Arrangements for qualityassurance. (1) Institutional Framework 22* The appointment and powers of the Auditor General need to be adequately covered in the Audit Act. The Constitution and relevant laws provide for the President to appoint the Auditor General with a mandate to audit all government bodies, but does not require that audit reports be published. Commercial state-owned enterprises are audited by accounting firms and can be also reviewedby the Auditor General.The newNationalAudit Act which was a draft at the time of the study workshop in January 2007 was legislated soon after. Discussions during the workshop also included some desirable changes to improve the effectiveness of the Audit function. Some revisions have now been made to the final Act, and these revisions do provide additional value to the final legislation, which now provides for a better institutional framework. 6 (2) SettingAuditing Standards 23. The Audit Act empowers the Auditor General to set auditing standards. The Auditor General should formally adopt INTOSAIAuditing Standards and InternationalStandards on Auditing promulgatedby the InternationalAuditing and Assurance Standards Board(IAASB) of the IFAC. The AustralianNationalAuditing Office Auditing Standards provide a model that incorporates the relevantprofessionalstandards and adds some specific public sector standards.7 The INTOSAIAuditing Standards supported by the detailed IAASB International Standards on Auditing underpina modern audit process. The IAASB is progressivelyrolling out International Standardson Auditing. INTOSAI supports the IAASB's development of auditingstandards.This i s being done in particular so that the IAASB InternationalStandards on Auditing appropriately reflectthe interests ofthe internationalpublic sector audit community. 24. The IAASB International Standards on Auditing represent the best international practices for the auditingprofession, particularlyin such areas of fundamental auditingpracticeas the following: auditevidence, documentation, auditmateriality, fraud, audit errors, audit opinions, audit planning, controlenvironment assessments, and supervision o fthe work of auditstaff, (3) Code of Ethics 25. The Auditor General should adopt the INTOSAI Code of Ethics. Along with INTOSAI's Lima Declarationof Guidelines on auditing precepts,8the INTOSAI Code of Ethics i s consideredan essential complement to the INTOSAIAuditing Standards.A code of ethics i s a statement of values and principles guiding the daily work of the auditors. The Supreme Audit Institutionhas adopted neither the IFAC-issuedCode of Ethics for ProfessionalAccountants nor the INTOSAICode of Ethics. (4) Accountability in the Supreme Audit Institution 26. The Institutional Development Plan in strengthening the Office of the Auditor Generalshould assist in the designof the annualreport requiredby the PublicFinance Act. An Institutional Development Plan and capacity-building technical assistance are under implementationat the time of this assessment. The technical assistance should give aid to the advisement on the development of an annual report on operations and performance. This report would provide an objective, balanced, and understandable account of activities and achievements and providetransparency inthe accountabilityprocess. 7 * Notified intheAustralian CommonwealthGazetteNo. GN4.5,November 16, 2005 LimaDeclarationof GuidelinesonAuditingPrecepts, October 1977,INTOSAI 7 (5) Independence 27. The National Audit Act should provide effective independence to the Auditor General. Five o f the eight core principles o f SA1 independence that were set out by INTOSAI were only partially, if at all, met by the legislative and administrative framework prevalent at the time of the study workshop in January 2007. These are: 0 The independence o f the SA1 Heads including security o f tenure and legal immunity in the normal discharge o ftheir duties. 0 The obligation to report. 0 The freedom to decide on the content and timing o f SA1 reports and to publish and disseminate them. 0 The existence o f effective follow-up mechanisms on SA1recommendations. 0 Financial and managerial autonomy and the availability of appropriate human, material, and monetary resources. The recently enacted Audit Act now satisfactorily resolves some o f these concerns but some concerns still remain. They are (i)specific term o f appointment for the Auditor General is still not set, (ii)reporting requirements are still fairly minimal, (iii)there is no statement o f legal immunity,and (iv) there is little to guarantee follow up o fthe audit reports that are made, (6) Qualificationsand Skills for the Auditors 28. Improved distance learningeducation is neededto establishthe necessarystandards for training and education. The quality o f accounting and auditing educational and training arrangements in the Maldives does not meet the needs o f modern accounting and financial management. The ongoing technical assistance from the World Bank will look at training and certification needs, and provide a long-term human resource plan. (7) Training 29. An in-house training unit fop government auditorsshould be introduced. At present training i s achieved through overseas courses. The technical assistance from the World Bank includes buildingan in-house training capacity. 30. A skills analysis program based on internationalstandards for competenciesshould be conducted. The Office o f the Auditor General does not have basic facilities for training, research, and development. A proper needs-based approach is required that will support the introduction o f an audit methodology, and international accounting and auditing standards. The Institutional Development Plan would be usedto re-assess these needs. 8 (8) Audit Competence 3 1. The roll-out of a computerized accounting system is likely to take some years and at that stage the Auditor General will require additional hardware and software support. The technical assistance from the World Bank will develop training toolkits covering audit methodology, reporting, and quality control for financial and computerized audit. (9) QualityAssurance 32. There is a need to introduce a system of quality assurance. This requirement is included in the ongoing technical assistancefrom the World Bank. B. Auditing Standards as Practiced 33. The diagnostic questionnaires have been used to collect information about the current arrangements for the audit methodology and the apparent gaps in the country for: audit planning audit supervision reviewing internal controls reviewing compliance with laws ensuringthat adequate audit evidence is collected analyzingwhether the financial statements accord with accounting standards preparingaudit opinions reporting on fraud, and reporting on compliance. Out of this exercise came recommended activities that will help bring local standards in line with international standards. (1) Audit Planning 34. The updatedAudit Manualwould provide a sound basis for audit planningand thus needsto be implemented. Improvements in implementationwill occur as training is provided in certification audit under the technical assistance. (2) Audit Supervision 35. A more rigorously applied working paper system is needed to ensure proper supervision. Current supervision is hampered by incomplete working papers. Quality assurance as required by the Audit Manual will helpto ensure that supervision takes place properly. 9 (3) Reviewing Internal Controls 36. An update of the Audit Manual will support the review of internal controls. The general budget sector audits examine transactions in accordance with the rules established by the Financial Regulations. They therefore report on where controls have not been applied. They approach the audit from the perspective o f material misstatement o f an accounting figure. INTOSAI has issued a paper on internal control standards that provides a good international benchmark for assessing internal control^.^ The technical assistance will provide the basis to provide any necessary updates to the Audit Manual. (4) Reviewing Compliance 37. Necessary steps need to be taken in order to maintain compliance of audit work. Publishing audit reports, monitoring the implementation o f the recommendations, and reporting on the process in the annual performance report are all necessary. The Office o f the Auditor General uses much o f its resources for the compliance type of audit work. An important issue is whether the audits are effective in dealing with instances o f noncompliance. In the absence o f published audit reports, there is little opportunity to press for response effectively. (5) Analyzing the Financial Statements 38. The Public Finance Act requirescertificationof ministry and government financial statements. The technical assistance from the World Bank will help develop effective analytical tools. A revised audit methodology will improve the way the Office o f the Auditor General analyzes financial statements. 9 Guidelines for Internal Control Standards, Internal Control Standards Committee, International Organization of Supreme Audit Institutions, 1998. 10 Ill.ACTION PLANS Accounting StandardsIssue Current status Action to be taken to move towards international standards 1. Has the Public Sector No The Auditor General(AG) would prescribe AccountingLaw adopted the adoptionof IPSASfor Maldives (to be IPSAS? confirmedandcommunicatedby GoMby March,2007). 2. Doesthe educationand No A proposalis requiredto be draftedjointly trainingof accountants' accord by Ministry ofHigherEducation, Public with IES? ServiceTrainingInstitute(PSTI), Public ServiceCommission(PSC), Ministryof FinanceandTreasury (MoFT) andthe AG by June, 2007 (ledby MoFT) 3 . Doesthe ICABCode of No The MoFT is to developa Code ofEthics Ethicsmatchinternational 1IIfor Dublic sector accountants -by standards? Deiember,2007. 4. I s there a bodyto prescribe The Auditor Generalhas this II MoFT will be issuingimplementation - - public sector accounting responsibility underthe guidelinesas per the principles and standards? Constitution standards prescribedby the AG. 5. Are the financial statements in No By June, 2007, MoFTwould form a accordwith the IPSASstandard? Committeeto define the reportingentity. 6. I s the statement of cash IPSAS format will beusedas part ofthe roll receiptsandpaymentsinIPSAS out ofthe accountingsystem project-by format? January, 2009. 7. Are accountingpolicies and a I No The IPSASformats for statements, explanatory notesrequired? explanatorynotes anddisclosureswill be usedas part ofthe roll out ofthe PAS 8. Are other disclosuresin project-by January, 2009. accordwith IPSAS? 9. Doesthe governmentissue a No consolidatedfinancial statement which consolidatesall controlled entities? Auditing StandardsIssue Current status Action to be taken to move towards international standards 1. I s the SA1statutory Yes'" The Republic ofMaldiveshas recently framework inaccordwith the enactedthe Audit Act (included inAnnex needs ofthe INTOSAIAuditing D) followingthe workshop in January 2007 Standards? andprovides an adequate statutory framework. The effectivenessofthe implementationofthe new Audit Act is yet to be seen lo Current status has recently changeddue to enactment ofthe Audit Act on March 13,2007 11 Auditing Standards Issue Current status Action to be taken to move towards international standards 2. Is there abody to prescribe Yes The Audit Act needsto prescribethe AG as public sector auditing standards? the responsiblebody and S. 5 ofthe recently enactedAudit Act (included inAnnex D) does this. The AG could work jointly with the proposedprofessionalbody to develop implementation guidelines. 3. Have INTOSAIand IFAC Yes. The Audit Manual is audit standardsbeen adopted? basedon them. 4. Has a code of ethics Not for the core public A code will be developed as part of the IDF equivalentto the INTOSAI sector. Most SOEs are grant and it needs to be adoptedby the AG. Auditing Standardsbeen auditedby the private sector (by Jan.2008) adopted? auditors. 5. I s the accountability process No An annualreport is required by 2007. inthe SA1inaccordwith INTOSAIAuditing Standards? 6. Doesthe SA1'legalframework No The new Audit Act at Annex Dprovidesfor meet the INTOSAIAuditing these and satisfactorily adopts the Standards for independence and recommendationsmade by the UK National powers? Audit Office (NAO) team and the Task Team (World Bank)) on the draft Audit Bill examinedduringthis study . 7. Doesthe education and No A needs analysis is being carried out by the training of auditors accordwith NAO team. Formation of the proposed INTOSAIand IES? professionalbody and opportunities like overseaspractical experienceor secondment andjoint audits with other SAIs and/or professional firms could help. A proposalto be draftedjointly by Ministry of Higher Education, PSTI, PSC, MoFT and the AG by June, 2007 (led by MoFT) for institutional education andtraining facilities inMaldives supportedas necessaryby distance learning syllabi from academic and professionalbodies overseas. 8. I s the SA1equippedwith the No The ongoing IDF grant will give assistance audit methodsand technologies for developing this, but additional computer to meet the INTOSAIAuditing software and hardware are neededby 2008 Standards? for certification auditing. 9. Doesthe SA1havethe quality No The ongoing technical assistance through assurance programsto meet the IDF will introduce this program by international standards? Sep.2008. 10. Doesthe processto plan the Yes The developmentplan will address audits meet international variations inplanning requirementscaused standards? by the Public FinanceAct. 11. Doesthe processto Yes supervise the audits meet international standards? 12. Doesthe process to evaluate Yes the reliability of internal control IICurrent status has recently changeddue to enactment ofthe Audit Act on March 13,2007 12 Auditing Standards Issue Current status Action to be taken to move towards international standards meet international standards? 13. Does the process used in Yes audits to assess compliance with laws meet international standards? 14. Does the audit process used Yes to obtain evidence to support conclusions meet international standards? 15. Does the audit analyze the No Certification audits from 2009 will needthis financial statementsto establish capacity and the technical assistancewill whether acceptable accounting provide it. standards for financial reporting and disclosure are complied with? 16. Does the auditor prepare an For SOEs commercial Certification audits from 2009 will needthis audit opinion on the financial sector auditors use capacity and the technical assistancewill statements ina form that accords international standards. For provide it. with international standards? the government no certified accounts are produced at present. 17. Does the consideration o f Yes fraud and error in an audit o f financial statements accord with international standard? 18. Are the Auditor General's No The new Audit Act includes public reports made public? reporting o fthe audit report on the annual financial statements o fthe Government. It will be important for reports on all audits done to be made public as well as be included inthe quarterly reports to the Parliamentary Committee. 19. I s the process for taking No The IDF grant will cover the preparation of action on audit recommendations recommendations for this. The Audit Act sufficiently effective to meet specifies that the Auditor General will international standards? submit quarterly reports on work undertaken by his Office to a Parliamentary Committee acting inthe capacity of a Public Accounts Committee. 13 ANNEX A: METHODOLOGYOFTHE ASSESSMENT As part o f the general support program in South Asia for the assessment and improvement o f public sector accounting and auditing against international standards, the World Bank i s conducting the Review o f Public Sector Accounting and Auditing Practices in member countries, with the cooperation o f member governments. The development o f the Public Financial Management (PFM) Performance Measurement Framework12 by the Public Expenditure and Financial Accountability (PEFA) Program13 has opened the way for a diagnostic tool to be developed that is referenced to the accounting and auditing standards o f International Federation o f Accountants (IFAC) and InternationalOrganization o f Supreme Audit Institutions (INTOSAI), and other relevant international benchmarks. This exercise provides substantial insight into country performance in regard to the external auditing and financial statement reporting FM indicators. A set o f6 questionnaires are 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, and ethical requirements compared with the IFAC Code o f Ethics for Professional Accountants. Public sector accounting practices for the general budget sector if usingthe cash basis o f accounting-compared with the requirements o f the Cash Basis International Public Sector Accounting Standards (IPSAS). Public sector accounting practices for the general budget sector if using the accrual basis o f accounting-compared with the PSAS requirements that govern accrual reporting for the public sector. Public sector auditing environment compared with the provisions o f the INTOSAI Code o f Ethics and the INTOSAI general standards. Public sector auditing practices compared to the requirements o f the INTOSAI field standards and reporting standards, and the IFAC International Standards on Auditing. Accounting and auditing practices for state-owned enterprises-compared with the requirements o f the International Financial Reporting Standards (IFRS) and International Standards on Auditingthat govern commercial reporting. The responses to the diagnostic questionnaires, prepared by the relevant authorities o f the country, with the help, as necessary, o f in-country experts retained by the World Bank, are ''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 ofPFM performanceprogress, and creating a common platform for dialogue. l3 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 InternationalMonetary Fund and the Strategic Partnership with Africa. A Steering Committee, comprising members of these agencies, manages the program. A Secretariat is located in the World Bank in Washington, DC. 14 supplemented by a due diligence review conducted by members o f a World Bank task team from the country. Various documents are examined as part o fthe 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 reviewed by an expert panel o f advisors before examination by the World Bank country team. The draft i s then shared with the Government for response before finalization. 15 ANNEX B: ACCOUNTING AND AUDITING STANDARDS This section contains a summary o f the frameworks that have been used for the public sector accounting and auditing assessment. These have been compiled by the International Accounting Standards Board (IASB), the International Federation of Accountants (IFAC) and the International Organization of Supreme Audit Institutions (INTOSAI), which are cooperating in setting international standards for accounting and auditing. The IASB is an independent, privately funded accounting 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 cooperates 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 headquarters in New York, USA and i s comprised of 163 member bodies, mainly the national professional accountancy bodies of most countries around the world. The IFAC Board established the 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.org/publicsector. The first 20 IPSAS are basedon 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 Standardson Auditing (ISA) and is now working in cooperation with INTOSAI on preparing public 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 inthe Vienna offices of the Auditor General of Austria. Its Auditing Standards Committee, chaired by the Auditor General of Sweden, produces the 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 i s working with the IAASB to preparepractice notes explaining the application of each ISA inthe public sector.l4 The various standards are listed on the following pages. 14 Working Group on Financial Audit Guidelines, INTOSAI Auditing Standards Committee, Swedish NationalAudit Office, 2004. 16 International Public Sector Accounting and Education Standards InternationalPublic Sector Accounting Standards IPSAS 1,Presentation of Financial Statements IPSAS2, CashFlow Statements IPSAS 3, Net Surplus or Deficit for the Period, Fundamental Errors and Changes in Accounting Policies IPSAS4, TheEffects of Changes in Foreign Exchange Rates IPSAS5, Borrowing Costs IPSAS6, ConsolidatedFinancial StatementsandAccountingfor ControlledEntities IPSAS7, Accountingfor Investments inAssociates IPSAS8, Financial Reporting of Interests in Joint Ventures IPSAS9,Revenuefrom 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 GeneratingAssets CashBasis IPSAS, Financial Reporting under the Cash Basis of Accounting InternationalEducationStandards IES 1,Entry requirements to aprogram ofprofessional accounting education IES2, Content ofprofessional accounting educationprograms IES 3, Professional skills IES4, Professional values ethics and attitudes IES 5, Practical experience requirements IES6, Assessment ofprofessional capabilities and competence IES7, Continuingprofessional development IES 8, Competencerequirementsfor auditprofessionals 17 International Financial Reporting Standards and InternationalAccounting Standards IFRS 1, First-time Adoption of InternationalFinancial Reporting Standards IFRS 2, Share-basedPayment IFRS 3, 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, Segment Reporting IAS 16, Property, Plant and Equipment IAS 17, Leases IAS 18, Revenue IAS 19, Employee Benefits IAS 20, Accountingfor Government Grants and Disclosure of Government Assistance IAS 21, TheEffects of Changes in Foreign ExchangeRates IAS 23, Borrowing Costs IAS 24, Related Party Disclosures IAS 26, Accounting and Reporting by Retirement Benefit Plans IAS 27, Consolidated and SeparateFinancial Statements IAS 28, Investmentsin Associates IAS 29, Financial Reporting in Hyperinflationary Economies IAS 30, Disclosures in the Financial Statements of Banks and Similar Financial Institutions IAS 31, Interests in Joint Ventures Instruments - other issues IAS 32, Financial Instruments: Disclosure and Presentation see also: See also Financial IAS 33, Earnings per Share IAS 34, Interim Financial Reporting IAS 36, Impairment ofAssets IAS 37, Provisions, Contingent Liabilities and ContingentAssets IAS 38, Intangible Assets Financial Instruments - other issues IAS 39, Financial Instruments: Recognition and Measurement see also: See also IAS 40, InvestmentProperty IAS 41, Agriculture 18 INTOSAI Code of Ethics and Auditing Standards Codeof ethics Integrity. Auditors have a duty to adhere to highstandards ofbehaviour (e.g. honesty and candidness) in the course oftheir work and intheir relationshipswith the staff of auditedentities. Independence, objectivity and impartiality. The independence of auditors should not be impairedby personalor external interests. There is aneedfor objectivity and impartiality inthe work and the reports, which should be accurate and objective. Conclusionsin opinions and reports should be basedexclusively on evidenceobtainedand assembled inaccordance with the SA1auditing standards. Professional secrecy. Auditors should not disclose information obtained inthe auditing process to third parties except for the purposesof meetingthe SA1statutoryresponsibilities. Competence. Auditors must not undertakework for which they are not competentto perform. Basicpostulatesfor the auditingstandards (a) The SA1should consider compliancewith the INTOSAIauditing standards inall matters that are deemed material. Certain standards may not be applicableto some ofthe work done by SAIs, including those organizedas Courts of Account, nor to the non-audit work conductedby the SAL The SA1 should determine the applicable standards for such work to ensure that it i s of consistently high quality. (b) The SA1should apply its ownjudgment to the diverse situationsthat arise inthe course of government auditing. (c) With increasedpublic consciousness, the demand for public accountability of persons or entities managingpublic resourceshas become increasingly evident so that there is a needfor the accountability processto be inplace and operating effectively. (d) Developmentofadequate information, control, evaluation andreporting systems within the government will facilitate the accountability process. Management is responsiblefor correctness and sufficiency ofthe form and content ofthe financial reports and other information. (e) Appropriate authorities should ensure the promulgation of acceptable accounting standards for financial reporting and disclosurerelevant to the needs ofthe government, and audited entities should develop specific and measurableobjectives and performancetargets. (0Consistentapplication ofacceptableaccountingstandards shouldresultinthe fair presentationofthe financial position andthe results of operations. (g) The existenceof an adequate system of internal control minimizes the risk of errors and irregularities. It is the responsibility of the 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, andthat probity and propriety are observedindecision-making. The auditor should submit proposals and recommendationswhere controls are found to be inadequate or missing. (h) Legislative enactments would facilitate the co-operationofauditedentities inmaintaining andproviding access to all relevant datanecessary for a comprehensiveassessment ofthe activities under audit. (i)AllauditactivitiesshouldbewithintheSA1auditmandate.* 0) Legislative enactments would facilitate the co-operationofauditedentities inmaintaining and providing access to all relevant data necessary for acomprehensiveassessmentofthe activities under audit. (k) SAIs should work toward improvingtechniquesfor auditing the validity ofperformancemeasures. (1) SAIs should avoid conflict of interest betweenthe auditor and the audited entity. * The full scope of governmentauditing includesregularity andperformance audit. Regularity audit embraces: i. Attestationoffinancialaccountabilityofaccountableentities,involvingexaminationand evaluation of financial records and expressionof opinions on financial statements; ... ii. Attestationoffinancial accountabilityofthegovernmentadministration asawhole; 111. Audit of financial systems and transactionsincluding an evaluation of compliance with applicable statutes and regulations; iv. Audit of internal control and internal audit functions: 19 v. Audit ofthe probity andpropriety of administrative decisionstakenwithin the auditedentity; and vi. Reportingof any other mattersarisingfrom, or relatingto, the audit that the SA1considersshould be disclosed. Performance audit is concerned with the audit of economy, efficiency and effectiveness, and embraces: vii. Audit ofthe economyof administrative activities inaccordance with soundadministrative viii. Audit ofthe efficiencyofutilizationofhuman, financial and other resources, including ... principles andpractices, andmanagementpolicies; examinationof informationsystems, performancemeasuresandmonitoringarrangements, and proceduresfollowedby auditedentities for remedyingidentifieddeficiencies; and ix. Audit ofthe effectiveness ofperformanceinrelationto the achievementofthe objectivesofthe auditedentity, and audit ofthe actual impact of activities comparedwith the intendedimpact. Generalauditingstandards The auditor andthe SA1must be independent. The auditor andthe SA1must possessthe requiredcompetence. The auditor andthe SA1mustexercisedue care andconcern incomplyingwith the INTOSAIauditing standards. This embraces due care inplanning, specifying, gathering andevaluatingevidence,and in reporting findings, conclusions andrecommendations. The SA1shouldadoptpolicies andproceduresto recruit personnelwith suitablequalifications. The SA1shouldadoptpolicies andproceduresto develop andtrain SA1employeesto enable themto performtheir tasks effectively,andto definethe basis for the advancement ofauditors andother staff. The SA1shouldadoptpolicies andproceduresto preparemanuals and other writtenguidance and instructions concerningthe conduct of audits. The SA1shouldadoptpolicies andproceduresto support the skills and experience availablewithinthe SA1 and identifythe skills which are absent; provide a gooddistributionof skills to auditingtasks and assigna sufficient number ofpersons for the audit; andhave proper planningand supervisionto achieveits goals at the requiredlevelofdue care and concern. The SA1shouldadoptpolicies andproceduresto reviewthe efficiency and effectivenessof the SA1internal standards andprocedures. Field standards (a) The auditor shouldplanthe audit in a mannerthat ensures that an audit of highquality i s carriedout in an economic,efficient,andeffective way and ina timely manner. (b) The work ofthe audit staff at each levelandaudit phase shouldbe properly supervisedduringthe audit; the documentedwork shouldbe reviewedby a senior member ofthe audit staff. (c) The auditor, in determiningthe extent andscope o f the audit, shouldstudy andevaluatethe reliability of internal control. (d) Inconductingregularity(financial)audits, a test shouldbe made of compliancewith applicable laws andregulations.The auditor shoulddesignaudit steps andproceduresto providereasonableassurance o f detectingerrors, irregularities, and illegalacts that couldhave a direct andmaterialeffect on the financial statementamounts or the results ofregularity audits. The auditor also shouldbe aware o f the possibilityof illegalacts that couldhave an indirect andmaterialeffect on the financial statements or results of regularity audits. Reportingstandards (a) At the endof eachaudit the auditor shouldpreparea written opinion or report, as appropriate, setting out the findings inan appropriateform; its content shouldbe easy to understandandfree from vaguenessor ambiguity, includeonly information which is supportedby competentandrelevantaudit evidence,andbe independent, objective, fair and constructive. (b) It is for the Auditor Generalto decide finally onthe actionto betaken inrelationto fraudulent practices or seriousirregularities discoveredby the auditors. 20 InternationalStandards on Auditing [ntroductoryMatters Audit Evidence 100AssuranceEngagements 500 Audit Evidence I10Glossaryof Terms 501Audit Evidence -- Additional Considerationsfor 120Framework of ISAs Specijc Items 505 External Conzrmations Responsibilities 5 10 Initial Engagements-- Opening Balances 200 Objective and General Principles Governing 520 Analytical Procedures an Audit of Financial Statements 530 Audit Sampling 210 TermsofAudit Engagements 540 Audit of Accounting Estimates 220 Quality Controlfor Audit Work 550 Related Parties 230 Documentation 560 SubsequentEvents 240 TheAuditor's Responsibility to Consider 510 Going Concern Fraud and Error in an Audit of Financial Statements 580 Management Representations 240A Fraud and Error 250 Consideration of Laws and Regulations in anUsingthe Work of Others Audit of Financial Statements 600 Using the Work of Another Auditor 260 Communications of Audit Matters with Those 610 Considering the Work of Internal Auditing Charged with Governance 620 Using the Work of an Expert Planning Audit Conclusionsand Reporting 300 Planning IO0 TheAuditor's Reports on Financial Statements 3 10 Knowledge of the Business 710 Comparatives 320 Audit Materiality 120 Other Information in Documents Containing Audited Financial Statements Internal Control 400 Risk Assessments and Internal Control Specialized Areas 800 TheAuditor's Report on Special Purpose Audit 401Auditing in a Computer Information Systems Engagements Environment 810 TheExamination of Prospective Financial 402 Audit Considerations Relating to Entities Information Using Service Organizations RelatedServices 910Engagementsto Review Financial Statements 920 Engagementsto Perform Agreed-Upon Procedures Regarding Financial Information 930 Engagementsto CompileFinancial Information 21 ANNEX C: NATIONALACCOUNTING LEGISLATION ConstitutionExtracts 78. (1) Prior to the commencement o f every financial year, the Minister o f Finance shall submit to the People's Majlis the estimated expenditure and income o f the State for the year, and the expenditure and the income o f the State for the preceding year and the budget so proposed shall be passed by the People's Majlis. (2) No supplementary or excess funds shall be added to an already passed budget unless it has been submitted to and passedby the People's Majlis. 127. The accounts o f the State shall be kept and maintained in such form and manner prescribed by the Auditor General on the advice o f the President. PublicFinanceBill2002 (draft) extracts - 35. Annual reports to be prepared (1) Within two months o f the end o f a financial year the accountable officer for each accountable government agency must prepare and submit to the Auditor General a written report containing (b) a statement o f the actual revenue and expenditure.. . (a) a statement o f the estimates o fthe revenue and expenditure.. . ...(c) a report o f the operations o fthe agency for the year. 36. Auditor General's duties as to annual statements (2) Within two months o f receiving a report from an accountable agency the AG must audit the report and must submit a written report about the audit to the accountable officer o f the agency. 37. Statement and audit report to be submitted to the Speaker Within 14 days after receivingthe AG's report the accountable officer o f the agency must submit to the Speaker o fthe Peoples' Majlis - (a) a copy o f the report together with (b) the Auditor General's report. 38. Annual accounts to be prepared (1) Within two months after the end o f a financial year the Financial Controller must prepare and submit to the Minister the State's annual statements for the year - (d) a statement o f the estimates o fthe revenue and expenditure.. . (2) The State's annual statements for a financial year must contain (e) a statement o f the actual revenue and expenditure.. . (f) as far as is practicable a statement o fthe assets, liabilities and contingent liabilities ofthe State at the end o f that financial year. 22 (4) Within 14 days after receiving them the Minister must submit the State's annual statements to the AG 39. Auditor General's duties as to State's annual statement (2) Within two months o f receiving the State's annual statements from the Minister the AG must submit the report requiredby article 126 ofthe Constitution to the Minister. 40. Statement and audit report to be submitted to the Speaker (1) Within 14 days after receiving the AG's report the Minister must submit to the Minister o f Finance and Treasury Speaker o f the Peoples' Majlis - (a) the State's annual statements (b) the Auditor General's report. (2) Within 14 days after receiving them the Minister o f Finance and Treasury must submit the State's annual statements and the Auditor General's report to the Speaker o f the Peoples' Majlis 41. Speaker to submit reports and statements to Peoples' Majlis Whenever the Speaker o f the Peoples' Majlis receives a report or statement.. he or she . must present it to the Peoples' Majlis as a soon as practicable. 23 ANNEX D: NATIONALAUDIT LEGISLATION ConstitutionExtracts 124. (1) There shall be an Auditor General o f the Maldives appointedby the President. (2) A person appointed to the office o f Auditor General shall have the qualifications required for membership o f the People's Majlis and shall, in the opinion o f the President, have the competence to perform the duties o f the said office. 125. The Auditor General shall assume office upon taking, before the President, the oath set out in paragraph (k) o fthe Schedule to this Constitution. 126. It shall be the duty o f the Auditor General, in accordance with law, to audit the accounts o f the State, prepare the reports thereof, and perform other duties concerning the accounts o f the State. 127. The accounts o f the State shall be kept and maintained in such form and manner prescribed by the Auditor General on the advice o f the President. 128. The Auditor General may resign from office by writing under his hand addressed to the President. However, the Auditor General shall continue to hold office until such time that the President notifies him o f the acceptance of the said resignation. 129. The President may remove the Auditor General from office if in the opinion o f the President the Auditor General has failed to satisfactorily perform the duties o f his office. Public FinanceBill 2002 (draft) extracts - 36 (2) Within two months o f receiving a report from an accountable agency the Auditor General must audit the accounts and submit a written report about the audit to the accountable officer o f the agency. 37 Within 14 days after receiving the Auditor General's report the accountable officer must submit the accounts and the audit reportto the Speaker o fthe People's Majlis. 39 (2) Within two months after receiving the State's annual statements the Auditor General must submit the report required by Section 126 o fthe Constitutionto the Minister. 40 (2) Within 14 days after receiving them the Minister o f Finance and Treasury must submit the State's annual statements and the audit report to the Speaker o fthe People's Majlis. 24 Audit Act 2007 (recentlyenacted on March 13,2007) 1. Descriptionand Title a) Description This Act sets out the requirements for the audit o f all Government institutions, accounts and Government trading bodies and the duties and responsibilities o f the Auditor-General. b) Title This Act may be cited as the Audit Act, 2. Appointmentof Auditor-General a) There shall be an Auditor-General appointed under the Constitution o f the Republic o f Maldives. b) The Auditor-General shall be appointed by the President on recommendation of People's Majlis (Parliament). 3. Functionsof Auditor-General The following are the functions of the Auditor-General: a) To audit all the government institutions, accounts and government trading bodies. b) To promote public accountability and good governance and sound financial management in the administration o f the government institutions, state owned enterprises andjoint venture companies inwhich state holds shares. c) To set rules, regulations and standards governing the audit inthe Maldives. d) To carry out any function conferred on the Auditor-General by or under any other law o f the Maldives. 4. PerformanceAudit The auditor general may at any time conduct a performance audit ofthe following: a) Ministries, departments, Government offices and other government institutions; b) State owned enterprises or any other trading bodies in which Government has 5 1% or more shares; c) Government trusts or trusts under the care o fthe government. 25 5. PowersofAuditor-General Inthe performanceofhisfunctions, the Auditor-General hasthe followingpowers: a) Prescribe the manners and form in which accounts o f the state shall be kept and maintained. b) In the performance o f his functions the Auditor-General have access to all records, books, vouchers, documents, receipts, cash, stamps, securities, goods or any other items, stores and may make copies o f such documents. c) Inthe performance o f his functions the Auditor-General may call upon any person for explanation and information which the Auditor-General may require in order to enable himto discharge his duties. d) To decide upon the priority ofthe accounts to be audited. e) To appoint qualified and able persons to assist the Auditor-General to perform his functions as the Auditor-General. f) May obtain the advice o fthe Attorney-General upon any question on law. g) To assign any function or part o f a functions o f the Auditor-General to any person decided by the Auditor-General. h) To set auditing standards andaudit manuals inline with international standards. i)TodoanythingincidentalorconducivetoanyoftheAuditor-General's functions. j) Setting of procedures for the issuance and cancellation of operating license of auditors inthe Maldives and issuance and cancellation o f license according to the set procedures. k) Subsection 6) does not prevent private individuals to undertake audit without license for their own private purposes. 6. Power to Obtain Information Inconnectionwiththe performanceofa function ofthe Auditor-General, a) Any person called upon by the Auditor-General for any explanation and information which the Auditor-General may require in order to enable him to discharge his duties shall provide such information. 26 b) The Auditor-General may direct a person to attend before the Auditor-General at a specified place and specified time to answer any questions. In deciding such time and place, Auditor-General should consider the reasonability o f the circumstances. c) A person who without reasonable excuse, contravenes a direction under subsection (b) commits an offence and i s liable upon conviction - 1) ifthe offender is anaturalperson, to afine notexceedingRf5,OOO. ii)iftheoffenderisabodycorporatetoafinenotexceedingRf25,OOO. 7. Access to Premisesetc. a) Inconnection with performance o f a function o fthe Auditor-General, the Auditor- General or a person appointed by him may enter without prior notice, the premises and places occupied by a state institution, and examine the documents and make copies o f such documents. b) Inconnection with performance of a function of the Auditor General, the Auditor- General or a person appointed by him may enter into any other places (other than those mentioned in subsection (a)) without prior notice, with an authorized court order on the grounds that there i s reasons to believe that documents or other information relating to the activities o f a public body may be held at those premises, and may examine the documents and make copies o f such documents. b) The person who is sent under subsection (a) and (b) shall produce a written authorization by the Auditor-General to the owner or the person in-charge o f the premises at that time. c) Inconnection with the performance o f Auditor-Generals functions, ifthe Auditor- General or any person appointed by him visits any place, those persons who are present at the time o f visit shall facilitate Auditor-General or any person appointed by him, to carry out his functions. 8. AuditingandReportingof AnnualFinancialStatementsof the Government a) Within 3 months and 14 days, after the end o f each financial year, the annual financial statements o f the Government shall be prepared in accordance with the Public finance Act 2006, and submitted to the Auditor-General to audit by the Minister o f Finance and Treasury. 27 b) If the financial statements have not been prepared and submitted in accordance with subsection (a), the Auditor-General shall inform inwriting, the President and Speaker o f the People's Majlis within 14 days. 9. Notificationof Irregularities a) If at any time in the opinion o f the Auditor-General, serious irregularities have occurred in the receipts, custody or expenditure o f public moneys or in the receipt, custody, issue, sales, transfer, or delivery o f any stamps, securities or stores or other Government property or in the accounting for the same, he shall bringthe matter to the notice ofthe President inwriting. b) The Auditor-General may at his discretion take action against any person who in accordance with the circumstances o f the irregularity in subsection (a) by preventing the offender from returning to his place o f employment until legal action can be taken against him. 10. Audit Fees a) The Auditor-General may charge audit fees from entities audited under this Act, based on the principle set out by the Auditor-General. b) Fees payable under subsection (a) should be paid within 30 days to the Ministry o f Finance and Treasury. c) If the fees due under subsection (b) are not paid within the prescribed time, the state should take legal action on behalf o f the Auditor-General. 11.Auditor General's Annual Report Upon receipt o f the annual accounts stated in section 8 o f this Act, the Auditor- General shall audit the accounts within 3 months and prepare a report incorporating details o f work done to audit the accounts, his opinion on the accounts and recommendations for improvements. The report shall be submitted to the President and People's Majlis and shall bepublished. 12. Resignationof the Auditor-General Should the Auditor-General elect to resign from his office, he/she may submit his 28 resignation to the President in writing, stating the reasons for his resignation and he should continue to hold office untilhe i s informed o f acceptance o f his resignation by the President. 13. Removalof the Auditor-General The Auditor-General may be removed from his office by the President on the consultation with the People's Majlis, if inthe opinion o f the President; the Auditor- General has failed to perform satisfactorily the duties o f his office. e OFFICE ADMINISTRATION 14. Expenditurefor Office Administration a) To ensure the independence o f the Auditor-General and the Office o f the Auditor- General, 90 days before the end o f every financial year, the Auditor-General shall prepare and submit to the parliamentary committee acting in the capacity of Public Accounts Committee, a plan detailing the work programme o f the Auditor-General's Office for the following year, together with a detail budget necessary to accomplish the work programme. The budget so submitted should include necessary provisions for the following expenditures. 1) The salary and allowances payable to the Auditor-General. 2) Salaries and allowances o f the Office o fAuditor-General's staff. 3) Cost for training and professional development activities. 4) The money for reasonable traveling, transportation and subsistence needed by the staff engaged inconducting office o fthe Auditor-General business and 5) The administration expenses o f the Office o f the Auditor-General. b) The budget submitted by the Auditor-General as stipulated in subsection (a), shall be evaluated by the Parliamentary Committee and amended by them if necessary, shall be submitted to the People's Majlis for approval together with a report o f the committee. And as and when the budget i s approved by the People's Majilis, funds should be released from the consolidated revenue funds to the Office o f the Auditor- General. c) Funds received to the budget o f the Office o f the Auditor-General shall be managed in such manner deemed fit for the efficient discharge o f Auditor-Generals functions and duties inconformity with sound financial practices. 29 d) The Auditor-General shall prepare and submit quarterly reports to the Parliamentary Committee acting in the capacity o f Public Accounts Committee, on the office administrationandworks undertaken taken by hisoffice. e) The Auditor-General shall prepare and submit to the Parliamentary Committee acting in the capacity o f Public Accounts Committee, an annual performance report together with the annual report containing the audited financial statements o f the Office o f the Auditor-General. The performance report so submitted should indicate the targets or tasks accomplished against the set targets for the year ended and the reasons for failure to accomplish set targets ifthere are any unaccomplished tasks. 15. Recruitment,Transfers and Terminations a) To carry out the functions o f the office of Auditor-General and implement the powers o f the Auditor-General, the Auditor-General has the power to recruit, decide on the scales o f salaries and other allowances, training, promotions and termination o f his staff withinthe budgetarylimits authorized by the Majlis. b) A separate cadre o f officers and employees in the office of the Auditor-General shall be constituted. The recruitment and other conditions o f services o f the officers and employee within the cadre shall be as prescribed in the rules and regulations to be framed under this Act. AUDIT OF THE AUDITOR-GENERAL'S OFFICE 16. Audit the FinancialStatements of the Audit Office a) The Parliamentary Committee acting in the capacity o f Public Accounts Committee shall appoint an independent auditor every year, to audit the accounts and financial statements o f the Office o f the Auditor-General and to report on the performance o f the Office o f the Auditor-General. b) The financial statements o f the Office of the Auditor-General shall be submitted for audit to the independent auditor appointed under subsection (a) within two months o f the every year end. c) After completing the audit as stipulated under the subsection (b), the independent auditor shall prepare and submit a written audit report to the President, the Speaker o f the People's Majlis and the Auditor-General within 3 months. 30 MISCELLANEOUS 17. ConfidentialInformation The information obtainedheceivedby the employee o f Audit Office inthe capacity of an employee o f the Office o f the Auditor-General i s confidential. And such information shall not be disclosed except under the circumstances specified insection 18 o f this Act. 18. Disclosureof ConfidentialInformation a) 1. The disclosure o f specified information to such persons as the Auditor- General directs if the Auditor-General certifies that it is necessary in the public interest that the information should be so disclosed; 2. the disclosure o f information to an authority, or a person, prescribed by the regulations or 3. the disclosure o f information about a specific person to another person with the express or implied consent o f the first mentioned person inwriting. 4. Any information requested by the People's Majlis or a committee of the People's Majlis. 5. Any information requested by an investigative agency with legal authority which i s requiredfor an investigation undertaken by them. 6. Any informationthat shouldbedisclosed under a court order. b) A person who contravenes subsection (a) commits an offense and is liable upon conviction to a fine not exceeding Rf25,000 (twenty five thousand). c) A person who contravenes subsection (a) and discloses or uses information for personal interest is liable for a fine not less than Rf 10,000 (Ten Thousand) or a term o f imprisonment of 3 to 12 months. 19. PreparingRegulationsandImplementationof the Act To give effect to the provisions o f this Act, the regulation under this act shall be made andimplementedby the Auditor-General. 19. Offenses andPenalties 31 a) 1- Any person commits an offence who intentionally obstructs, hinders or resists the Auditor-General and refuses or willfully suppresses any information required by the Auditor-General inthe performance o f hidher duties. 2- The Auditor-General must submit the case o f any person who commits the offences stated in subsection (a), to the Attorney-General to take legal action against hidher. b) Subsection (a) does not enforce any person to disclose information against himher self. c) Any person who commits the offences stated in subsection (a) i s liable for a fine o f Rf 10,000 to Rf75,000 or a term ofimprisonment o f3 to 12months or both. INTERPRETATIONS 21. Inthis Act unless the contrary intention appears: "public money" means all revenue, loan, trust and other moneys and all stamps, bonds, debentures and other securities whatsoever raised or received by or on account o f the Government; and includes moneys received or held on trust by the Public Trustee, Official Receiver or any public officer for purposes other than purposes o f Government; "person"refers to a government entity or a government institution or a state-owned enterprise or an entity with government controlling interest or an other entity under another law. "personappointedby the Auditor-General"refers to any person who is authorized inwritingto carry out the functions o fthe Auditor-General under this Act. "financial year" refers to the period starting from January lSt December 3lSt, to inclusive o f startingand ending days. "audit fee" refers to the fees paidto the person carrying out the audit functions. "performance audit" in relations to a person, body or thing, refers to a review or examination o f any aspect o fthe operations o fthe person, body or thing. "Stateentities"refers to those entities or agencies stated insection 4 ofthis Act. 32 Unofficial translation by: NiyazIbrahim Audit Office AminathNiuma Audit Office 33 ANNEX E: BENEFITSOF ACCRUAL BASIS OF 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 Public Sector Committee 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). Inorder 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 f those 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, reportingon 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 is 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 o f assets and liabilities recognized inthe financial statements; plan for future funding requirements o f asset maintenance and replacement; 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 o f 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. 34 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 bohowings; provides information onthe impact o f existing liabilities on future resources; means that it is 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 of financing decisions on net assetdequity and may lead governments to take a longer term view when making financing decisions than is 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 assetdequity. Changes in an entity's net assetdequity between two reporting dates reflect the increase or decrease in its wealth duringthe period, under the particular measurement principles adopted and disclosed in the 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 is 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 o f future taxation or other revenues which are already committed to paying o f f debt and other liabilities. Net assetdequity can comprise some or all o f the following components: contributed capital; accumulated surpluses and deficits; and reserves (for example revaluationreserve; 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 is 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 f current 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 accountingprovides governments with information on the full costs o f their activities so that they can: consider the cost consequences o f particular policy objectives and the cost o f alternative mechanisms for meeting these objectives; decide whether to fund the production o f services within government sub-entities, or whether to purchase goods and services directly from non-governmental organizations; decide whether user fees should cover the costs associated with a service; and allocate responsibility for managing particular costs. 35 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 remuneration options; assess the most efficient way o f producing their goods and services and o f managing the resources over which they have been delegated authority; determine the appropriateness o f cost-recovery policies; and monitor actual costs against budgeted costs. 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. 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